Is there no end to this mess? Subprime

[westsv]

The fall of IndyMac
Feds seize bank - once a leading mortgage lender. It may turn out to be most expensive collapse ever. One thing is sure: The credit crisis is still with us.

NEW YORK (CNNMoney.com) -- In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bancorp Inc. was taken over by federal regulators on Friday.

The operations of the Pasadena, Calif.-based thrift - once one of the nation's largest home lenders - were shut down at 3 p.m. PDT by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.

About 95% of the $19 billion in deposits in the bank are insured, but that leaves $1 billion that was not covered by FDIC guarantees. According to the agency, 10,000 IndyMac customers could lose as much as half of that amount, or $500 million. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.

"This will certainly be a costly failure. Whether it's the costliest, we just don't know at this point," FDIC Chairman Sheila Bair said on a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.

The closure of IndyMac capped a dramatic day that offered a stark reminder that the credit crisis is not abating. An investor panic sent shares of mortgage finance giants Fannie (FNM, Fortune 500) Mae and Freddie (FRE, Fortune 500) Mac on a wild ride and fueled speculation of a government rescue.

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Is there no end in sight? I have been speaking to a good number of bankers in the sector and each time they say we are near the bottom, even more bad news appears. I personally don't think the crisis will abate before the end of 2009.

So the question we should be asking ourselves is whether the US and UK subprime crisis has any impact on us? The short answer to the long question is a resounding yes!

Expect more writedowns from the banks including but not limited to our local banks. As for the stock market, Caveat Emptor!

westsv

 

[westsv]

I realised after speaking to a good number of people here in Singapore that most people don't quite understand the nature of the mortgage market in the US and the full implication of the news that is flowing out of the US.

Think of Freddie Mac and Fannie Mae as something as important to the US as Temasek Holdings and GIC is to Singapore. If these Singapore instituions were ever in such a precarious state, we would be pissing in our pants.

I know that many articles have been written about the subject but i think today's article posted by CNN is most concise in its elucidation of the significance of Freddie Mac and Fannie Mae. Enjoy!

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NEW YORK (Fortune) -- They own or guarantee $5 trillion worth of mortgages* - nearly half of all the country's outstanding home loan debt-and they're crashing. Big time.

Fannie Mae and Freddie Mac are struggling with an investor loss of confidence so great that, while they're unlikely to go under, they could conceivably see their ability to function impaired. That would wreak yet more havoc on an already wrecked housing market- making loans tougher to come by and possibly pushing hundreds of billions of dollars in cost onto U.S. taxpayers.

How could the companies end up in such awful straits? Given the way they were created and run, a better question might be: how could they not?

The two companies are so-called government-sponsored enterprises, created by Congress in 1938 (Fannie) and 1970 (Freddie) to help more Americans buy houses.

Their mandate is to maintain a market for mortgages - buying loans from banks, repackaging them as bonds, and selling those securities to investors with a guarantee that they will be paid. This makes lending more tempting for banks because Fannie and Freddie take on risks like missed payments, defaults and swings in interest rates.

But the companies are also publicly traded, with the usual mandate of trying to maximize profits for shareholders.

That effort, of course, involves risk, but as quasi-government programs, they've long carried an implicit guarantee that the feds wouldn't let them fail.

Their hybrid nature created both the opportunity and the temptation for the enterprises to take on more risk and to make themselves ever larger, more important and thus more profitable players in the mortgage market.

Very special treatment
The market and ratings agencies have treated Fannie and Freddie as bulletproof, even though the actual business of dealing with interest sensitive loans is very risky. This is in large part because of the very special perks granted to the mortgage giants, but to no one else.

Each may borrow up to $2.25 billion direct from the Treasury. They are exempt from state and local income taxes and from Securities and Exchange Commission registration requirements and fees. And they can use the Federal Reserve as their bank.

One result of all this special treatment was AAA credit ratings. That means Fannie and Freddie could borrow at super-low rates, a benefit they used to purchase - and hold -high-yielding mortgage loans. The spread between the two provided an irresistible earnings stream and the companies just kept getting bigger.

The mortgages they hold on their books alone total about $1.4 trillion, said Mike Stathis, managing Principal of Apex Venture Advisors, a research and advisory firm.

In the meantime, the companies were allowed to operate in this manner, piling on risk after risk, with virtually no capital cushion (Wall Street speak for the rainy-day piggybank financial companies keep should one of their investments blow up.) As the company's loan portfolio loses value and the mortgage market continues to crumble, it's easy to see why this was a fatal misstep.

Some saw the crisis coming before this week. For example, Alan Greenspan famously warned in 2004 that Fannie and Freddie's rapid growth needed to be curbed because their expansion threatened the financial markets.

Still, the cocktail of high credit ratings, domination of the mortgage securities market, and preferential government treatment led to the sort of shenanigans that go hand in hand with excessive privilege.

Fannie overstated its earnings by $10.6 billion from 1998 through 2004, and its chief executive Franklin Raines lost his job. Freddie Mac had understated its profit by nearly $5 billion from 2000 through 2002. Both companies missed earnings filings while their overhauled their books.

"If Fannie and Freddie had been created in the private sector, they wouldn't look like this," says Christopher Whalen, head of research firm Institutional Risk Analytics. "They have a public sector mission to expand housing and run what is essentially an insurance company. But they also have a conduit to securitize and sell loans, which is what broker-dealers like Lehman do; and they have an interest arbitrage piece (making money on the spread between interest rates) that looks like a hedge fund."

Robert Rodriguez, the founder of First Pacific Advisors, hasn't bought Fannie for Freddie bonds for over two years. "With the recent issuance of their financials, we were still uncomfortable with their leverage," Rodriguez says. "We believed there was considerable balance sheet risk in both of these companies.

Now the dwindling pool of mortgages, higher foreclosure risk, and a shaky interest rate environment have the companies on the ropes; and investors are beginning to lose faith in Fannie and Freddie.

Both firms told Fortune that they have enough capital to weather the storm and continue to support the nation's housing market.

And yet, Fannie has fallen 32% this week and 65% since the beginning of the year. Freddie plunged 47% so far this week and is down 75% since January.

Investors have lost faith that the companies can operate in their current incarnation without running into major problems.

If investors abandon these companies, what do we learn from this odd Frankenstein of a business model?

"Nobody every believed that Fannie and Freddie were truly private and they never should have been," says Whalen. "Now we will all have to pay for a company that has gone astray."

 

[Nomad]

i believe more of those bad news will come.
presently,all bad news are from US and Europe.
normally,it will take awhile before Asia-Pacific really feel the impact.

 

[Cmdr. Shockwave]

It's like a wound that won't close. I just hope the bleeding will stop soon otherwise we are all in deep trouble. The US economy goes down many other economy will follow. :(

 

[storm]

The more the Americans are trying to avoid, the deeper the wound.

 

[Wang Ye]

The more the Americans are trying to avoid, the deeper the wound.

Avoid it? More like trying ways to pass the buck to the rest of the world.

 

[xiaohero]

sadly, in the last 1/2 a year, my investment portfolio has taken 1 helluva beating. bad news from the states, natural disasters in asia...

hopefully, things will turn for the better by the last quarter of the year

 

[DerekLeung]

Take note and be warned !