Sunday World Business News

Storm brews in US economy as Fannie, Freddie pushed to brink Agence France-Presse . Washington
As panicked investors pushed US mortgage finance giants Fannie Mae and Freddie Mac to the brink, debate swirled on whether the meltdown was a crisis of confidence or the onset of wider economic woes. The two government-chartered, shareholder-owned giants underpin some five trillion dollars in home loans, and the meltdown in shares this week raised fears of a government bailout, or a possible worsening of the credit crunch. In highly volatile trade Friday, shares plunged some 50 per cent for both firms before a partial recovery. Freddie Mac ended with a loss of three per cent and Fannie was down 22 per cent, but both have lost around 75 per cent since the start of the year. Brad Sorenson, analyst at Charles Schwab & Co said the companies ‘affect a much wider swath of the economy than just a typical financial institution, such as Bear Stearns,’ and that any hint of failure would be ‘devastating to the US, and indeed the global, financial markets.’ The troubles intensified as the New York Times reported the administration of president George W Bush was weighing placing one or both companies in a conservatorship to protect them from the snowballing US housing market crisis. Under a 1992 law, if either is seen as being severely undercapitalized, it may be placed into government conservatorship. The two firms said in separate statements they were ‘adequately capitalised’ and had ample liquidity despite swirling market fears. The Freddie Mac statement said speculation around the issue of conservatorship ‘does not accurately reflect the facts. Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized.’ Fannie Mae said: ‘As we work through this tough housing market, we are maintaining a strong capital base, building reserves for our credit losses, and generating solid revenues as our business continues to serve the market. We also have access to ample sources of liquidity, including access to the debt markets.’ Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae’s is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 per cent of the total value of home loans in the United States. Treasury secretary Henry Paulson, in a statement, offered no indication of any imminent intervention. ‘Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission,’ Paulson said. Senator Christopher Dodd said meanwhile the Federal Reserve was considering opening its discount window, which had been used for troubled banks. Paul Krugman, a Princeton economist, said in a New York Times blog that the government will be forced to come up with a rescue plan. ‘Big financial crises always end with an expensive bailout of the banking system,’ he said. ‘It happened in Sweden, it happened in Japan. Why should we be different? Except that in this case banks proper took on very little of the risk; Fannie and Freddie, on the other hand, took on a lot of it.’ Joel Naroff, an economist at Naroff Economic Advisors, said the two entities are being hurt by investor panic about their future prospects. ‘It’s an environment when the financial markets are so weak, investors would rather sell first and ask questions later,’ he said. Jerry Howard, chief executive of the National Association of Home Builders, lamented the ‘hysteria’ over the viability of the firms. ‘Pundits who have questioned the viability of Fannie and Freddie are not operating on a factual basis, unnecessarily inflaming market fears’ he said. One brokerage note this week said the two firms may have to raise tens of billions of dollars in fresh capital under new accounting rules to offset massive losses in their home loan portfolios. The two firms, which have no explicit government backing despite their government charter, provide liquidity to the housing market by buying mortgages and repackaging them into securities sold to investors. As such they play a key role in the housing system. FreedomWorks, a conservative think tank, urged lawmakers to reject a bailout and to remind investors that there is no government guarantee for the companies. ‘Taxpayers should not and will not bail out Freddie Mac and Fannie Mae from their poor lending decisions, lack of adequate reserves, and past accounting corruption,’ said the group’s president Matt Kibbe.
3rd largest US mortgage lender shut amid financial troubles Reuters/Bdnews24.com . Washington
US banking regulators swooped in to seize mortgage lender IndyMac Bancorp Inc on Friday after withdrawals by panicked depositors led to the third-largest banking failure in US history. California-based IndyMac, which specialised in a type of mortgage that often required minimal documents from borrowers, became the fifth US bank to fail this year as a housing bust and credit crunch strain financial institutions. The federal takeover of IndyMac capped a tumultuous day for US markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac. IndyMac will reopen fully on Monday as IndyMac Federal Bank under Federal Deposit Insurance Corp supervision, but tensions ran high as customers at a branch at its Los Angeles-area headquarters read a notice in the window saying it was closed. At another branch down the road, a man who said he had more than $200,000 in an account — twice what is normally FDIC guaranteed — argued with a security guard who was closing up. The FDIC, which will seek a buyer for IndyMac, estimated the cost of the bank’s failure to its $53 billion insurance fund at between $4 billion and $8 billion. ‘IndyMac is a company that was pretty much 100 per cent invested in mortgage assets, and we’re in a bad mortgage market, and it had no capital. It’s not complicated,’ said Adam Compton, co-head of global financial stock research at RCM in San Francisco, which manages about $150 billion. IndyMac joins top bank failures headed by the 1984 collapse of Continental Illinois National Bank & Trust Co. The Office of Thrift Supervision insisted IndyMac’s failure was the second-largest bank failure based on FDIC figures. But the FDIC said its data showed it was third behind the collapse of First RepublicBank Corp in 1988. The OTS, IndyMac’s primary regulator, blamed comments by New York Democratic Sen. Charles Schumer for causing a run on deposits at the largest independent publicly traded U.S. mortgage lender. Schumer responded quickly on Friday, blaming the OTS for not doing its job and allowing IndyMac’s loose lending practices. ‘OTS should start doing its job to prevent future IndyMacs,’ he said in a statement. Schumer questioned IndyMac’s ability to survive the housing crisis in late June, and over the next 11 business days, depositors withdrew more than $1.3 billion, the OTS said. ‘This institution failed today due to a liquidity crisis,’ OTS Director John Reich said. ‘Although this institution was already in distress, I am troubled by any interference in the regulatory process.’ IndyMac was founded in 1985 by David Loeb and Angelo Mozilo, who also founded Countrywide, another big mortgage lender whose loans helped fuel the housing boom. Countrywide was taken over last week by Bank of America Corp. FDIC spokesman David Barr said agency officials arrived at IndyMac’s headquarters in Pasadena at 3pm. The successor FDIC-run bank opens for business on Monday. Over the weekend, depositors will have access to their funds by ATM, other debit card transactions, or by writing checks, but no access via online banking and phone services until Monday. Yet many customers were in the dark as branches shut on Friday. ‘I’m pissed. They should have let me know,’ said Elizabeth Ortega, a 29-year-old hairdresser who has a checking account with IndyMac. IndyMac had said earlier in the week it was unable to raise new capital, would slash staff by 60 per cent and had stopped making home loans. Its stock then tumbled, last trading at 28 cents on the New York Stock Exchange, down 95 per cent in 2008. The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks. At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 per cent of the uninsured amount. The OTS told a conference call with reporters that it did not expect significant market impact from IndyMac’s closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail. Four small banks have already been closed this year and the FDIC is hiring more staff in preparation for more failures. The agency has boosted its list of troubled banks to 90 and has said an increasing number of banks face high exposure to deteriorating conditions in commercial real estate and construction lending. Last year, just three banks failed. ‘IndyMac’s takeover by the FDIC is one of many to come,’ predicted Daniel Alpert, an investment banker at Westwood Capital in New York. Former FDIC official Ann Graham said it was not unprecedented for the FDIC to start running a bank after it fails. ‘It happens when they need to move more swiftly with the closing than they can move with a potential sale,’ said Graham, a law professor at Texas Tech University. ‘They don’t have to sell the institution over the weekend,’ she said. ‘They have the time to shop around.’ Graham said the FDIC has the authority to operate an institution for two years but expected the agency would dispose of it much sooner than that.