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failed IndyMac
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On Monday morning, customers of the failed IndyMac
Bancorp Inc. lined up at the thrift's retail branches to withdraw their
hard-earned savings, rather than leave it in an institution that was
being taken over by the Federal Deposit Insurance Corp.
It was too little too late, closing the barn door after the horses were
gone. And their reaction was completely unnecessary.
The biggest irony of IndyMac's failure -- and it was the nation's
second-largest independent mortgage lender and the seventh-largest
savings and loan -- was that the branches had big signs telling
customers "You can count on us," when in fact the only thing those
consumers could rely on ultimately was the promise of FDIC insurance.
While it's understandable that consumers would want to get their money
out of a failing bank, experts suggest that there is no real reason to
make such a move, provided you fall under FDIC protection guidelines --
specifically holding no more than $100,000 per individually registered
account.
(If you have two certificates of deposit in your name at the same
institution and each is worth $75,000, you have exceeded the protection
limit; if one was registered in an individual name and the other was
registered jointly, however, the total amount would be protected because
neither registration has exceeded the coverage limit.) See related
story.
Show and tellers
When regulators stepped in last Friday, IndyMac customers experienced a
brief disruption in the ability to get their money. While automated
teller machines were working, they also capped the amount that a
shareholder could withdraw electronically, limiting it to a few hundred
bucks.
That's why customers had to wait around for Monday morning's opening to
rush the bank and ask for their cash back.
By then, of course, they had full access to their money, up to the
protection limits. If they had balances above the insured level, they
could only access up to $100,000, with the rest being frozen until
regulators sell IndyMac and see what's left. While the best-case
scenario is full restitution and the worst case is a total loss, the
truth is likely somewhere in the middle. That means months of foregone
interest and lost opportunity, but not necessarily a big loss in
principal.
"People rush to the banks out of an irrational fear," says Greg McBride,
senior financial analyst at BankRate.com. "Only depositors who had an
exposure more than the $100,000 limit really have to worry, because they
are going to be standing in line waiting for a payout."
That's important to remember, in light of reports suggesting that the
Federal Reserve has almost 100 banks on a "watch list" of potential
candidates for the next bank failure/takeover. The list hasn't been
released -- because it would spur a run on those institutions -- but
analysts are quick to say they do not believe IndyMac was an isolated
failure. Things will get worse before they are cleared up.
Safe deposits
As a result, McBride noted that anyone with accounts that top the
deposit insurance limits need to remedy that situation now, either
re-titling accounts or moving money to stay safe. At a time when some of
the biggest financial institutions are in trouble, it may be better to
diversify your safe havens -- spreading money into several banks or
thrifts -- rather than letting it build in one place, even if it's
earning a higher rate of return.
"It's like driving without a seat belt," McBride says. "You have this
tool to protect you -- FDIC coverage -- but you drive around without
using that protection, figuring it will be all right. And it is, right
up to the point where there's an accident. ... Right now, there are a
lot of accidents waiting to happen. It's easy to buckle up, and people
ought to be doing it."
For consumers who are caught up in the anticipated wave of regulatory
takeovers, bailing out after the news surfaces won't make much
difference good or bad. There are new checks to buy and any new account
fees to be paid if you move your money to a new bank, but that's a small
price to pay for the peace of mind from knowing there won't be even a
moment when the bank that is supposed to be safeguarding your nest egg
is meeting with regulators.
In reality, the only reason to run to your bank is to protect yourself
in case the institution fails -- not to get your cash back once failure
has happened.
The finance-based dike has sprung a lot of leaks. It
remains to be seen how many fingers are left to plug the holes.
We can discuss the moral hazard of privatizing gains and socializing
losses until we're blue in the face. Much like the Iraq war, the debate
whether we should be there in the first place is now moot. Pulling out
at this point, in either instance, would have profound consequences for
the world at large.
The government had little choice but to backstop the debt of Fannie Mae
(FNM
Fannie Mae
FNM) and Freddie Mac (FRE
Freddie Mac
FRE) . I don't like eating the bar tab either, but given the $5 trillion
of underlying mortgages, they're the textbook definition of "too big to
fail." Read Minyanville column
Lost in the shuffle to rescue government-sponsored agencies, IndyMac
Bancorp was absorbed by the Federal Deposit Insurance Company (FDIC).
That seismic shift shocked an already-shaky financial foundation
desperately looking for signs of stability.
Given that 25% of the financial universe disappeared in the 1989-1991
recession and only 10% thus far vanished during our current crisis,
there's no denying that real risks remain for many banks. The question
for the sector -- and by extension the broader market -- is how that
weeding-out process manifests.
In other words, can the contagion be contained?
Looking back and looking forward
The DNA of the current marketplace is an historical anomaly. Policy
makers never let us digest the overcapacity from the technology bubble,
and cumulative imbalances have steadily built under the seemingly calm
surface. There is indeed a difference between legitimate economic growth
and debt-induced demand, and that dichotomy has come home to roost.
'There must be some way out of here, said the joker to the thief.' Bob
Dylan
During the same period, financial engineering recreated and repackaged
risk that effectively passed the buck. Our economy, once rooted in
manufacturing, shifted from service-based to finance-based, dependent on
the velocity of money and the prices of financial assets. Fannie and
Freddie generated that velocity and their inability to execute
exacerbated the current conundrum.
When the private sector could no longer shoulder the load, the
government stepped in to assume the obligations. They unleashed a litany
of conduits, auction facilities, working groups and lending windows with
hopes of muting the deleveraging process. On Monday, Hank Paulson took
the final step of socialization when he proposed a plan to buy the
equity of Fannie and Freddie.
The wall on the street
While cracks in the financial foundation are now front-page news, the
writing has been on the wall since last summer.
You remember that period -- the Dow Jones Industrial Average was at
record levels, the banks were 60% higher and despite obvious signs, we
were hard-pressed to find a single bear on the corner of Wall and Broad
streets.
Fast-forward one year. Fears of a complete market seizure are running
rampant. Well-known market pundits are proclaiming that real estate will
never recover. Oversold indicators, including those used by savvy seers
such as Jeff Saut of Raymond James and Lowry's, were recently at decade,
if not all-time, lows.
Toss in the capitulation of the analyst community -- 18 of 22 analysts
have "holds" or "sells" on Wachovia Bank (WB
Wachovia Corp
WB) , 15 of 16 have a similar stance on Washington Mutual (WM
Washington Mutual Inc
WM) and 20 out of 21 are negative on KeyCorp (KEY
KeyCorp
KEY) and, baring the doomsday scenario, the stage is set for a
sharp, mean-reverting rally.
I've never been accused of being Pollyanna. In fact, given my oft-stated
big-picture blues, I'll admit feeling a bit odd swimming against the
ursine tide. Some perspective is in order, however -- the KBW Bank Index
(BKX) could double from here and still be entrenched in a negative
pattern of lower highs.
Lens crafter
I've traded through my fair share of disasters -- Long-Term Capital,
Thai baht and Russian ruble currency contagions, the dot-com debacle,
Sept. 11, the real-estate implosion -- and I understand that the
sharpest sell-offs occur during an oversold condition when the fewest
possible participants are properly positioned.
While my big-picture bent since 2006 has been that we're in for a
prolonged period of socioeconomic malaise -- one that could potentially
last five years -- we must draw the distinction between trading and
investing. Indeed, synching time horizon and risk profile is perhaps the
most important element of effective money management.
The obvious key to the tape is the financials, which continue to
correlate with the S&P 500 If they can find a bid, the
tape will fry the fur of the late-to-the-party bears. If, however, they
continue to slide -- or, for that matter, hold current levels --
downside risk remains to S&P 1,050. See related graphic
I operate with two buckets of capital, an active account and an all-cash
nest egg that's stashed away for a rainy day. Into the teeth of Monday's
steep slide, I aggressively scaled upside exposure into my trading
account. While I rotated some of that risk into the lift as a function
of discipline, I carried some of it home.
I have concerns about our long-term financial fate, but as a trader, the
destination we arrive at pales in comparison to the path that we take to
get there. It's a delicate dance between the elephants but one that is
ripe with incremental return for those that operate with discipline over
conviction.
I will simply ask that when the inevitable rally arrives, you remember
how it felt when we were perched on the precipice of pain.
For when choruses of "all clear!" arrive, it will likely be time to
batten the hatches anew.
failed IndyMac Bancorp Inc
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