Indymac Bancorp, a long time favored to fail entry on Mortgage Lender Implode-O-Meter has finally gone to the great foreclosure auction in the sky.
Unlike Bear Stearns being swept under J.P. Morgan's rug or Countrywide being swept under Bank of America's there doesn't appear to be anyone with an appetite for Indymac's toxic stew of funny money mortgages ...
Meanwhile, the Center for Responsible Lending released a report today(6/30/2008) titled "IndyMac: What Went Wrong?," in which it "finds substantial evidence that IndyMac routinely made loans with little regard for their customers' ability to repay the loans" according to The Earth Times.
So this is what the end looks like - 265 imploded mortgage lenders on the Mortgage Lender Implode-O-Meter, and the guys behind it have had such a good time there is now a Bank Implode-O-Meter and a Hedge Fund Implode-O-Meter, too. The FDIC is calling folks out of retirement who worked on the great Savings and Loan mess of the Reagan years with offerings of $180k/year packages for those who know how to unwind a bank with a balance sheet full of fraudulent crapola.
I read The Automatic Earth every single days for clues as to how soon the Greater Depression is going to kick off. It is common knowledge that one watches at the quarter ends for such things - 1/1, 4/1, 7/1, and 10/1. I really expected we'd all be the April Fools come 4/1 and I'm amazed it has staggered forward this long, but something has to give. The Federal Reserve and U.S. Treasury stuck their fingers into the Bear Stearns mess and propped things up for another quarter but they have no means to do this with the monoline bond insurers.
What is a monoline bond insurer? This is simple - when any business or municipality/government agency wants to raise some money they do a bond issue. Investors buy the bonds and they're all considered "investment grade" because they bond issuing agency pays for insurance from the likes of AMBAC, FGIC, or MBIA.
All three of these things are pretty much insolvent - the first big claim any of them gets will bowl them over. Do I have to say it? They got in on the mortgage gold rush by insuring CDOs ... those bundles of now worthless mortgages.
So something like Indymac lets go, then one of the monolines lets go because they can't afford a claim on a CDO sold by the failing mortgage lender, then all hell breaks loose. When a monoline dies all of the bonds it insures suddenly lose their AAA rating and instead take on the native credit rating of the issuing organization. So follow this line of thought - pension funds invested in "safe" things insured by the monolines, but the monolines are doomed and something like an Indymac failure is going to trigger pension fund rules that don't let them hold any bond less than AAA, and then the wheels come off ... everything.
The whole system is interconnected, like the childrens' game of Kerplunk, with a tube full of sticks and a bunch of marbles on the top. Indymac was another large stick pulled from beneath the stack of financial consequence marbles.
Some folks always bring this up so I'll get it out of the way now - the Federal Deposit Insurance Corporation can not protect you from this stuff. The FDIC's charter and the premiums they collect from the banks protected presume the Glass Steagall act is still in effect and limiting the hazard. This is no longer the case, thanks to among others Phil Gramm, one of Weathervane McCain's economic advisors.
The losses have already occurred. We will not avoid the consequences. The Greater Depression began moving last August and it will very soon come to the point where everyone is aware that something has changed. The exhaustion of cheap oil means we never recover from it - each time we try to stand up again the ever lowering ceiling of oil production will knock us back down.