Economic Week In Review

14. July 2008 by Ana Connell.

Lots of news last week and most of it was on the sobering side. We started off the week with a report from a Lehman analyst that FNMA and Freddie Mac will both need to raise a substantial amount of capital, 46 billion for FNMA and 29 billion for Freddie Mac, due to future pending write downs. Although this could be a non event, given the situation with IndyMac(see below) it is very troubling. Fed Chairman Ben Bernanke said he was opening the discount window to both institutions in order to provide “liquidity”.

The big news for the week came late on Friday. After market close, it was announced, that IndyMac Bank, a leader in “Alt-A” loans, had been seized by the Office of Thrift Supervision, due to a run on deposits. This made IndyMac Bank the 2nd largest federally insured financial institution to be seized by US regulators. The largest failure, if you are curious, was in 1984, Chicago’s Continental Illinois Bank and Trust. A successor institution, IndyMac Federal Bank FSB, will open next week. About now I’m remembering two years ago, when many prominent individuals were talking about how the subprime situation was under control said it would produce minimal fallout.

What caused all this was the huge number of defaults on mortgage loans made to, well, people who could not afford them. More troubling is the fact that there has clearly been little to no oversight of these institutions. The why is easy, everybody seemed to be making money, investors were making money and more people were given the ability to buy property, so it seemed like a win win for all. Problem is that if it seems too good to be true, it probably is. IndyMac managed to acrue $900 million in losses. So now depositors are left with the grim reality that only $100,000 on deposit with Indy Mac Bank will be insured.

What’s even more troubling about all this is that the FDIC has 90 institutions on it’s troubled bank list and Indy Mac Bank was not one of them. So this begs the question of how many more might fail. The clean up for this failure alone is expected to run between $4 and $8 billion.

The Federal Reserve is expected to issue new lending rules on July 14th that limit what’s termed as “exotic” mortgages. Too little too late for many and especially those with Indy Mac.

Market open tomorrow should be very interesting!

• Bonds…2 year 2.65%, 5 yr. 3.34% and the 10 yr. 4.00%.

• Crude oil closed at $145.12 per barrel.

• 30 Yr. mortgage average 6.09%

The Economic Week Ahead:

• Producer Price Index, Empire State Manufacturing Survey, Retail Sales , Business Inventories(Tuesday)

• MBA Purchase Applications, Consumer Price Index , Industrial Production, Housing Market Index , FOMC Meeting Minutes , Treasury International Capital report(Wednesday)

• Jobless Claims , Housing Starts, Philidelphia Fed Survey-(Thursday)

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