The Week Ahead: Perils Of The Mac Attack

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By Greg Peel

While Wall Street’s attention was turned to the demise of Fannie Mae and Freddie Mac on Friday night, US regional thrift IndyMac went under with $32bn in assets, including $20bn in deposits. IndyMac is exclusively California-based, and has but 33 branches, but its collapse is still the second biggest in US banking history – outstripping those of the 1990s savings & loan crisis. It is the fifth regional to go under in the current credit crisis.

IndyMac’s demise has been blamed on one Senator Schumer, who publicly published a letter he had sent to regulators last month expressing his concern over the bank’s capital position. This effort naturally caused a run, and IndyMac is now in the hands of the Federal Deposit Insurance Corp. All deposits in IndyMac of up to US$100,000 are insured.

IndyMac was a spin-off from what was once America’s biggest private mortgage lender, Countrywide. Countrywide itself would no doubt have gone under by now if it hadn’t been acquired for threepence by Bank of America. IndyMac specialised in adjustable rate mortgages requiring no proof of income. California is one of the worst hit housing-slump states.

This means that while what Senator Schumer did might have been foolish, he clearly only hurried along the inevitable. There are hundreds of state-specific regional banks in the US, and the FDIC currently has some 90 of them on a failure watch list. IndyMac’s combination of adjustable, no income and California, made it the subprime specialist of subprime.

Meanwhile over in prime mortgage land, there will likely be some sort of statement regarding the two giant government sponsored mortgage lenders – Fannie and Freddie – tonight, with respect to what the Fed and/or US Treasury have in mind to protect these two from a similar fate.

It’s a busy week in the US on the economic data front this week, with inflation figures in focus. However, with the US financial system once again sitting precariously on the brink of collapse, talk of raising the cash rate will now take a back seat.

Tuesday sees the release of May business inventories, the June PPI and retail sales, and the July Empire (New York) manufacturing index. Wednesday brings the June CPI and industrial production, and the July NAHB housing index, as well as the May US dollar fund flows and the release of the minutes of the last Fed meeting. The latter will be closely examined for clues of just what the Fed’s next rate move might be, but ongoing developments are drawing away the focus from historical minutes.

On Thursday June housing starts and building permits are released, along with the July Philadelphia Fed economic activity report, to wrap up a wealth of weekly data.

In Australia the focus has been very much on banks as well, with both the Commonwealth and ANZ choosing to make late Friday mortgage rate rises. The moves follow an earlier 20bps increase from St George, but CBA only added 14bps and ANZ 15bps. Attention today will be on Westpac and National. NAB has also announced the review of a possible $1bn exposure to ongoing US subprime problems. Banking problems are not contained only within the US.

Australia’s economic week begins on Monday with May lending finance, while Tuesday brings the minutes of the RBA’s last rate decision meeting. This document will also be closely examined for clues.

Wednesday sees the Westpac leading economic indicators for May, while the RBA monthly bulletin is released on Thursday and Friday sees the second quarter import/export price index.

Resources company quarterly production reports are beginning to flow now, with Energy Resources of Australia ((ERA)), Rio Tinto ((RIO)) and Woodside Petroleum ((WPL)) among the highlights this week. Woolies ((WOW)) also releases its quarterly sales report. All the details can be found in the FNArena calendar on the website.

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