America's regulators were last night shoring up the country's financial defences, after one of the biggest bank failures in US history sparked fears about the viability of the world's largest mortgage providers.
The Northern Rock-style collapse of California's Indymac Bank, which had assets of $32bn (£16bn), came amid speculation that regulators are also preparing to step in to save the two federally-backed finance houses known as Fannie Mae and Freddie Mac, which together have commitments of $5 trillion, amounting to half of America's mortgage book.
Government officials closed down Indymac late on Friday, citing a massive run on deposits by worried customers. All 33 branches of the Pasadena-based bank closed three hours early, locking out hundreds of jittery investors hoping to withdraw their savings before it went under.
Amid chaotic and often angry scenes, it emerged that Indymac will reopen tomorrow as Indymac Federal Bank. According to a two-page notice taped to branch doors, it had been in an "unsafe and unsound condition" and was unable to meet continued demand by customers for their deposits. The Federal Deposit Insurance Corporation, a government regulator, will guarantee all deposits of up to $100,000 – a commitment that may nonetheless leave more than 10,000 savers out of pocket
Indymac, known ironically as a "thrift" bank, becomes the second-largest savings firm in US history to go under, after the Continental Illinois National Bank and Trust Company, which collapsed in 1984. The latest failure was caused by massive losses in the so-called "foreclosure crisis", which has seen huge numbers of property owners defaulting on mortgages taken out at the height of the property bubble.
Many sub-prime borrowers unable to meet their mortgage payments had their homes reclaimed by the banks, who sold them off to the highest bidder. When the housing market was rising, this allowed banks to recoup their losses. But with house prices now down between a quarter and a third from their peak – and still falling as the market becomes flooded by bank-owned properties – the markets are not far from full-scale panic.
The growing crisis is threatening to engulf Freddie Mac and Fannie Mae, both of which halved in value in two days at the end of last week. This sparked rumours that Federal Reserve officials – whose rescue of Bear Stearns earlier in the credit crisis was announced on a Sunday – would undertake a similar operation this weekend.
On Friday, senior US officials sought to allay fears that a bailout would be needed. the US Treasury Secretary Hank Paulson said: "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission. We are maintaining a dialogue with regulators and with the companies."
But the markets were not convinced, and the plight of the US financial system is expected to trigger further falls in shares around the world this week. Three of Wall Street's biggest investment banks, Merrill Lynch, Citigroup and JPMorgan, will all post second-quarter earnings, with new writedowns likely to exacerbate market jitters.
Britain's FTSE index of leading shares was caught up in America's slide. The value of the UK's top 100 companies fell on Friday by nearly a quarter to its lowest for two and a half years. The index dropped 2.7 per cent to 5,261.6 – with the relative strength of mining and energy sectors the only factor keeping it above 5,000.
After a torrid week for Britain's blue-chip companies, led by the building industry, where thousands of jobs were lost and fears that 60,000 more could go over the coming months, further bad news is expected in coming days. There were 98 profit warnings issued in the UK by listed companies in the second quarter of the year, according to accountants Ernst & Young – the worst figures since 2001.
"These are uncertain and challenging times for UK plc," said Keith McGregor, restructuring partner at Ernst & Young. "Mistrust and trepidation have spread. Raising capital is perilous and equity markets are demanding unprecedented reassurance, especially from the leveraged and those exposed to home construction or the consumer."
On Tuesday, the Bank of England Governor, Mervyn King, will have to write a third letter to the Chancellor, Alistair Darling, explaining why the inflation rate continues above the 2 per cent target. This will follow the release of the June consumer price index figures.
Meanwhile, the price of oil reached fresh heights on Friday, breaching $147 a barrel. The jump, fuelled by concerns about Iranian crude production, comes only days ahead of a Treasury Select Committee hearing into oil price speculation. Sir Bob Reid, chairman of London's ICE Futures Exchange, will be questioned by the John McFall-led committee over its perceived part in the exploding price of oil.
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