IndyMac to Halt Most of Its Mortgage Business and Lay Off 53 Percent of Employees

IndyMac to stop most mortgage loans and cut 3,800 jobs
By Jonathan Stempel
Monday July 7, 5:47 pm ET

NEW YORK (Reuters) - IndyMac Bancorp Inc (NYSE:IMB), one of the largest U.S. mortgage lenders, said on Monday it will eliminate 3,800 jobs and stop making most home loans after regulators concluded it was no longer "well-capitalized."

In a letter to shareholders and employees, Chief Executive Michael Perry said Pasadena, California-based IndyMac will stop accepting most applications and locking rates on retail and wholesale mortgages. IndyMac plans to honor existing rate-locked loan commitments.

The job cuts will affect 53 percent of IndyMac's 7,200 person work force and be made in the next couple of months, reducing operating expenses by 60 percent, Perry said. They are in addition to about 2,700 cuts already made this year.

Perry said regulators have directed IndyMac to follow a new business plan designed to bolster capital, but the company does not expect to raise capital "until there is more stability and less uncertainty in the housing and mortgage markets."

IndyMac plans to focus on its mortgage servicing unit, its 33-branch southern California thrift with $18 billion of deposits and its Financial Freedom reverse mortgage unit.

The company made $77 billion of mortgage loans in 2007, ranking ninth nationwide, according to the Inside Mortgage Finance newsletter.

In addition, IndyMac expects its second-quarter loss to be larger than the $184.2 million, or $2.27 per share, it lost in the first quarter. Analysts on average expected a quarterly loss of 96 cents per share, according to Reuters Estimates. IndyMac lost $896 million in the nine months ending March 31.

"It shows the environment for mortgage lending remains extraordinarily challenged," said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey mortgage information publisher. "IndyMac had been a well- regarded player in mortgages, but given how the market is, it may be easier to restart such a business in the future than maintain one now."

Perry also said he asked IndyMac's board to reduce his base salary by 50 percent. His annual salary is capped at $1 million, a regulatory filing shows. Perry was unavailable for comment, spokesman Grove Nichols said.

IndyMac is the largest independent, publicly-traded U.S. mortgage company, following last week's roughly $2.5 billion purchase of Countrywide Financial Corp by Bank of America Corp (NYSE:BAC - News). It joins more than 100 mortgage companies to curtail lending or go bankrupt since the start of 2007.

CAUGHT UP IN MORTGAGE BOOM

IndyMac long specialized in making "Alt-A" home loans, which fall between prime and subprime in quality and which typically go to borrowers who cannot verify income or assets.

While IndyMac typically sold many loans it made, it was hit hard as mounting delinquencies and defaults caused the market for most nontraditional home loans to disappear.

IndyMac in the second half of 2007 refocused on making smaller, safer loans that it could sell to government-sponsored enterprises Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE ).

The changes, however, came too late. IndyMac said its ratio of nonperforming assets to total assets increased sixfold to 6.51 percent in the year ending March 31, as its mortgage industry market share fell to 1.7 percent from 4.08 percent.

A June 30 report by the nonprofit Center for Responsible Lending said IndyMac, like many rivals, got caught up in "the overheated atmosphere of the mortgage boom" by making too many unsuitable loans in the quest for short-term profit.

On June 27 and 28, IndyMac said it suffered a mini bank run as customers withdrew about $100 million of deposits.

The withdrawals came after Sen. Charles Schumer, a New York Democrat who chairs the Joint Economic Committee, wrote to banking regulators that IndyMac could fail. IndyMac said on June 30 that Schumer's concerns created the "wrong impression."

Reverse mortgages let people, mainly 62 years and up, borrow against equity in their homes. Advances are not taxable, and loans typically need not be repaid during homeowners' lifetimes.

IndyMac Letter to Shareholders

Charts in the Babson Style for Market Close 7 July 2008

As a reminder, the first of the Dow Industrials, Alcoa Aluminum, will be reporting quarterly earnings after the close tomorrow.

The Decline from the Market High in October 2007



The VIX as an Indicator of Significant Market Bottoms



Charts in the Babson Style

Internal Report Urges Gulf States to Rethink Their Dollar Pegs

It makes perfect sense for high growth countries to de-peg from the US dollar, since the Fed does not have the latitude to raise rates to fight inflation, and a monetary inflation is gripping most of the world, sourced by the US dollar as the world's reserve currency and its negative interest rates.

The US dollar peg could transmit a troublesome easing of monetary policy to those who peg to its currency since the US is in recession, but inflation is more of a problem in the growth countries like the BRIC and the Middle East, and to a lesser extent in Europe.

The postential downside is that this provides an all too convenient for government and economic demagogues to denounce countries that drop the peg as causing the US' problems, shifting blame from themselves and the reckless and irresponsible US banking system, its regulators, the Fed, and the corporations that have sprung up around them.

Gulf states urged to rethink dollar pegs
By James Drummond in Abu Dhabi
Sunday Jul 6 2008 14:45
The Financial Times

Abu Dhabi has reignited speculation that the United Arab Emirates may break its fixed peg to the US dollar. The UAE is one of the world's main holders of dollar-denominated assets.

In a report published at the weekend, the Abu Dhabi department of planning and economy floated the idea of tracking a basket of currencies in advance of formation of a currency union in the six-member Gulf Co-operation Council.

The department is answerable to the emirate of Abu Dhabi and is not a federal policymaking body. However, it reflects official thinking in the most wealthy of the seven statelets that comprise the UAE.

Inflation in the UAE runs at 11 per cent and is higher elsewhere in the Gulf. The dollar peg means Gulf central bankers have to match the interest rate moves of the US Federal Reserve and thus have only limited tools with which to curb inflation.

"Although the UAE has officially made it clear that it would not de-peg its currency from the flagging US dollar, international financial institutions as well as experts and analysts have maintained that the UAE would do well [to float] its currency as a means [of] curbing inflation," the report said.

Qatar and the UAE are usually thought to be the most likely states to quit the dollar peg. Speculation mounted last year that the UAE was about to break with the dollar after ambiguous comments by Sultan Bin Nasser Al Suwaidi, central bank governor, but the authorities acted to deny it.

Of the GCC states, only Kuwait manages a currency basket dominated by the dollar but it can decide its own interest rate policy. Inflation in Kuwait is lower than in the other GCC states.

"GCC states need to peg against a basket of world currencies, taking into account the latest trading patterns, which tend to be bent toward the eurozone and Asia," the Abu Dhabi department said.

"That the Gulf states continued to have fixed-dollar exchange rates, even as the dollar continues to decline, causes greater harm to the Gulf countries," it said.

Analysts did not believe a change in the UAE's currency administration was imminent, although the report clearly reflected a strand of thinking. Simon Williams, economist at HSBC in Dubai, said the report showed a preference for joint action over unilateral action.

"The case for reform of the GCC currency regimes is strong but we don't anticipate change taking place in the near-term. The report may indicate that debate is ongoing but I don't take it as a sign that change is nigh," Mr Williams said.

The UAE yesterday said that it was forgiving up to $7bn (€4.5bn, £3.5bn) in principal and arrears of Iraqi debt to help Baghdad with reconstruction. The announcement coincided with a visit to Abu Dhabi by Nouri al-Maliki, Iraqi prime minister, and with confirmation that the UAE will send an ambassador to Baghdad two years after one of its diplomats was kidnapped there.

Currency Crisis in the Dollar May Be the Next Shock - BMO Nesbitt Burns

The Bottom Line: The Latest View on the Economy
Next Shock: Currency Crisis?
by Sherry Cooper
July 7, 2008
BMO Financial Group

The malaise of the U.S. economy is palpable. Not only have sky-high food and gas prices drained consumer discretionary income, but the weak dollar has dampened travel plans and the stock market declines have exacerbated the wealth destruction coming from the housing collapse. Businesses in many sectors continue to lay off workers as earnings collapse in the auto and airline industries, banks and brokerages, housing-related retail stores or just about anything discretionary.

Consumer finances are in perilous condition, a harbinger for further declines in consumer confidence. With growth running at about a 1% annual rate in the second quarter, most of which is in net exports, the Fed would have trouble doing anything but remaining on the sidelines, despite the mounting inflation pressure.

The ECB hiked rates last week for the first time in just over a year in a pre-emptive strike against inflation. The move had been so well telegraphed that the U.S. dollar actually rallied on the news, especially after Trichet indicated he had no bias on further moves.

A recession in the U.S. is apparent, but other G7 countries are now more vulnerable than ever to a punishing slowdown as well. After a decade and a half of continuous growth in Canada and Britain, a downturn comes as a painful shock. Ontario’s economic decline portends the spreading pain. Britain appears to be following the U.S. in a downturn in housing and retailing. As in the U.S., the bad news has weakened the prospects for the incumbent political parties.

Though many are calling for the government in both Britain and the U.S. to do something to spur the economy, the rising inflation pressure ties the hands of the central banks. Moreover, the governments cannot afford more crowd-pleasing giveaways, and there is a question just how effective the U.S. tax rebates were in the first place.

In the meantime, for decades, many emerging countries have fixed their currencies against the dollar to protect economies that were small, undiversified and dependent on the United States. But they are now the engines of global growth as the G7 struggles.

The BoE and the Fed have commented that inappropriately low interest rates in countries that peg their currencies to the dollar were helping to fuel commodity price inflation. Many of the countries in the Middle East and Asia are running double-digit or record-high inflation; but central banks cannot raise interest rates in response as long as they choose dollar pegs to keep their currencies undervalued.

The sustainability of the dollar pegs hinges on the U.S. interest rate outlook. If the Fed refrains from raising rates because of economic weakness, despite the rise in inflation, pegs will come under significant further pressure. This is a pressure cooker running over the boiling point.

The Bottom Line: The world may realize that it is no longer reasonable for the dollar to be the anchor currency. If several dollar-pegged currencies were revalued, we could expect to see some panic selling in the U.S. dollar, further destabilizing the global economy.

Dr. Sherry Cooper is the Executive Vice-President, Global Economic Strategist, BMO Financial Group, and Chief Economist, BMO Capital Markets & BMO Nesbitt Burns