Federal Reserve & Interest Rates

In what could be a sign of things to come, the Federal Deposit Insurance Corp. seized control of IndyMac Bancorp Inc. on Friday as the fallout from the subprime collapse continues to grow.  IndyMac becomes the third largest financial institution to fail in U.S. history and the second largest federally insured institution to ever fail.

The failure will cost the federal deposit insurance program about $4 billion to $8 billion, the FDIC said. Some $1 billion of uninsured deposits are held by about 10,000 customers, the FDIC said. Those depositors will get an “advance dividend” equal to half the uninsured amount, according to the statement.

It has been a bad week for financial markets with concerns surfacing over the solvency of Fannie Mae and Freddie Mac as well as credit downgrades for a number of mortgage insurers.  Financial firms have dragged down the stock market this week, as it officially enters bear market territory losing over 20% of it’s value from it’s high last fall. 

The Fed has resisted raising interest rates despite mounting pressure as inflation concerns have grown over the past few months.  The fact is financial markets are not getting better and they probably won’t get better as long as the housing market remains depressed.

This could just be the tip of the iceberg, as we could see a wave of bank failures in the next couple of years.  Federal regulators will have their hands full as they try to cope with the hundreds of troubled financial institutions.

While the big name banks will have a much easier time in raising capital, that’s not the case for a lot of small to mid-sized lending institutions.  The Fed has already pumped billions of dollars of liquidity into the money supply as well as reducing the spread between the fed funds rate and the discount rate to a mere 25 basis points.

However, until someone can come up with a meaningful plan to turn around the housing market, the number of casualties from the subprime collapse will continue to grow.