Protected: Bank News and Bailout

Bank News and Mutual Fund Problems

ECONOMY:

• Housing Starts (950k est.; 954k prior; 895k act.): Builders

broke ground on fewer houses than expected in August, as

rising foreclosures led to even tighter lending conditions.

FIXED INCOME & RATES:

Yesterday: Yields climbed 6bp as market activity swirled around

American International Group and word surfaced Barclays would

buy Lehman from bankruptcy. Today: Yields are down 6bp as

investors deal with the government takeover of AIG, while the 3M

T-Bill has dipped to its lowest level since 1954. Investors remain

deeply concerned that financial turmoil could get worse before it

gets better.

BANK NEWS:

• Mutual Fund Problem: Reserve Primary Fund became the

first mutual fund in 14Ys to expose investors to losses, after

“breaking the buck” on its money market mutual fund. The fund

wrote off $785mm of debt issued by Lehman that it owned,

which in turn led investors to dump more than 60% of fund

assets through redemptions. The fear at this point is that if this

problem spreads through the mutual fund sector, it could lead

to withdrawals from other funds. While good for banks (since

the money would likely flow back into the safety of bank

deposits), it would further exacerbate the crisis.

• ID Theft: A new study finds 57% of small businesses don’t

think they need a formal plan to secure their data. The FCC

reports the average cost to replace a stolen identity is $8k

Source: Bank News Daily

Bank News, Lehman & Goldman Sachs

ECONOMY:

• CPI (-0.1% est.; +0.8% prior; -0.1% act.): Lower gasoline

prices and a slowing economy pushed consumer prices lower

for the first time in 2Ys. Excluding food and energy costs, core

inflation came in as expected.

• FOMC Rate Decision (2.00% est.; 2.00% prior): While many

think the FRB may cut rates 25bp (or perhaps even as much

as 50bp), we think they will leave rates at 2% for now. Global

central bankers are cutting rates overseas and the U.S. is

already pretty low (plus, doing so doesn’t really get us very

much), so we just don’t see it in the offing right now.

FIXED INCOME & RATES:

Yesterday: Yields were slammed about 44bp lower, as market

fears reached epic proportions. News that Lehman had filed the

largest bankruptcy in U.S. history, Merrill Lynch had been

acquired by Bank of America and sharp late-day deterioration in

the stock of insurance giant AIG left investors spinning and

depressed. Today: The FOMC meeting couldn’t come at a better

time and it will be interesting to see what actions and

commentary occur. Yields are down 9bp as fears continue and

Goldman Sachs reports sharply lower earnings.

BANK NEWS:

• Goldman Sachs: The Wall Street firm reported 3Q profit fell

70%, the biggest decline in its 9Ys as a public company.

• Fed Funds: In an effort to keep Federal funds at lower levels

and ensure enough liquidity is in the system, the FRB turned

on the spigots and flooded $50B into the system. This action

comes after yesterday’s $70B flow, which served to eventually

push the Fed Fund rate down to 0.25%.

Source: Bank News Daily

Bank News & Failed Banks

FIXED INCOME & RATES:

Friday: Yields rose 13bp on a jobs report that wasn’t as bad as

the market thought and a bounce back in equities. Banks were

heavy purchasers of agency mortgages, as the forward curve

shifted down and the likelihood of future rate increases abated.

Today: Yields are up 7bp on the GSE news and banks are

starting to sell their Agency debt and MBS. Look for this to

continue for some time.

BANK NEWS:

• Failure: Silver State Bank ($2B, NV) was closed on Friday with

branches and non-brokered deposits sold to Nevada State

Bank.

• Ousted: The Board of WAMU fired CEO Kerry Killinger and

announced it had entered into a memorandum of

understanding with the OTS. The nation’s largest thrift said the

MOU related to risk management and compliance.

• Under Pressure: The OTS has issued a C&D on Downey

Financial Corp. ordering the thrift to reduce assets, provide an

REO disposition plan, strengthen its executive management,

decrease its risk to option ARMs and stated-income loans and

maintain a minimum Tier total risk-based capital ratio of 14%.

Bank News and Bankruptcies Surge

Factory Orders (1.0% est.; 1.7% prior): Orders are expected

to have increased in July, as export strength continued to

support production.

FIXED INCOME & RATES:

Yesterday: Yields slipped 6bp, as lower oil prices could not

offset stronger than expected weakness reported in construction

and manufacturing. For the most part, banks were content to

watch and wait for higher yields. Today: Yields are down 1bp, as

investors worry economic softness in Europe is likely to last

longer and be deeper than previously expected.

BANK NEWS:

• Construction Lending: The national delinquency rate

(calculated as loans 30 days or more past due) for construction

loans climbed to 8.1% in the 2Q, up from 7.2% in the 1Q and

2.4% in the 2Q of 2007.

• Text Banking: USAA Federal Savings Bank rolled out their

Text Banking which allows customers to check balances, pay

bills and initiate transfers all with a text message.

• Rising Bankruptcies: The latest data shows bankruptcy filings

jumped 29% in the 12 months ended June 30, as business

filings soared 41% and personal filings climbed 28%.

• New Bank Deposits: The average de novo branch opened in

the past 5Ys carries $19mm in deposits.

• Branch Location: A recent study of 5k bank branches finds

location drives about 70% of branch success.

• Remote Capture: A new survey finds 25% of small businesses

plan to use remote capture by the end of next year, as they

seek lower costs, later deadlines, faster availability and

increased time savings.

Source; Bank News Dailiy

Mortgage News Aug 19 2008

Bank Neww, Public Bankruptcies & Citigroup

ECONOMY:

• Pending Home Sales (-1.0% est; -4.7% prior): Sales activity

is expected to continue to decline due to higher mortgage rates

in June and tight credit conditions.

FIXED INCOME & RATES:

Yesterday: Yields rose 3bp as the market absorbed the better

than expected $17B 10Y note auction. Today: Yields dropped

8bp following the highest level of weekly jobless claims since

2002 and on AIG’s 2Q $5.4B loss announcement. Market

participants will look to today’s $10B 30Y bond auction for further

direction.

BANK NEWS:

• Benefits of Trust: According to a survey of 3,200 consumers,

banks with the highest level of trust captured over 50% of a

customer’s business compared to only 34% for banks with the

lowest results. Nearly 85% of local bank and credit union

customers trust their primary bank completely or mostly,

compared to less than 70% of customers whose banks are in

the top 12 largest in terms of asset size.

• Bankruptcies: According to research from Bain & Co., as

many as 75 corporations may file for bankruptcy this year and

more than 100 may do so next year. For comparison, there

were 13 filings in 2007 and the record was hit in 2001, when

263 public companies fell into bankruptcy.

• Citi: A preliminary agreement was reached between Citigroup

and the NY AG that will likely result in the Bank repurchasing

$8B of auction rate debt and paying a fine of $100mm. The AG

felt Citigroup did not fully disclose the risks to both retail and

institutional buyers of these commercial paper-liked

instruments and failed to honor its liquidity obligations.

• ECB: As expected the European Central Bank kept rates

unchanged. While their target rate remains at a 7Y high, like

the Fed, the ECB is increasingly worried over inflation and

growth.

Source: Bank Investment Daily

Bank News, Bank Closings, & Primary Dealers

ECONOMY:

• PCE Deflator YOY (3.7% est.; 3.5% prior; 4.1% act.): The

FRB’s preferred inflation index jumped by the most since 1981,

offsetting some of the benefit of the tax rebates.

FIXED INCOME & RATES:

Friday: Yields slipped 2bp, as investors reacted to data showing

the 7th straight month of job losses and an unemployment rate

that rose to a 4Y high. Many bankers were on vacation or busy

closing the books, so activity was muted. Today: After data

showing a spike in inflation, yields are up 4bp. Most investors are

content to await the FOMC meeting results scheduled tomorrow,

so activity is expected to be subdued.

BANK NEWS:

• Closed: The FDIC shut down First Priority Bank ($259mm, FL)

on Friday, costing the federal insurance fund an estimated

$72mm. SunTrust Inc. will purchase $42mm of First Priority’s

assets, assume $214mm in insured deposits and reopen 6

branches as SunTrust Bank today. A subsidiary of Beal Bank

Nevada will purchase another $14mm of the bank’s assets.

First Priority is the 8th FDIC-insured bank closed this year and

the 1st in Florida in 4Ys.

• Lending: According regulatory data, as of 2007, 13.1mm loans

were made to small-businesses and 219k went to small-farms.

The bulk of these loans were under $100k.

• Liquidity: Market players are discussing the impact in liquidity

as a result of a sharp drop in Primary Dealers. The number has

fallen from its peak of 46 in 1988 to 19 as of last month, when

Bank of America acquired Countrywide.

Source: Bank News Daily

Bank New, FBI & Naked Short Selling

ECONOMY:

• Housing Starts (960k est., 977 prior, 1,066k act.): Starts

unexpectedly surged (the most in 2Ys), after NY City changed

a building code that resulted in a mass of new multi-family

housing construction in the area. The single family component

fell to the worst level in 17 years.

FIXED INCOME & RATES:

Yesterday: Yields went up a mere 1bp, amid falling oil, stronger

data and an equity rally. Banks were moderately active and

selling for gains was the day’s thematic undercurrent. Today:

Stronger equity futures and better than expected bank earnings

are pushing yields up 5bp.

BANK NEWS:

• JP Morgan: The bank reported 52% lower profits, but handily

beat Wall Street estimates, helping to push its stock price

higher. JP increased loan loss reserves by $1.3B, wrote down

mortgage-related assets and leveraged loans by $1.1B and

absorbed $540mm in costs related to the Bear Stearns

acquisition. ROE fell to 6%, compared to 14% last year.

• Merrill: Merrill Lynch has reportedly struck a deal to sell its

share of Bloomberg for $4.5B, according to the Los Angeles

Times. Merrill is struggling with ongoing credit issues and

experts predict it will write down up to $5B this quarter.

• FBI Probes: IndyMac, along with Countrywide and 19 other

financial institutions are under investigation by the FBI for

possible fraud. Countrywide founded IndyMac in 1985, but

they separated into independent companies in 1997.

• Subpoenas: The SEC has issued over 50 subpoenas to

hedge fund advisory firms including Deutsche, Goldman and

Merrill as part of its investigation over stock price manipulation

related to Lehman Brothers and Bear Stearns.

• Bank Plans: A new study finds that within the next 2Y, 67% of

banks intend to roll out expedited payments and 57% will offer

online bill pay with credit cards. Only 25% are planning to

provide person-to-person transfers through cell phones, though

50% of banks will offer this service though the web.

• No More Shorts: The SEC issued an emergency order

blocking “naked” short selling of 19 major financial companies

including FNMA and FHLMC. Naked short selling occurs when

traders sell stocks short without either owning them or

borrowing them first.

Source: Bank Investment Daily

Indymac Issues Stakeholder Letter - Going Down

While this is a disaster pending, it is a great time for successful shortsales with Indymac, if you know how to negotiate and deal with loss mitigators (not to mention less of them now).

Our last two successful shortsales have been with Indymac with a 61% discount of FMV (one was 46% of loan balance). So get ready for a flood of shortsales that may approve easy with Indymac.

Enjoy,

Ron

Indymac Issues Stakeholder Letter PASADENA, Calif., Jul 07, 2008 (BUSINESS WIRE) –

Indymac today issued the following letter to its stakeholders: Dear Indymac Stakeholders: In this very difficult and challenging environment, any of the actions that we take to keep Indymac safe and sound unfortunately have negative consequences to some important constituency. As we stated in our financial update on May 12, 2008, we have been working with our investment bankers to raise additional capital. To-date, we have not been successful with these efforts, and, while we will continue these efforts with our bankers and others, we don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets. While some shareholders may believe it is in their best interests that we not raise capital right now given the significant dilution that it would cause, there are consequences of not being able to raise more capital and, therefore, actions that we now must take. Given the continued downward trend in home prices and a resulting increase in our forecasted credit losses and the related downward trend in the pricing of all mortgage related assets in the capital markets, especially mortgage-backed securities where we have experienced significant rating agency downgrades this quarter, we expect our loss for the second quarter to be larger than Q108, but it is difficult at this time to be more precise given the significant uncertainty surrounding accounting estimates, fair value accounting and other accounting matters. In light of the current environment and related deterioration of our financial position since last quarter, we have been working closely with our federal banking regulators with respect to the actions that they and we must take to meet our mutual goal of keeping Indymac safe and sound through this crisis period. In that respect, based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario. Our regulators have also asked us to submit to them a new business plan for their review and approval, something on which we have been working with them for some time. We have agreed on the basic elements of the plan, and the regulators have directed us to begin executing on it. An important element of our plan is to improve our capital ratios. Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further.

As a result, the most realistic and cost-effective way to shrink both our balance sheet and our servicing rights asset (which, as discussed in previous communications, is up against the regulatory cap limit), is to curtail most new loan production. In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted. As a result of the above, we have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel. We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks. While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets. At the same time, these operations take up significant balance sheet capacity and “feed” growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital. In closing our forward mortgage business, we will refocus our lending efforts on supporting and building within regulatory constraints Financial Freedom, our reverse mortgage unit (FHA production only), and on continuing the retention activities associated with our servicing portfolio. Combined, we currently expect these units to produce roughly $5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core business model will include (1) Financial Freedom, one of the largest reverse mortgage lenders in the Country; (2) a top ten mortgage loan servicing operation, with a solid retention production unit; and (3) a Southern California retail bank branch network, including 33 branches and roughly $18 billion in deposits, of which over 96% is fully covered by FDIC insurance.

In addition, when this housing and mortgage crisis abates and we return to health, we would also hope to be an investor in mortgage loans and mortgage-backed securities and might re-enter the national forward mortgage production business with a low-cost, non-commissioned-based business model.

Unfortunately, the above actions will necessitate the reduction in our present workforce from approximately 7,200 to roughly 3,400 or so over the next couple of months, which should reduce our operating expenses by roughly 60%. We will retain about 1,100 employees in loan servicing in Kalamazoo and Austin; 350 in our servicing retention group in Irvine and Kansas City; 800 at Financial Freedom, primarily in Irvine, Sacramento, and Atlanta; 400 in our Southern California retail and web bank; 500 in portfolio management and administration, largely in Pasadena; and 250 in discontinued businesses. In building Indymac up from 4 employees in 1993 to its present size, we have had to retrench and then rebuild several times over the past 15 years, but clearly these are the largest and most difficult staff reductions we have ever had to make. If we had another alternative, we clearly would have chosen it, as we understand how painful these workforce reductions can be for the affected employees and their families. Given Indymac’s current financial position and these significant layoffs, I strongly believe it is appropriate that I further materially reduce my own compensation.

As a result, I have requested of Indymac’s Board of Directors that they reduce my base salary by 50%.With respect to severance, our policy has always been that the fair and right thing to do is to provide our departing employees with a generous severance program to ease their transition to the next stage of their career. Our severance program, which provided one month of pay and one month of Indymac-paid COBRA insurance coverage for each year of service, was clearly the most generous in the mortgage industry, if not among most of the Fortune 500. I very much regret that the reality today, however, is that we can no longer afford this program given our need to preserve capital and return to profitability. Therefore, we will be providing employees with a minimum 30-day notice of the termination of their employment (effectively, 30 days severance), with employees covered under the Federal WARN Act and similar state statutes (”WARN”) receiving 60 days of advance notice prior to the effective date of the their termination. Affected employees with five or more years of service will receive a minimum $20,000 severance, including any compensation payments made during the notice period.

With all of the above said, in this environment plans can change often and quickly (e.g. ability to raise capital and/or liquidity, regulatory actions, etc.). All we can do is continue to work hard and do our vey best to keep Indymac safe and sound, so that we can rebuild our workforce and shareholder value when the housing and mortgage markets stabilize. We will be providing more information on our plans and prospects when we release Q208 earnings.

Very truly yours,
Michael W. Perry
Chairman and Chief Executive Officer