Personal Finance Blog By MoneyRates - September 2008

IndyMac Federal Bank is a new bank created when the FDIC closed the old IndyMac Bank. The large bank failure on July 11th, 2008 of IndyMac Bank was one of the first warning signs of the financial chaos to come later in the summer. Now that the federal government is running the bank some progress is being made on their large collection of troubled mortgages. The government has the ability to restructure troubled loans to more acceptable terms and prevent more foreclosures and losses. While IndyMac Federal Bank works through the restructuring of their mortgage portfolio they continue to offer above-market deposit rates which are FDIC-insured. These rates include:

Money Market Accounts - 3.75% APY on balances over $50,000

7-month Online CD Special - 4.05% APY with a minimum opening deposit of $5,000

Ultimnate Checking Account - 2.00% APY on balances over $25,000

Some depositors have been hesitant to deposit money at the new federal bank, but analysts have been quick to point out that regulators are unlikely to close their own bank anytime soon.

The FDIC has released some new videos about bank deposits and FDIC insurance. The videos feature media star and financial expert Suze Orman along with FDIC Chairman Sheila Bair.

The price tag for the US taxpayer of the government bailouts is reaching staggering proportions. To date the estimated costs has been reported at:

$29 billion for Bear Stearns

+$100 billion for Freddie Mac and Fannie Mae

$85 billion for AIG

$400 billion for the FDIC failed bank fund

$700 billion for the entity which will buy mortgage securities from financial companies and banks

Total estimated cost +$1.3 trillion

The total cost is almost twice the current account deficit which is the amount of money the Treasury Department has to raise annually through the sale of US Treasury securities to meet our spending demands. Historically foreign investors have been more than willing to buy our debt as the US dollar has been considered as a safe haven. Many economists are now publicly questioning if the large amount of new debt which will be issued will push up longer-term interest rates as foreign investors demand more yield for their commitment to the US.

One major economist has forecast that the 10-year Treasury bill currently yielding 3.86% may be as high as 6.50% in one year as our extra debt demands force yields higher. This would have many detrimental effects on the US economy which is already in fragile shape. Homeowners with mortgages should consider these relatively new forecasts of higher and persistent long-term interest rates when choosing the right type of mortgage.

One of the major developments last week was the initiative announced by the Treasury Department in which the Treasury Department will temporarily back up money market mutual funds with a new federal guarantee program. The program applies to funds in money markets before September 19, 2008. The press release from the Treasury Department summarizes the new program:

Treasury Announces Guaranty Program for Money Market Funds

Washington- The U.S. Treasury Department today announced the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program.

President George W. Bush approved the use of existing authorities by Secretary Henry M. Paulson, Jr. to make available as necessary the assets of the Exchange Stabilization Fund for up to $50 billion to guarantee the payment in the circumstances described below.

Money market funds play an important role as a savings and investment vehicle for many Americans; they are also a fundamental source of financing for our capital markets and financial institutions. Maintaining confidence in the money market fund industry is critical to protecting the integrity and stability of the global financial system.

Concerns about the net asset value of money market funds falling below $1 have exacerbated global financial market turmoil and caused severe liquidity strains in world markets. In turn, these pressures have caused a spike in some short term interest and funding rates, and significantly heightened volatility in exchange markets. Absent the provision of such financing, there is a substantial risk of further heightened global instability.

Maintenance of the standard $1 net asset value for money market mutual funds is important to investors. If the net asset value for a fund falls below $1, this undermines investor confidence. The program provides support to investors in funds that participate in the program and those funds will not "break the buck".

This action should enhance market confidence and alleviate investors' concerns about the ability for money market mutual funds to absorb a loss. Investors in money market mutual funds with a net asset value that falls below $1 would be notified that their fund triggered the insurance program.

The Exchange Stabilization Fund was established by the Gold Reserve Act of 1934. This Act authorizes the Secretary of the Treasury, with the approval of the President, "to deal in gold, foreign exchange, and other instruments of credit and securities" consistent with the obligations of the U.S. government in the International Monetary Fund to promote international financial stability. More information on the Exchange Stabilization Fund can be found at http://www.treas.gov/offices/international-affairs/esf/.

The Treasury Department then issued the following clarifications on September 21, 2008:

1. All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940 and are publicly offered and registered with the Securities and Exchange Commission will be eligible to participate in the program.

2. Eligible funds include both taxable and tax-exempt money market funds. The Treasury and the IRS intend to issue guidance that will confirm that participation in the temporary guaranty program will not be treated as a federal guaranty that jeopardizes the tax-exempt treatment of payments by tax-exempt money market funds.

3. The temporary guaranty program will be designed to provide coverage to shareholders for amounts held by them in such funds as of the close of business on September 19, 2008.

4. Further details on other aspects of the temporary guaranty program and the required documentation for funds to participate will be provided in the coming days.

Online reports are indicating that large institutional shareholders of Washington Mutual Inc. have cleared the way for the troubled banks to be purchased. Goldman Sachs and the federal government have both been rumored to be assisting in finding the right buyer. The orderly purchase of Washington Mutual Bank and unwinding of its suprime mortgage exposure is seen as important to prevent more turmoil in the markets. Despite the disasterous financial condition of Washington Mutual Bank, their +$100 million deposit base and branches in large states like exas, Florida, California, and Illinois make it attractive to some potential buyers.

Rumored buyers of Washington Mutual Bank include:

JPMorgan Chase

Wells Fargo

HSBC

Citigroup

U.S. Bancorp

Depositors at Washington Mutual Bank will be better off with a purchase than a FDIC closure because of the likelihood that the purchasing bank will keep deposit rates competitive just like Bank of America did when they purchased Countrywide Bank. Currently Washington Mutual Bank is offering the following rate specials:

Online Savings account 3.75% APY

8-month Online CD 4.25% APY

12-month Online CD 4.00% APY

48-month Online CD 4.15% APY

60-month Online CD 4.50% APY

4-year to 10-year Traditional CD 5.00% APY (branch visit required)

Due to uncertainty with Washington Mutual Bank keeping all deposits below the FDIC insurance limit of $100,000 is advisable. Visit wamu.com for more information regarding Washington Mutual Bank deposit offerings.