Fear of failure

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: By tradition, sequels are pale shadows of their forerunners. In this financial crisis, each episode in the saga seems even more potent than the last. While one arm of the American government tried to allay fears about Fannie Mae and Freddie Mac, another was busily orchestrating the seizure of IndyMac Bancorp, a large mortgage lender which collapsed on July 11th. The Federal Deposit Insurance Corporation (FDIC) set up a new bank to take control of IndyMac’s insured deposits and assets, and will now try to sell what it can.

Judged by the standards of Northern Rock, a British mortgage lender where the death throes lasted for months, the failure of IndyMac has been orderly. Its consequences were anything but. Worried IndyMac customers queued in the sweltering Californian sun to retrieve their money, despite FDIC guarantees on deposits of up to $100,000 (of the bank’s $19 billion of deposits, $1 billion is uninsured).

Investors in other banks showed far less decorum. On July 14th the S&P500 banks’ index suffered its worst daily fall since its creation in 1989. Regional banks took the brunt of the punishment. Washington Mutual in Seattle and National City in Cleveland were both moved to issue statements reassuring panicking investors that they were well capitalised and had access to short-term funding. Such tactics can easily backfire. Wachovia, the country’s fourth-biggest lender, also sought to soothe markets about its finances on July 15th, and watched its shares sink further. Wachovia, which has achieved infamy for an ill-advised acquisition that swamped it with adjustable-rate mortgages in California, has lost more than 75% of its value since the start of the year.

Reasoned analysis is a struggle in such circumstances. “Who is next?”, asked a July 13th research note from Dick Bove, a respected industry observer, which ranked banks on the basis of ratios of non-performing assets. His reassuring subheading, “Not as many candidates as one would think”, got lost in the stampede as investors shied away from banks anywhere near the top of the list. Mr Bove issued a hasty clarification on July 14th saying that the data had been misinterpreted.