Indymac has been notified that it is no longer considered a “well capitalized bank”. A Stakeholder Letter” posted on Indymac’s Corporate Blog describes the grim situation.

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.

My Translation: “Don’t expect miracles. They are not coming”

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.

My Translation: “We will stretch accounting rules as far as we can, but right now, things look hopeless, even to us.”

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.

My Comment: The stock market figured out Indymac (IMB) was not well capitalized sometime around October of 2007. Except for one sharp bear market rally in January, the stock has been in a freefall ever since. The share price is now 71 cents, down from about $25.

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.

My Comment: Indymac needs to consider the strong possibility that its loan portfolio is of negative value and that they would have to pay someone to take it.

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.

My Comment: The waiver should not be granted. There is no reason to throw good money after bad.

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.

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%.

My Translation: It’s all over.

Washington Mutual (WM) and/or Wachovia (WB) are likely to find themselves in a similar situation in due time.

Mike “Mish” Shedlock
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