UPDATE: Comments from Sen. Schumer’s office now are included below.

Pasadena-based mortgage lender IndyMac Bancorp, battling fresh rumors that it is near collapse, conceded today that its financial position “has deteriorated since last quarter,” and said it was working on a plan with its regulators to improve “the safety and soundness” of the bank.

The company’s statement, put up on its corporate website, follows a weekend that saw depositors line up at some of its San Gabriel Valley branches to pull their money, as they reacted to news reports questioning the company’s survival.

It’s no secret on Wall Street that IndyMac has been ailing in the wake of huge losses on its loan portfolio as borrower defaults surge. The company’s stock price has been hammered down to mere pennies, and the plunge in the shares has accelerated over the last week. They ended at a record low of 62 cents today, down 23% from Friday’s close of 81 cents.

But depositors may have been spooked by a letter late last week from Sen. Charles E. Schumer (D-N.Y.) to the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Federal Home Loan Bank of San Francisco, saying he was “concerned that IndyMac’s financial deterioration poses significant risks to both taxpayers and borrowers.”

The letter stunned some Wall Street analysts, who said Schumer was in effect sealing the lender’s fate by raising the prospect of its failure. Schumer’s response? Don’t kill the messenger. “Make no mistake about it: IndyMac’s problems were caused by IndyMac’s management and no one else,” Schumer spokesman Brian Fallon said in an email. “The home loan bank system has an obligation to lend responsibly and police its members. But it has not been doing its job. We have found the only way to get the home loan bank system to act appropriately and positively is to make public the concerns we’ve already expressed privately.”

In its statement today, IndyMac said that after the Schumer letter appeared in the media, “we did experience elevated customer inquiries and withdrawals in our branch network last Friday and on Saturday of roughly $100 million.” IndyMac said that amounted to about 0.5% of its total deposits of $19 billion.

“While branch traffic is somewhat elevated this morning, it is substantially lower than on Saturday,” the bank said. It added that more than 96% of its deposits were fully insured by the FDIC (meaning the accounts were within federal insurance limits, and therefore should be safe no matter what happens to the company).

But the final part of IndyMac’s statement sounds more like a plea than a declaration that it will survive: “We are hopeful that this issue appropriately abates soon,” the bank said about the deposit outflows, “so that we can focus, with our regulators’ involvement, on the important issue of continuing to keep IndyMac Bank safe and sound through this unprecedented crisis period.”

Separately today, the non-profit Center for Responsible Lending published a report slamming  IndyMac’s lending practices in recent years. Read it here.

Photo: Nick Ut/Associated Press

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Since 9/11, and seemingly without the notice of most Americans, the federal government has assumed the authority to institute martial law, arrest a wide swath of dissidents (citizen and noncitizen alike), and detain people without legal or constitutional recourse in the event of “an emergency influx of immigrants in the U.S., or to support the rapid development of new programs.”

Beginning in 1999, the government has entered into a series of single-bid contracts with Halliburton subsidiary Kellogg, Brown and Root (KBR) to build detention camps at undisclosed locations within the United States. The government has also contracted with several companies to build thousands of railcars, some reportedly equipped with shackles, ostensibly to transport detainees.

“The power of the Executive to cast a man into prison without formulating any charge known to the law, and particularly to deny him the judgment of his peers, is in the highest degree odious and is the foundation of all totalitarian government whether Nazi or Communist.”

- Winston Churchill, Nov. 21, 1943

Since 9/11, and seemingly without the notice of most Americans, the federal government has assumed the authority to institute martial law, arrest a wide swath of dissidents (citizen and noncitizen alike), and detain people without legal or constitutional recourse in the event of “an emergency influx of immigrants in the U.S., or to support the rapid development of new programs.”

Beginning in 1999, the government has entered into a series of single-bid contracts with Halliburton subsidiary Kellogg, Brown and Root (KBR) to build detention camps at undisclosed locations within the United States. The government has also contracted with several companies to build thousands of railcars, some reportedly equipped with shackles, ostensibly to transport detainees.

According to diplomat and author Peter Dale Scott, the KBR contract is part of a Homeland Security plan titled ENDGAME, which sets as its goal the removal of “all removable aliens” and “potential terrorists.”

Fraud-busters such as Rep. Henry Waxman, D-Los Angeles, have complained about these contracts, saying that more taxpayer dollars should not go to taxpayer-gouging Halliburton. But the real question is: What kind of “new programs” require the construction and refurbishment of detention facilities in nearly every state of the union with the capacity to house perhaps millions of people?

A key rule for all who trade the market is don’t fight the Fed. And the central question for those who recognize this is, what will the Fed do next? From the time that Bernanke astonished conventional opinion by cutting rates last September in the face of a collapsing dollar, the two questions on everyone’s mind have been: how far, and how fast?

But this past week we got a strong clue. Former Fed chairman Paul Volcker stepped forward and made some sharp criticisms of the way that Bernanke is handling his job.

For years, many people have preached an independent Federal Reserve on the argument that, if left to Congress, monetary policy would be too easy, and only the Fed Chairman had the fortitude to resist the public’s demand for easy credit. But of course, what we have witnessed over the past 7 months is a Fed Chairman gone berserk and easing in the face of a massive, world-wide increase in prices and a corresponding collapse of the dollar. Indeed, we have witnessed an easing policy going back to 1981, and there were few examples of fortitude.

But few people, most prominently the Wall Street Journal’s Paul Pigot, have criticized Bernanke. The reason is the pseudo-mystique of the Fed chair. Monetary theory sounds like a mass of incomprehensible gobble-de-gook, and everyone is afraid to criticize the head of this institution. They knuckle under to what they do not understand.

But on Tuesday April 8, 2008, Paul Volcker gave a speech to the New York Economic Club. He stated:

“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank.”

Paul Volcker, as quoted by Michael M. Grynbaum, “Ex-Fed Chairman Chides His Successors,” New York Times, 4-9-08, p. C-1.

The Wall St. Journal commented:

“The present climate Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s.”

“Volcker’s Demarche,” WSJ, lead editorial, 4-9-08, p. A-14.

The importance of this criticism lies in the fact that your average newspaper editor or radio talk show host will shy away from a criticism of the Fed chairman if it comes from you or me. But coming from another Fed chairman it commands respect. This is the key step in an attack on Bernanke which has been building since Jean-Claude Trichet went eye-to-eye with Bernanke on Jan. 23. But Trichet did not verbally criticize Bernanke (and as head of the ECB it was not his place to). But even before Volcker’s speech, there was a palace revolt against Bernanke at the Fed. Grynbaum again:

“Minutes released on Tuesday of the Fed’s March 18 policy meeting revealed strenuous disagreements among top central bankers, with two of the 10 officials present voting against the decision to lower interest rates by three-quarters of a point.”

Michael M. Grynbaum, Op. Cit., 4-9-08, p. C-4.

What are the implications of this for Fed policy? We are rapidly approaching the time when the Fed will be forced to stop easing and then a little later it will be forced to resume tightening. The Fed funds futures are predicting another quarter point, possibly a half, by year end, and they have been very good. But that will probably be it.

The long bond is very close to its June 2003 high. It may or may not make it. But a 25-year bond chart indicates that, when the long bond gets below 4½% yield, this creates an enormous demand for credit and makes it almost impossible for the bond to go much higher. It is likely that 4½% nominal yield is very close to 0% real yield. (Many people make an important mistake in calculating the real yield on the long bond by taking the nominal yield and subtracting the past year’s CPI. However, the bond market is not looking backward to last year’s CPI. It is looking forward to the average price increase over the next 30 years, and that is a harder number to calculate.)

A yield of 0% in real terms on the long bond creates a virtually infinite demand to borrow, and an infinite demand for credit is an important part of a bubble. The internet bubble of 1999 and the housing bubble of 2003-2006 indicate that real interest rates at those times were close to 0. Hint to Alan Greenspan: If you are wondering if you did anything wrong during your period as Fed chair, these two bubbles are a big clue. The fact that people around the world are rioting for food is another clue. This tells us that, although T-bonds are not yet in a bear trend, it is almost impossible for them to go significantly higher.

And if there is little upside in T-bonds, then the stock market is in some trouble. We did have a classic stock bottom on Jan. 22-23 with a secondary test on March 10. But without leadership from bonds, any stock bull market will be weak and of limited duration.

And what of commodities? What will commodities do when bonds turn down?

Gold Tops $1,000 on Bear Stearns Crisis

By STEVENSON JACOBS – 1 day ago

NEW YORK (AP) — Gold prices bolted above $1,000 again on Friday, hitting a new record after a liquidity crisis at Bear Stearns Cos. rattled Wall Street and fed buying of safe-haven investments.

Other commodities traded mostly lower, with crude oil, copper and agriculture futures falling.

Following weeks of flirting with the $1,000 mark, gold finally breached the milestone Thursday after the dollar plunged against rival currencies. The dollar hit a record low Friday against the euro, which bought as much as $1.5687. The greenback’s fall has been a major driver of gold because investors consider the metal a safe investment in times of economic turmoil and rising inflation.

Investors pushed gold higher Friday in reaction to a plan by the New York Federal Reserve and JPMorgan Chase & Co. to provide secured funding to Bear Stearns in a bid to keep the troubled investment firm from collapsing amid a global credit crisis.

“The fact that gold was able to power back over $1,000 was very much due to the bad credit-related news that continues to sweep Wall Street,” said James Steel, analyst with HSBC in New York. “The credit crisis keep morphing and the safe-haven buying keeps getting reinforced.”

Gold for April delivery gained $5.70 to settle at $999.50 on the New York Mercantile Exchange, after earlier rising as high as $1,009 — a new trading record. The metal rose above $1,001 in aftermarket trading.

Gold has gained nearly 20 percent this year amid the tumbling dollar, record-high crude prices and nervousness about the faltering U.S. economy. Analysts say the metal could go even higher if the Federal Reserve continues its interest rate-cutting campaign when it meets on Tuesday.

Lower interest rates can boost the economy but also tend to undermine the dollar, encouraging investors to buy hard assets like gold and silver. A weak greenback also makes dollar-denominated commodities like gold cheaper for overseas buyers.

Other precious metals traded mixed Friday. Silver for May delivery gained 23.5 cents to settle at $20.655 an ounce on the Nymex, while May copper fell 0.30 cent to settle at $3.820 a pound.

In energy markets, crude oil prices dipped modestly, closing lower for the first time in a week as the slide on Wall Street and U.S. economic worries led to profit-taking.

Light, sweet crude for April delivery fell 12 cents to settle at $110.21 on the Nymex, after rising earlier to just below its latest trading record of $111, set Thursday.

Other energy futures rose Friday. April heating oil futures rose 2.17 cents to settle at a record $3.1465 a gallon after earlier setting a new trading record of $3.222 a gallon. April gasoline futures rose 0.66 cent to settle at $2.6894 a gallon.

In agriculture markets, wheat, corn and soybean futures plunged amid expectations that the U.S. economic downturn will dampen demand.

Wheat for May delivery plummeted 52.5 cents to settle at $11.915 a bushel on the Chicago Board of Trade, while May soybeans lost 50 cents to settle at $13.5275 a bushel. May corn fell 10.25 cents to settle at $5.5925 a bushel on the CBOT.

Are you a commodities investor with friends that think you are “crazy” for investing in precious metals? Do these same friends advise you to indefinitely “buy and hold” a large amount of “well diversified” mutual funds for the “long term”? We are continually amazed at how few investors seem to open their eyes to changes all around them, including what is really happening in the financial markets.

The following chart illustrates what would have happened to the Dow Jones Industrial average if it had increased in value at the same percentage rate as gold has since the year 2000.

In the above chart the blue line represents the actual monthly price of the Dow Jones Industrial Average. The red line in the above chart represents the percentage gains of gold factored into the price of the Dow Jones since 2000. In other words, if the Down Jones had performed as well as gold actually has in percentage gains since 2000, the Dow Jones Industrial Average would now be worth approximately 37,000 points. This chart helps illustrate just how significantly better gold has outperformed the Dow Jones Industrial Average since roughly 2000. If an investor had “bought and held” the Dow Jones Index since the year 2000 their investment would barely have broken even after eight years. This is a very large period of time for such poor investment performance. When inflation is factored into the equation of the Dow Jones, the actual return is extremely poor.

But your friends are likely to point out that stocks outperform commodities in the long term. We recognize that from 1980 to 2000 the Dow Jones Industrial Average far outperformed gold in terms of investment performance but this is exactly our point. In our opinion investments are cyclical and not linear. In the 1970’s commodities had a major bull run that significantly outperformed stocks just as stocks outperformed commodities in the following decades. We do not concern ourselves with which investment class is the ultimate investment of all time but rather which investment class is undervalued relative to other investments at any given time.

Unfortunately it appears most investors have a very short term bias and put too much emphasis on their recent experiences instead of history. We believe most investors are bias towards one strategy of investing because that strategy is what worked for them in previous years. Sadly, most of these investors will not learn that their former method for investing may no longer be effective until it is too late.

We wonder what the mainstream media such as television networks, news papers, radio stations and social mood would be like if the Dow Jones Industrial Average were to consistently hit new highs, with a value as high as 37,000 points. Based on the Medias apparent bias on US stocks, likely encouraged by sponsors and advertising revenue, we believe the coverage would be extreme. Interestingly, gold and commodities in general have grown many hundreds of percent points since 2000 yet few members of the media have noticed this significant development in the markets. More coverage on these types of investments would help countless investors find out about such opportunities within a short time. Instead we believe most investors will find out about the mega commodities bull market when it is once again overvalued and at risk of a serious correction. As usual, the cycle will eventually turn and the naive public will likely come late to the party and be destined for failure.

In the big picture we are concerned with what is undervalued now and likely to increase in value in the future, rather than what has already increased in value and therefore should always increase in value. We believe the former is a much more realistic strategy for making money in the financial markets.

Michael Kilbach
March 14, 2008