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Regulators seize troubled IndyMac


Feds take over mortgage lender IndyMac. FDIC will seek buyer. May become most expensive bank collapse ever.


By Catherine Clifford and Chris Isidore, CNNMoney.com writers

Last Updated: July 11, 2008: 11:03 PM EDT


NEW YORK (CNNMoney.com) -- In what could turn out to be the most expensive bank failure ever, troubled mortgage lender IndyMac Bank was taken over by federal regulators on Friday.


The operations of the Pasadena, Calif.-based bank - once one of the nation's largest home lenders - were shut down at 3 p.m. by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.


According to the FDIC, 10,000 IndyMac customers could lose as much as $500 million in uninsured deposits. The agency says the failure will cost the Deposit Insurance Fund between $4 billion and $8 billion, based on preliminary estimates.


"It's possible this will be the most costly bank failure in history, but it's too soon to say," FDIC Chairman Sheila Bair said in a conference call late Friday night. The failure could also affect premiums paid by all banks for deposit insurance, she added.


IndyMac, with assets of $32.01 billion and deposits of $19.06 billion, is the fifth bank to fail this year. Between 2005 and 2007, only three banks failed. And in the past 15 years, the FDIC has taken over 127 banks with combined assets of $22 billion, according to FDIC records.


"There will be increased failures, but it will be within range of what we can handle," Bair said. "People should not worry."


IndyMac marks the largest bank collapse since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records. The two most expensive failures were in 1988: American Savings and Loan Association in California ($5.4 billion) and involved First Republic Bank in Texas ($4 billion).


What now for IndyMac customers?


Bair said that the FDIC will try to sell IndyMac as a complete entity within 90 days.


When a bank shuts down, traditional bank accounts are insured to at least $100,000. Some accounts such as annuities and mutual funds are not insured at all. Individual Retirement Account funds are insured to $250,000.


Customers with uninsured deposits will get at least half that money back, and they could get more back, depending on what the FDIC gets when it sells the bank, said Bair.


IndyMac customers will have their funds transferred to a new entity - IndyMac Federal FSB - controlled by the FDIC. They will have uninterrupted customer service and access to their funds by ATM, debit cards and checks.


However, customers will have no access to online and phone banking services this weekend, according to the FDIC. Service will resume on Monday. Loan customers were advised to continue making loan payments as usual.


For additional information, the FDIC has established a toll-free number for customers of IndyMac Federal Bank, FSB. The toll-free number is 1-866-806-5919 and will operate today from 3:00 p.m. to 9:00 p.m. (PDT), and then daily from 8:00 a.m. to 8:00 p.m. thereafter, except Sunday, July 13, when the hours will be 8:00 a.m. to 6:00 p.m. Customers also may visit the FDIC's Web site at http://www.fdic.gov/bank/individual/failed/IndyMac.html for further information.


How it got to this point


IndyMac specialized in loans it had long argued were of minimal risk: low documentation loans to residential mortgage borrowers.


On Tuesday, IndyMac - which had 33 branches - announced that it was firing 53% of its workforce and exiting its retail and wholesale lending units. Last year, the lender was ranked 11th in residential mortgage origination, according to trade publication Inside Mortgage Finance.


More importantly, IndyMac also disclosed that regulators no longer considered it "well capitalized." As a result, since Tuesday, the bank wasn't able to accept brokered deposits, or short-term investments in large dollar amounts from brokers seeking the highest return on certificates of deposit.


Over the past two years, IndyMac dropped over 95% in stock price, or about $3.5 billion in market capitalization. Shares traded down nearly 10% on Friday to close at 28 cents.


IndyMac lost $184.2 million in the first quarter and announced on Monday that it was expecting a wider loss for the second quarter. It lost $614 million last year stemming from its focus on the Alt-A mortgage sector, where it originates loans to borrowers who fall between prime (or conforming) and sub-prime on the credit spectrum. The lender's chief executive, Michael Perry, had long argued that it was being unfairly punished given its relatively paltry exposure to sub-prime mortgages.


Rising Alt-A and prime mortgage delinquencies likely were enough indication for investors that the housing crisis had moved beyond the weakest borrowers. Even worse, with the securitization markets in collapse, IndyMac had no way to get new loans off its books. As it turned out, IndyMac was a leader in loans requiring little income and asset documentation, a category that has had disastrous levels of delinquencies at other troubled lenders. What loans the bank had made recently were to borrowers with well-documented assets and income, but those are sharply less profitable with respect to fees and interest income.


IndyMac, in its filing on Monday, said it would focus on its reverse mortgage business, retail branch network and mortgage servicing operations. But the growth restrictions placed on IndyMac by regulators and the banks and brokerages it did business with, as well as the sharply higher borrowing costs, placed the profitability of even its non-mortgage-related banking efforts in doubt.


Even efforts to prop up the bank hurt it. Last month, Sen. Charles Schumer, D-N.Y., wrote a series of letters to regulators in Washington and California asking them to take steps to prevent the bank's "likely collapse." In response, about $100 million in customer deposits has been withdrawn from the bank, according to one of its filings.


-Fortune writer Roddy Boyd contributed to this report.


First Published: July 11, 2008: 8:55 PM EDT






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IndyMac marks the largest bank collapse since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records.

And no one has anything to say? This may become THE BIGGEST BANK FAILURE EVER and no one has any comments? DarleneSwooneek

This will hurt every tax paying citizen of this country. It's going to hurt. We will end up holding the bag since it is our tax dollars they will be using in the end to bail all this out with.

I think I'll go read some more of FERFal's stuff again...

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I'm just holding my breath to see what happens with Fannie and Freddy on Monday. Note that in the article below, things settled down late in the afternoon based partly on a report that the Federal Reserve was opening a discount window to the firms. It wasn't until after the market closed that an FR person said there was no discussion of opening such a window. I bolded that section below.



Special Report Mortgage Meltdown

Fannie and Freddie: A wild ride

Shares of mortgage finance firms recover most of deep losses from earlier in day on assurances that government takeover is not needed.



Paste this link into your favorite RSS desktop reader

See all CNNMoney.com RSS FEEDS (close) By Chris Isidore, CNNMoney.com senior writer

Last Updated: July 11, 2008: 6:08 PM EDT


Mortgage backers get whacked


NEW YORK (CNNMoney.com) -- The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.


The wild day capped a brutal week for the shares of the two companies, as investors fled the two giants on worries they would need a bailout that would wipeout the value of their stock.


An early selloff was fanned by speculation of a looming government bailout. The stocks recovered on assurances by a leading senator that no rescue is needed and a Reuters report that said the Federal Reserve is opening up its discount window to Fannie and Freddie.


But after the market closed, Federal Reserve spokeswoman Michelle Smith told CNN that no discussions with Fannie or Freddie about access to the discount window have taken place.


The discount window is a source of funds that traditionally was only available to commercial banks. But after the Fed engineered the purchase of Wall Street firm Bear Stearns in March, it opened the window to investment banks as well.


Smith added that "the Fed is following the situation with Fannie and Freddie closely" and that she was "not prepared to discuss the range of options and alternatives" available to the Fed regarding Fannie and Freddie.


Immediately after the markets opened Friday, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before.


But the stocks made up much of their earlier losses. Fannie finished the day down 22% while Freddie's stock closed with a 3% loss.


Friday's selloff left both shares down just over 45% for the week and about 75% for so far this year.


Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.


Fannie and Freddie hold or back $5 trillion between them, or about half the mortgage debt in the country.


They play a central role in the U.S. housing market, providing a crucial source of funding for banks and other home lenders, especially since a credit market crisis last summer left them the only major players in packaging pools of mortgage loans into securities for sale to investors.


If they were unable to do so, it would significantly raise the cost and restrict the availability of mortgage loans, causing significantly more problems for already battered housing prices and sales. That in turn would be another significant problem for the overall U.S. economy, as well as global credit markets.


Trying to restore a sense of calm

The problems for Freddie and Fannie weighed on broader markets, causing a sell-off in U.S. stocks, especially hitting major banks, Wall Street firms and home builders. At one point during the day the Dow fell below the 11,000 mark for the first time in nearly two years.


Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators.


"In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.


Freddie's statement said speculation in media reports about a government takeover of the firms through a process known as conservatorship was not accurate.


"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."


Others also tried to reassure Wall Street that Fannie and Freddie were not in immediate danger of collapse.


In fact, shares of both companies started their modest rebound shortly after 2 p.m. when Sen. Christopher Dodd, D-Conn., the chairman of the Senate Banking Committee, defended the strength of both firms.


Dodd said his discussions with Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, the regulators who oversee the firms and the two companies' CEOs convinced him they have more than adequate capital and that there was no need to even discuss failure or a bailout.


He also vowed quick passage of a long-debated housing bill to give greater oversight of the two companies. The bill passed the Senate Friday night and is expected to be taken up by the house next week.


"There is a sort of a panic going on," he said. "The facts don't warrant that reaction in my view. Fannie Mae and Freddie Mac were never bottom feeders in the residential mortgage markets. People ought to feel confident about them."


Talk about a bailout

The New York Times reported Friday that senior Bush administration officials are considering a plan to have the government take over one or both of the companies if their problems worsen.


But Paulson said Friday that the government's primary focus is making sure that Fannie and Freddie remain "in their current form."


Even before the latest report on a possible rescue plan, investors fled the two stocks this week due to speculation about their future. The drop in their shares raised questions about how difficult and expensive it will be for them to raise needed capital in the future, which fueled further losses in their stock prices.


"Fannie Mae and Freddie Mac have lost investor confidence evidenced by the rapid brutal sell-off in their stocks, which could dramatically hinder their ability to raise any additional capital going forward," wrote Richard Hofmann of research firm CreditSights in a note Friday.


Hoffmann added that the firms' ability to function normally "remain at the core of government efforts to stabilize the mortgage markets."


A number of scenarios were being discussed by bankers and analysts about what the government may do to deal with the crisis of confidence facing the firms.


Jaret Seiberg, a financial services analyst for the Stanford Group, a Washington research firm, said Thursday that the Federal Reserve could purchase some of Freddie's and Fannie's debt or mortgage-backed securities. He also said the Treasury Department could make billions of dollars in loans to the companies or even buy the firm's stock.


"Government officials are always planning for worst-case scenarios and our note is intended to highlight some options that may be available to policymakers," he wrote. "We suspect hybrid versions of these plans also are possible."


Under current law, the Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of Fannie and Freddie, could take control of the firms if their capital falls too far below required levels. It is unclear how the firms would operate in that situation, known as a conservatorship.


OFHEO Director James Lockhart issued a statement late Thursday saying that his agency was closely monitoring the firms' credit and capital positions. But he pointed out that they had already raised $20 billion in capital and that they adequately capitalized, holding funds well in excess of his agency's requirements.


Investor panic

Still, investors were worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.


"Our primary concern about Freddie and Fannie is that credit losses are likely to be worse than the management's current judgment, which will further pressure the capital base, and we remain cautious until we are better able to quantify these risks," wrote UBS analyst Eric Wasserstrom in a note Thursday.


Those concerns prompted him to raise his estimated loss for Freddie and to cut his price target for the stock, although, he retained his neutral rating on both firms, rather than urging clients to sell their holdings.


But the biggest worry Fannie and Freddie shareholders faced Friday was what would happen if the government did have to step into rescue them. Certainly, the big selloff earlier in the day reflected some investors' fears that shares of Fannie and Freddie could become worthless in a bailout scenario.


CNN's Scott Spoerry contributed to this report



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I just saw this. This is playing out just like people on this board have said.


I'm thinking that what some members grandparents have said, about having cash in the house and not trusting the banks - is a good idea.


I think I need to get a larger cash stash hidden. What else can we do, as preppers in this situation?

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So the nightmare begins. Does any besides me feel as if they are living their parents or grandparents nightmare all over? Thank goodness people are jumping out of windows YET.


Remember in the 80's when the Savings & Loans crashed and burned. I worked for a S&L then and lost my job. We were bought out by a bank and they didn't need (or want) the S&L people.


Like Cricket I am holding my breath come Monday I want to see what Fannie Mae does and the other big mortage companies. What can one say when foreclosures are up 75% from one year ago. I said it then and I will say it now...ARMs are a rip off I don't think they should have ever been allowed period.


We got our quarterly retirement statements (we have TIAA-CREF) yesterday and I was sick. Hubby has got to revamp the way his is split up he lost half of what he put in this past quarter that is two quarters in a row he took a BIG loss. Mine wasn't as bad but I still had small losses here and there. The only thing that is doing anything right now it is the IRA part...at least it had a gain wasn't much mind you but at least it didn't have a - in front of the amount.


M23b going to look for fireproof boxes going to start her own bank in the walls, floor ceiling, mattress and other place she can find to stuff a box.

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Here is what Cramie says about fannie and freddie



At last, we have now found our own Resolution Trust Corporation for this era of overbuilding. In fact, we have two of them: Fannie Mae (FNM - Cramer's Take - Stockpickr) and Freddie Mac (FRE - Cramer's Take - Stockpickr). That's right, we know they are both out of capital, and unlike the ne'er-do-well banks -- almost all of which seem now slated to disappear in one giant bear-market orgy -- there are no saviors.


The dissolution of these two companies is the height of irony. President Bush made it his sub rosa mission to end the hegemony of these two Democrats-in-waiting companies. I don't even think he understood what the guarantee was or what they were supposed to do. That would take a lot of time to figure out. He probably just said, "We have banks, good banks, like Washington Mutual (WM - Cramer's Take - Stockpickr) and Countrywide; why do we need Fannie Mae, which just makes money for the Democrats?"

So, over a multiyear scheme, he hamstrung the agencies and let the private banks take over lending and securitizing pretty much anything, because homeownership was another one of his themes, of course, aided by the Fed's insistence that exotic mortgages, especially weird adjustable types, made the most sense.


That created the madness of speculation boom, and now bust, that wiped out almost all of the mortgage issuers, and now, because Fannie Mae and Freddie Mac were at last invited into the party, them, too. They lowered their standards, believed in the fiction of personal mortgage insurance and didn't know they were often being scammed like everyone else.


Now, if they had to be reserved properly, they would be insolvent. But here's where it gets tricky. They were only stroke-of-the-pen operations anyway, relying on an implied guarantee of full faith and credit, something that this administration has not re-implied at any time.


With the companies radically under-reserved even by the bulls' admissions, the equity has to be crushed and the bondholders take over. But that doesn't provide the capital that is needed for the company to keep securitizing. That's going to be the job of the government, because it will have to take these two over in the end.


Notice I am dispensing with the caveats, having hurt enough people by caveating all of the prospective tragedies in this group that have come true already (go back to the Dirty Dozen piece if you disagree.)


So with the government takeover, hopefully we can begin to get some sort of recognition of the seriousness of the situation, something that eluded the Fed last year and now eludes the Treasury and Congress and of course, the most clueless president economically in our history. This man mantra seems to be, "If cutting taxes doesn't solve it, then it can't be solved."


This whole new downturn is not because of Janet Yellen (Fire in a Crowded Theater). She's a good proximate cause. It is a recognition that the banking system could be going down here and the vanguard of the decline is the outfit meant to make housing more affordable, the government-sponsored enterprises (GSEs). After this, they won't be sponsored, they will be owned. Hopefully someone creative enough in this administration will recognize that what is needed is a huge pool of capital to buy mortgages stuck in the system -- I had thought the Fed should issue $200 billion in two-year notes and buy them, but it is way too late for that. The new recapitalized FNM/FRE will have to securitize a trillion in mortgages, offer some guarantee of a payoff, and at last we can get through this.


Of course, that presumes that anyone is at home in the government or even thinking about this.


And that may be too optimistic.


Either way, it's all unwinding now. Let's hope someone sees the potential for the new RTC. It is right in front of us. All you have to do is get rid of the private part of FNM/FRE -- the equity holders.


Looks like that's coming, looks like it is coming like an 18-wheeler down the interstate, right at these two entities that will soon no longer exist at this pace.


At the time of publication, Cramer had no positions in the stocks mentioned.




Jim Cramer writes about all the stock trades in his charitable trust for TheStreet.com in Action Alerts Plus. Recent stocks he's traded in this account include Schering-Plough(SGP - Cramer's Take - Stockpickr), Yamana Gold(AUY - Cramer's Take - Stockpickr) and Freeport-McMoRan(FCX - Cramer's Take - Stockpickr).







P.S. Missing Lenny Dykstra's deep-in-the-money calls? They're now here..


Lenny "Nails" Dykstra's new service, TheStreet.com Nails on the Numbers, is the only place where you can now find the profit potential of his deep-in-the-money calls. Limited time to save $100


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This entire OTC derivative problem is so big that no central bank will be able to put the fire out.


Make certain your total bank balance including interest on CD's is under the $100k limit NOW - especially if you have deposits at WaMu or Wachovia for example.


Keep some cash on hand.


Got Gold?


P.S. Will the last solvent financial institution please turn off the lights on the way out?


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Sara...you got it! got gold?? and in tangable assets...no paper certificates either...get gold/silver in hand. Along with other assets.


I hope Darlene wont mind, but Doctor Fungcool, that some of you have read from TOL and TB2k, thought this would be a good article to share around the net to help out all of us preppers no matter where we call our online "home".










Deadly Assumption #5: My Bank Accounts Are Fully Insured

Gary North


When you open an account at a bank, you are told in writing that your account is insured by the FDIC. What is the FDIC? It's the Federal Deposit Insurance Corporation.


What is a corporation? It is a legal entity that is created specifically to insure its owners from bankruptcy. If the corporation goes bankrupt, the owners (investors) will be protected from further lawsuits. They lose only the money they invested in the now bankrupt corporation.


Is the FDIC a private corporation? No. It's a government corporation. So, does this make it more reliable? More reliable than what? It is as reliable as the U.S. government.


If you go to the FDIC's Website, you learn the following:


blockquote>The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for up to $100,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.


This sounds good. Depositors want someone to supervise banks. No one wants his bank to go bankrupt (bankrupt = bank + rupture).


There is another crucial question: What is the ratio between deposits and FDIC reserves?


The FDIC receives no Congressional appropriations -- it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities. With insurance funds totaling more than $44 billion, the FDIC insures more than $3 trillion of deposits in U.S. banks and thrifts -- deposits in virtually every bank and thrift in the country.




Let's see: $3 trillion divided by $44 billion. That tells us that the reserves are a little less than 1.5% of the money value of the insured accounts. For every dollar in an account, there is a penny and a half in the FDIC.


Or is there? If you go to the Bank Insurance Fund, Balance Sheets, June 2004, you will find that there were not $44 billion in assets, but rather $34.7 billion. Of this $34.7 billion, only 12.3 billion is classified as "Available-for-sale securities." These were U.S. government securities. Most of the portfolio ($19.4 billion) is invested in "Held-to-maturity securities," meaning U.S. government bonds: high interest rate assets.






I ask this favor of everyone. If you are members of other sites, please relay the info provided here in a timely fashion. I'd appreciate that.



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I was kind of disappointed when our local bank didn't have any of the creative loans, etc to help us get into a house. But now I"m glad because that means my money is at least a little tad bit safer since they are extremely cautious in their lending practices. I'm also glad all our real estate investments got cashed in before things got too crazy. I don't know why but we've been very blessed in regards to when we've bought and sold. Plan to buy a place this Fall before the weather gets too cold. Goal to be in by Thanksgiving.

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Originally Posted By: quiltys41
IndyMac marks the largest bank collapse since 1984, when Continental Illinois, which had $40 billion in assets, failed, according to FDIC records.

And no one has anything to say? This may become THE BIGGEST BANK FAILURE EVER and no one has any comments? DarleneSwooneek

This will hurt every tax paying citizen of this country. It's going to hurt. We will end up holding the bag since it is our tax dollars they will be using in the end to bail all this out with.

I think I'll go read some more of FERFal's stuff again...

these bailouts are starting to get me all miffed mad

I need help here, please explain! Why is it if I run a business and I run it into the ground, I'm just at a loss, but here, we are expected to pay millions/billions, possibly TRILLIONS of dollars to bail out these banks? Is this so the big guys still have money in their pockets? double madmad Now I know, there is much going on here, but why are WE THE PEOPLE expected to pay all of this money? I heard it mentioned on another loop that this was like a backdoor tax that they (the govt) is springing on us. I wanted to say no, it wasn't so, but all I could do was nod my head yes noyes
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I don't know anything about this mess either, but like I wrote on another thread a guy said if they don't get help for Fannie & Freddie we will go from a recession into a depression. Money is what makes the world go round.

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If you go to bankrate.com you can check to see how your bank is rated in your state. They do seem to give pretty good ratings, they do not all have basically the same rating.

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The fix means a higher burden for the American taxpayers.


Not fixing it would be catastrophically worse.


Kind of like the option of your choice between really bad and completely horrible.


Take your pick.


The gov't can't afford to not help out FannieMae and FreddieMac because our nations creditworthiness could go down if these banks fail, and we cannot afford that.


Not so great, is it? It will be interesting to see how this all pans out. Our country is really in quite a mess right now.

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Well now they are saying it's not going to work bailing them out...some aree saying there are lines outside of IndyMac (saw that on CNN) and WaMu banks too. This cannot be good for our country and will send inflation up higher than it is now. And I mean the real inflation...to me, that includes the price of gas and food!



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Back in the 70s I worked in banking . . . and was told by the big wigs that yes, the accounts were insured up to $100,000 but that they didn't say WHEN the insurance would pay it back . . . that it could be paid back to your grandchildren. . . .


Don't know if that still applies . . . but something to think about.

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There is a "fix", the .gov gives them money, either in the form of outright cash or low rate loans.


There are two ways the .gov can do acquire this money - borrowing even more money from other countries = higher debt OR raise your taxes. Choose your poison.

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I have only one thread of income and it doesnt vary much. I am only leaving enough money in my account from now on to pay the utility bill and one bill that will be done with by November or December. The rest of it is going into a fire box bolted to the floor of my closet I think. My birthday present this year will be the firebox. I don't feel comfortable leaving my money in my account anymore.

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Originally Posted By: Louis1
...There are two ways the .gov can do acquire this money - borrowing even more money from other countries = higher debt ...

And more inflation (less buying power for your dollar). Get ready to see even higher prices on everything as the dollar buys less and less!
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