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Fed's Kohn says banks face 'challenges,' but does not predict failures UPDATE
03.04.08, 10:45 AM ET
(updates with Fed actions)
WASHINGTON (Thomson Financial) - Federal Reserve Board Vice Chairman Donald Kohn today acknowledged that banks are likely to face more loan delinquencies and asset write-downs in the coming months, but indicated banks will be able to weather this storm, and did not predict a wave of new bank failures, something Fed Chairman Ben Bernanke predicted last week.
At a Senate Banking Committee hearing today, Kohn said the collapse of the mortgage market and asset-backed securities, and the credit tightening that followed, led to losses at many banks. He predicted more asset write-downs at large bank holding companies, but did not make a specific prediction.
Kohn also said there was a 'moderate overall decline in liquid assets' as a portion of total assets at bank holding companies, which together hold more than 14 trln usd in assets, and said 'strains have emerged in term interbank funding markets.'
'But in general these losses should not threaten their viability,' he told the committee.
Kohn noted that bank holding companies still reported net income of 90 bln usd in 2007, despite losses of more than 8 bln usd in the last quarter of the year. He added that while the non-performing asset ratio of these holding companies increased, the ratio was still lower than levels it reached earlier in the decade.
Kohn also pointed out that these holding companies have still maintained their required capital ratios, and said the largest companies are still managing to raise capital.
Kohn said state-member banks, which are regulated by both the Fed and state authorities, saw non-performing assets rise 'sharply' in the past year, and said the percentage of these banks with less-than-satisfactory supervisory ratings rose from 4.5 pct in 2006 to 6.3 pct in 2007.
'Like bank holding companies, these banks face deteriorating credit conditions in 2008 and we anticipate further increases in their loan delinquencies and charge-offs,' he said. 'We also foresee more difficult liquidity conditions for some of these banks,' and more banks with less-than-satisfactory ratings.
One trouble spot for smaller banks could be their exposure to commercial real estate loans, for which delinquencies doubled in 2007 to a rate of more than 2 pct. Kohn said small and medium-sized banks have 'sizable exposure' to commercial real estate loans, and said some banks were not effective in managing their exposure to this sector of the market.
Kohn said the Fed is planning a review on this issue to identify banks more at risk in this area.
Kohn outlined a range of activities that the Fed is undertaking to ensure banks can improve their risk management practices, but said the Fed itself must improve the way it oversees large bank holding companies and member-state banks.
'As supervisors, we must redouble our efforts to ensure risk management practices and controls keep pace with changes in financial markets and business models, providing both positive incentives and clear consequences,' Kohn said.
He said many banks were not aware of the risks of structured credit problems, and said the Fed is working to educate banks based on the lessons learned from last year's credit crunch and the collapse of many mortgage products.
'We are conducting critical assessments of our own supervisory programs, policies, and practices,' Kohn said. 'Our intent is to identify opportunities for improving our own supervisory processes both within the current environment and as preparation for future supervisory challenges.'
Steps the Fed is taking include encouraging loan workouts through modifications, deferrals, extensions, and conversion to fixed rate loans. The Fed has also put out rules for comment aimed at improving lending standards, which he said will 'depend critically on strong enforcement.'
The Fed is also working to improve the Truth in Lending Act in order to ensure more information disclosure at the time loans are made.
Kohn said the Fed is also closely watching the credit card delinquency rate, which rose in the second half of 2007. He said bankruptcy rates also bear watching, since an increase there 'could be a harbinger' of delinquencies on other consumer loans.
http://www.forbes.com/afxnewslimited/feeds/afx/2008/03/04/afx4727887.html
The Bankers' Bailout
Feb 19 2008
Washington is quietly planning a massive rescue for banks stuck in the subprime mess. Does anybody really think Wall Street deserves to be bailed out?
Since the onset of the subprime crisis last summer, the White House has repeatedly rejected the notion of a government bailout, either for homeowners facing foreclosure or for the banks and mortgage companies that made the now souring loans. "There's no bailout with government money, none whatsoever," Treasury Secretary Hank Paulson emphasized. But even as the administration has stuck to its laissez-faire stance in public, behind the scenes a covert bailout has been under way, with a number of public and quasi-public agencies quietly dispensing vast sums to financial institutions saddled with worthless or near worthless mortgage securities. All the while, homeowners at the heart of the problem have been left largely to their own woes. The rescue operation brings to mind John Kenneth Galbraith's dictum that in the United States, the only respectable form of socialism is socialism for the rich. (Read about some former government bailouts.)
Let's start with the Federal Reserve. In addition to bringing down the federal funds rate from 5.25 percent last August to 3 percent—including a dramatic three-quarter-point cut one day in late January—the central bank recently introduced a new auction process that makes it easier (and cheaper) for cash-strapped financial institutions to borrow from the government. Through four auctions in December and January, the Fed lent dozens of financial firms $100 billion at rates well below the discount rate, the rate at which distressed lenders formerly had to borrow. Crucially, the Fed also expanded the range of collateral it accepts to include triple-A-rated asset-backed securities, the same toxic paper that institutions like Citigroup and Merrill Lynch have been unable to sell or even value because the market for it has dried up. In effect, the Fed has been acting as a benevolent pawnbroker, extending cash for illiquid goods and charging low interest rates.
Then there is the Federal Home Loan Bank system, an obscure institution that President Herbert Hoover set up in 1932 to stimulate mortgage lending. The F.H.L.B., actually 12 government-chartered but privately owned regional banks, exploits its semiofficial status to raise money cheaply in the bond market and lends the proceeds to its membership, including most of the nation's big banks and investment firms. Since last summer, the F.H.L.B. has been extending low-cost credit at an unprecedented rate—$184 billion in the third quarter alone. Recipients include Citigroup, which owed the F.H.L.B. $98.7 billion at the end of September; Countrywide Financial, which owed $51.1 billion; and Washington Mutual, owing $43.7 billion.
Finally, there are Fannie Mae and Freddie Mac, which are also government-chartered but privately owned institutions. Fannie and Freddie do two things: They encourage other lenders to issue home loans to low- and middle-income families, and they raise money in the bond market to buy mortgage-backed securities. Despite losing money during the third quarter of 2007, the two mortgage giants stepped up their issuing and buying, often in tandem with the very Wall Street players that are now suffering. In fact, while many companies were drastically downsizing their mortgage divisions, Fannie and Freddie still did great business.
As a result of all this government-sanctioned activity, total mortgage lending nationwide actually rose in the third quarter of 2007, according to Richard Iley, an economist at BNP Paribas. However, as he pointed out in a recent research note, simply increasing the volume of business was probably not the only goal. "It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, Iley wrote. "The F.H.L.B. acted as a forgiving lender of the last resort, providing the liquidity to sustain mortgage production while Fannie and Freddie acted as risk intermediaries of last resort with record purchases of mortgages."
The government lending operation prevented the mortgage industry from seizing up, but it didn't solve the underlying problems facing the housing market. The question is whether more drastic measures will be needed to help lenders as well as borrowers. For the past three months, the widely watched S&P/Case-Shiller home price index has shown prices sliding at an annual rate of more than 15 percent across the country, with bigger falls in some areas. One in five subprime mortgages is already in arrears, and the delinquency rate is rising. Even more worrying are recent developments involving products like option ARMs, adjustable-rate mortgages that allowed borrowers to make such small monthly payments that their loan balances sometimes increased. The Los Angeles Times reports that in many parts of California, delinquency rates on option ARMs have reached double digits. Even on old-fashioned fixed-rate loans, the number of foreclosures is edging up. "This is turning into a human calamity," says Lou Ranieri, the Wall Street veteran who in the 1970s helped found the mortgage-backed-securities market. "We are looking at numbers that start to rival the Great Depression in terms of people hurt."
In an election year, pressure for more action is sure to intensify. The stimulus package working its way through Congress includes a proposal to let Fannie and Freddie buy mortgages worth up to nearly $730,000.
Hillary Clinton advocates a 90-day moratorium on subprime foreclosures as well as allocating more federal money to alleviate the housing crisis by, for example, purchasing vacant properties and renting them to working families. Other candidates have their own proposals.
Alan Greenspan has pointed out that rather than going through the trouble of negotiating with mortgage lenders and imposing rate freezes, the federal government could just send checks to distressed borrowers, which they could use to meet their monthly payments. The former Fed chairman, a free-market conservative, backed the handout nonetheless: He said that if the government wanted to bail out struggling homeowners, this would be a more efficient and transparent way to go, which is surely true.
A similar argument applies to the quasi-governmental agencies. Instead of relying on Fannie, Freddie, and the F.H.L.B. to ease the credit crunch, the federal government might be well advised to intervene directly in the financial markets. One solution is for the Fed, the Treasury Department, or a new official entity to buy large amounts of mortgage-backed securities, collateralized debt obligations, and other distressed paper from financial firms at bargain-basement prices. By purchasing these assets at a discount, the government could ensure that companies pay heavily for their reckless behavior, while also injecting much-needed liquidity into the system.
Such an initiative has historical precedents, and it wouldn't necessarily break the federal budget. In 1933, President Franklin D. Roosevelt founded the Home Owners' Loan Corp., which refinanced about a million troubled mortgages during the Depression. In 1989, Congress set up the Resolution Trust Corp. to take over more than 700 bankrupt savings and loans. Some experts predicted that the R.T.C. would end up spending $100 million or more, but by holding on to some of the S&Ls' assets until the economy and property values rebounded, it was able to keep its net spending to $87.9 billion. Adding in other expenses, such as those incurred by the R.T.C.'s predecessor, the Federal Savings and Loan Insurance Corp., the total cost to taxpayers of resolving the S&L crisis was $132 billion—in today's money, about $180 billion.
At this stage, the subprime crisis is still smaller than the S&L debacle: About 150 mortgage companies have been sold or gone under. Benn Steil, an economist at the Council on Foreign Relations, and Mark Fisch, a managing partner at Continental Properties, guesstimate that an R.T.C.-style subprime rescue could cost up to $75 billion. As part of the $3 trillion federal budget, this would be a perfectly manageable sum. There isn't much political support for such a dramatic move, however, so Wall Street is hobbling along on a combination of gradual write-offs and capital injections from foreign governments.
But one big financial collapse or near-collapse could change the climate overnight. How likely is such a catastrophe? Consider Merrill Lynch, one of the worst offenders in the subprime mess but an instructive example nonetheless. Last summer, before the credit crunch began, Merrill had total assets of roughly $1.1 trillion perched on top of equity capital of roughly $40 billion. With a leverage ratio of 25.3, it was in a situation where a mere 4 percent fall in the value of its assets would wipe out all of its capital. Such thinly capitalized financial firms are at the mercy of their lenders. If a crisis of confidence develops, funding can dry up and the firms can unravel with stunning rapidity.
Fortunately for Merrill, the full scale of its exposure to the subprime problem emerged gradually, and so far it has been able to secure fresh capital and stabilize its finances. The next casualty might not be so lucky. Much depends on the degree to which credit problems extend from subprime to other areas in which securitization was popular, such as home-equity loans, commercial real estate, corporate loans, credit-card receivables, and auto loans. If these sectors deteriorate—and recent reports from American Express, Citigroup, and other firms indicate some disturbing trends—more big financial firms will find themselves with holes in their balance sheets, and persuading others to bail the firms out may be difficult. (Presumably, even the governments of Dubai and Abu Dhabi have limits on their largesse.)
Since letting a major bank or Wall Street firm fail in the current environment could easily lead to contagion, the federal government would have little option but to launch a formal rescue. This is what happened in May 1984 when Continental Illinois, which was stuffed full of bad loans that had been extended to the oil patch, found itself shut out of its usual funding markets. The Federal Deposit Insurance Corp. injected $4.5 billion into Continental, removed the senior management, and took an equity stake of 80 percent. The bank continued to do business, albeit in a scaled-back manner; eventually it was sold to Bank of America.
GaveKal, a Hong Kong economics consultancy, says that this financial crisis, like those that preceded it, began with government at arm's length. But as in past rescues, that government resistance eventually begins to soften. "In each of these cases, the interventions were undertaken by doctrinaire free-market governments—and in each case, they worked," GaveKal's report states. Evidently, in order to save capitalism, it is sometimes necessary to administer a stiff dose of socialism.
http://www.portfolio.com/views/columns/economics/2008/02/19/Massive-Bailout-Planned-for-Banks
Bond Insurers Led Into Temptation
Rich White, Investopedia 02.28.08, 11:45 AM ET
Municipal bond insurance got its start as a way to protect investors if their bond issuer defaulted. But as the industry matured, bond insurers tried to generate new revenue by underwriting sometimes exotic structured finance products.
In 1971, MGIC Investment (nyse: MTG) of Milwaukee formed a subsidiary called American Municipal Bond Assurance (nyse: ABK) expressly for the purpose of providing financial guaranties to municipal bond investor. That same year, the first municipal bond was insured by Ambac to build hospital facilities for the town of Greater Juneau, Alaska.
The location dramatized an important benefit of this new type of insurance; after all, how many investors have ever visited Juneau? More importantly, how many would want to travel so far to perform due diligence on municipal hospital facilities? (To learn more, see "Due Diligence In 10 Easy Steps.")
Once Ambac attached its insurance guarantee to the bonds, long expeditions became less necessary. The insurance was purchased by the bond issuer (Greater Juneau) when the bonds were issued, and it continued as long as any bonds in the issue remained outstanding. If any insured bonds should ever default on principal or interest payments, Ambac guaranteed to make up any defaulted or late payments to the investor. In effect, the high credit rating of Ambac (which was "AA" from S&P in 1971) trumped the credit rating of the bond issuer. Once investors became satisfied that Ambac was a high-quality insurance company, they didn't have to worry as much about the due diligence on municipal bonds issued in Juneau, Laredo or Anytown, U.S.A.
The invention of municipal bond insurance revolutionized the public debt markets over the next 36 years. In 1974, another new insurance company entered the market, the Municipal Bond Insurance Association (nyse: MBI), and gained the highest possible rating, " AAA." In 1979, Ambac also achieved this rating. By 1988, 25% of all newly issued municipals carried insurance. In 1994, bond insurance helped to avert panic in the municipal market, when Orange County, California, declared bankruptcy. (For more on the corporate debt rating system, see "What Is A Corporate Credit Rating?")
The U.S. municipal bond market grew steadily over several decades to about $2.6 trillion in value as of year-end 2007, according to the Securities Industry and Financial Markets Association (SIFMA). The market is subdivided into two types of bonds: General obligation (GO) bonds are backed by the issuer's full credit and taxing ability, and are commonly issued by states, counties and municipalities.
Revenue bonds are backed by specific revenue streams from license fees, tolls, rents or special purpose tax assessments.
GO bonds are generally considered to be of higher quality, because the bond issuer has taxing power and can increase taxes to repay bonds, if necessary. For example, most states in the U.S. command either "AAA" or "AA" ratings, which indicates very high quality, even without bond insurance. The issuers of revenue bonds, however, tend to be smaller and lack discretionary taxing power, so their ratings are more varied and often lower. About two-thirds of all new municipal bonds issued are revenue bonds, according to the SIFMA. (To learn about investing in muni bonds, see " The Basics Of Municipal Bonds" and " Avoiding Tricky Tax Issues On Municipal Bonds.")
Building Investor Confidence
By paying a premium to a municipal bond insurer at the time a bond is issued, GO and revenue bond issuers have been able to "enhance" the issue's credit quality to the highest "AAA" level. This increases investor demand for the bonds in both the initial underwriting process and secondary trading market.
Historically, the leading bond insurers have pursued two other strategies that helped to increase investors' confidence in their guarantees.
-- Narrow focus--While many insurance companies pursue a variety of business lines (e.g., life, auto, health and homeowner's insurance), companies like Ambac and MBIA (nyse: MBE - news - people ) "stuck to the knitting." For this reason, these companies are often called monolines. The narrow focus helped them avoid exposure to huge losses that have hurt other insurers, such as the vast property damage caused by Hurricane Katrina.
-- Zero-loss standard--
The monolines have always emphasized that they conduct rigorous credit analysis of every bond issuer to maintain a "zero-loss" underwriting standard. In other words, they claimed to have confirmed that the insurance would not be necessary except in very extreme cases.
For a quarter of a century, the narrow focus and zero-loss standard worked for the monolines according to plan. For example, during the first half of 2007, $231 billion in long-term municipal bonds were issued in the U.S., according to the SIFMA. Within this issuance, roughly 48% of the nominal dollar volume had credit enhancement. About 90% of the enhancements were through monoline insurance, as opposed to other methods such as bank letters of credit or standby purchase agreements.
Meanwhile, default rates on municipal bonds were very low, averaging just 0.63% on a cumulative basis for all bonds issued between 1987 and 1994, according to a long-term study by Fitch Ratings.
In this environment, the municipal bond insurance industry flourished. MBIA and Ambac grew their annual revenues to $2.7 billion and $1.8 billion, respectively, and they were joined in the field by others including FGIC, XL Capital Assurance (nyse: XL) and ACA Capital Holdings (nyse: ACA).
In a search for increased profit, the monolines began to diversify their book of business into the lucrative world of residential mortgage-backed securities (RMBS) and other structured finance products. The RMBS products included both high-quality "prime" mortgages and lower-quality subprime mortgages. In the structured credit product line, monolines guaranteed the principal and interest on exotic CDOs ( collateralized debt obligations) that sliced and diced different cash flows of RMBS, all of which were heavily leveraged to a continuation of the U.S. housing boom that persisted from 2002 until 2006.
Then in 2006, the housing boom went bust. The RMBS and CDO guarantees of the monolines became costly liabilities, and the credibility of their zero-loss standard went out the window, perhaps forever. (To learn more, see "Why Housing Market Bubbles Pop.")
In late 2007 and early 2008, the tide began to turn against the monolines in three ways:
--Standard & Poor's downgraded the credit rating of ACA Capital Holdings by 12 levels, to "CCC" (highest risk). This downgrade came after ACA reported a $1 billion loss.
--Fitch Ratings reduced the prized "AAA" rating of Ambac to "AA," while also putting the company on "negative watch," indicating the potential for further downgrades.
--MBIA was forced to scramble for additional capital to shore up its losses, which were reported as $1.9 billion for 2007 amid heavy balance sheet write-downs. (To read about other subprime casualties, see "The Rise And Demise Of New Century Financial" and "Dissecting The Bear Stearns Hedge Fund Collapse.")
Although the monolines did maintain their narrow focus on insuring credit risks, their foray into RMBS and CDOs proved costly to their stature as strong guarantors. The question then remains: What should municipal bond investors know, and do, about this type of insurance going forward?
--Insurance is only as good as the rating and credit underwriting policies of the monolines that stand behind it. It's important for investors to evaluate not only the quality of the underlying bond, but also that of the insurer.
--It may take some time for the monolines to shake out the mess from the worst housing market in decades.
--Perhaps most importantly, diversification can be just as valuable in municipal investing as in other areas. That means spreading risk among different issuers and regions of the country. A number of tax-exempt mutual funds offer diversified portfolios of municipal bonds, and one significant event of 2007 was the proliferation of exchange-traded funds (ETFs) that specialize in municipals.
Consider insurance as just another feature attached to a municipal bond--not an excuse to preclude further due diligence. The bond insurers gambled their reputations on exotic new products--but you don't have to do the same with your nest egg.
http://www.forbes.com/2008/02/28/ambac-mbia-bonds-pf-education-in_rw_0228investopedia_inl.html?partner=yahootix
Nonprofits fight debt costs, bond insurers
Firms balk at helping colleges pay lower rates
Globe Staff / February 21, 2008
Universities and other institutions with rising debt costs are grappling with an unexpected problem: insurers who won't let them off the hook.
At Bentley College in Waltham, treasurer Paul Clemente expects he'll soon have to pay $500,000 to refinance a debt with soaring interest costs. If his bond insurer would let him convert from an auction-rate bond to a different type of variable-rate date, however, his cost would drop to around $50,000. He says the insurer, XL Capital Assurance of New York, first assured him there was no problem and then stopped returning his calls.
"Frankly, I'm disappointed they've essentially abandoned their clients," Clemente said yesterday.
Executives at XL and another insurer wouldn't discuss specifics but said they are working toward new arrangements with their clients. The problem is the latest manifestation of how problems with subprime mortgages have spread to nonprofit institutions such as hospitals and universities whose bonds previously were considered to be safe, conservative investments.
In fact, many of these institutions paid millions to XL and other big bond insurers to make their bonds more appealing to investors.
Since last month, the largest insurers have been downgraded or put under review by major credit rating agencies because of the subprime holdings in their portfolios. This in turn spooked many borrowers who stopped bidding on what are known as auction-rate bonds because their interest rates are set in periodic auctions.
In many auctions recently, no bidders have stepped forward at all. When no one bids, interest rates reset at levels specified in contract documents, as high as 20 percent in some cases. Bentley, for instance, had to pay 7.8 percent interest last week on bonds that paid around 3.5 percent in November, adding an extra $60,000 a week to the school's interest costs.
Yesterday, Massachusetts Secretary of State William F. Galvin launched an investigation into auction-rate bonds, asking several mutual-fund firms that hold these bonds for information. "The failures in these auctions cause many and diverse problems," Galvin said, and the impact "can be daunting for the investor who has sought a safe and dependable harbor for life savings."
To lower Bentley's rates, Clemente would like to switch the borrowing to what are known as "variable rate demand bonds." The market for those bonds has continued to function, because they can be held by institutional investors such as public-sector pension funds. But without XL's permission to convert, Bentley's refinancing costs will be much higher.
Officials at other schools, including Worcester Polytechnic Institute, have had similar concerns. "You could expect that they're upset and angry that the creditworthiness of the insurers is what's causing the cost of their borrowing to go up," said Robert L. Culver, the president of MassDevelopment, a quasipublic agency in Boston that issues bonds for companies and nonprofits.
Last week MassDevelopment approved several applications to restructure auction-rate borrowing. Many clients, Culver said, "are frustrated and seeking alternatives."
In a statement, another large bond insurer, MBIA Inc., said that "We are working closely with MBIA-insured issuers and their advisers to address liquidity concerns and achieve the most efficient cost of funding available." Representatives of a third insurer, Ambac Financial Group, didn't respond to questions.
Ed Hubbard, the president and chief operating officer of XL, said in a statement yesterday that "We understand the difficulties issuers are facing due to the current market conditions. Over the past few weeks we have been working to develop solutions to assist our clients. These possible solutions include terminating the insurance policy and working with certain clients to switch from auction rate to variable rate demand notes with or without a letter of credit."
XL put its intentions into practice in at least one case yesterday involving Bryant University in Smithfield, R.I. Like Bentley and WPI, officials at Bryant are considering how to switch about $50 million in debt out of the auction market and into variable-rate bonds. Fees on the transaction would be $212,000 with XL's permission and $350,000 without, estimated Barry F. Morrison, the school's treasurer.
In an initial interview yesterday afternoon Morrison said XL so far hadn't given him the approvals, which he called "a bit disappointing." But later he spoke with an XL representative and said he was told the transaction had been given the go-ahead - likely because the company wants to keep its reputation.
Ross Kerber can be reached at kerber@globe.com
Billionaires Pounce On Bond Insurers' Stumble
Andrew Farrell, 03.01.08, 6:00 AM ET
The woes of overextended bond insurers are creating a huge money-making opportunity and two of the world's most successful investors have pounced. Wilbur Ross followed Warren Buffett into the municipal bond insurance business Friday with a big investment in Assured Guaranty.
The recent entrance of the two billionaires into bond insurance was actually precipitated years ago with the decision of sector players to expand their coverage. At the time, most insured primarily municipal bonds. It was a safe, lucrative business because municipal bonds rarely default.
Insurers, hungry for bigger profits, then started insuring other types of debt. They found huge demand for their services in the exploding field of collateralized debt obligations, a type of debt backed by various assets. Many included bundles of subprime mortgages.
Now spiking mortgage defaults put the insurers on the hook for potentially mammoth payouts. The problem is prompting credit rating agencies to lower ratings on many of the insurers. The downgrades are a painful blow since municipal debt issuers only want to buy insurance from the highest rated companies.
Enter Warren Buffett, the second wealthiest American with a fortune of $52.0 billion, and Wilbur Ross, the 286th wealthiest with a fortune of $1.7 billion. Both have earned well-deserved reputations of finding value in out-of-favor sectors. Neither have any interest in insuring the collateralized debt obligations that caused so much trouble. They just want to grab the safe and steady cash flow of municipal bond coverage.
Buffett moved first. In December, he announced his Berkshire Hathaway (nyse: BRKA) would start insuring municipal bonds. With the company boasting a stellar credit rating, it's having no problems wooing governmental debt issuers. (See: "Buffett Swoops Into Bond Insurance")
Ross opted not to start from scratch. On Friday, Ross's plans to invest as much as $1 billion in Assured Guaranty (nyse: AGO) were unveiled. His choice of companies caught many off guard but makes sense. Unlike most of its competitors, Assured didn't jump on the collateralized debt obligation bandwagon and thus kept its top-notch credit rating. (See: "Wilbur Ross Makes A Safe Bet")
"Assured is one of the very few [bond insurers] that's ranked as a strong, stable triple-A even without our capital," said Ross on a CNBC appearance Friday morning. "So unlike the other situations where you would put in capital mainly to fill a hole, in the case of Assured, the capital is going in gradually over the next year to help [Assured Chief Executive Dominic J. Frederico] propel himself to a new level."
With deep pockets behind them and strong credit ratings, Berkshire Hathaway and Assured Guaranty are poised to make huge gains in market share in the current turmoil. Not only are they perfectly positioned to capture coverage for new municipal bonds, they can also profit by re-insuring older debt. Portfolio managers holding debt guaranteed by the struggling insurers are looking for insurance from more stable sources.
It adds up to more grim news for the sector's other major players like Ambac Financial (nyse: ABK) and MBIA (nyse: MBI). Shares of both dropped further Friday and continued a steep slide that has eroded the market value of each by about 80%.
http://www.forbes.com/facesinthenews/2008/03/01/ross-buffett-bonds-face-markets-cx_af_0229autofacescan04.html
Bank Regulator Mandates Monthly Details on Mortgage Delinquencies From Nine Banks
February 29, 2008 - 5:57 p.m.
WASHINGTON (AP) - Nine large banks must provide detailed information on mortgage delinquencies and foreclosures every month to a federal regulator.
The Office of the Comptroller of the Currency said Friday it wants to take a closer look at the performance of loans among the banks that it regulates.
It is requiring the information from Citigroup Inc., Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., US Bancorp, National City Corp. HSBC Plc and First Horizon National Corp., an agency spokesman said.
Those banks are large players in the business of loan servicing — collecting and distributing mortgage payments. They will be required to submit results for October 2007 through February by March 31.
The regulator wants the information "in order to assure that we have a detailed picture of the activities of national bank servicers and the performance of loans serviced by them," Comptroller of the Currency John C. Dugan said in a statement. Dugan said regulators met with bank officials earlier this month and were "pleased with the level of cooperation."
Dugan also said the effort will be coordinated with the Bush Administration's effort to stem foreclosures, dubbed "Hope Now."
The agency is looking for information on all loans, not just subprime loans made to borrowers with poor credit. Information will include detailed reports on loan modifications, credit scores, foreclosures and delinquencies, said the spokesman, Robert Garsson.
While the agency has full-time examiners at large banks that are familiar with such data, the agency has not compiled the information before, he said.
http://www.canadianbusiness.com/markets/market_news/article.jsp?content=D8V48STG0
Fannie Mae Posts Nearly $3.6B Loss in 4Q
By MARCY GORDON,AP
Posted: 2008-02-27 09:38:27
WASHINGTON (AP) - Fannie Mae on Wednesday said it lost nearly $3.6 billion in the fourth quarter of 2007 as home-loan delinquencies mounted and the company preserved cash in anticipation of further losses.
Shares of Fannie fell by more than 5 percent.
The quarterly loss at Fannie, the largest U.S. buyer and backer of home loans, contrasts with a profit of $604 million in the same period a year earlier.
Fannie's $3.56 billion fourth-quarter loss was equivalent to $3.80 a share. It earned 49 cents a share a year earlier. Thomson Financial said Wall Street analysts had expected the company to lose $1.24 a share in the latest period.
The government-sponsored company was forced to set aside billions to account for bad loans. Its results clearly showed the ravages of the mortgage-market turmoil that began last spring and rattled the economy.
Because Fannie customarily buys more solid mortgages as opposed to the high-risk subprime loans that have mushroomed into default, the latest losses show how pervasive the mortgage crisis has become.
The company's loss for all of 2007 was $2.05 billion, or $2.63 a share, compared with a profit of $4.05 billion, or $3.65 a share, in 2006.
"We are working through the toughest housing and mortgage markets in a generation," the company's president and CEO, Daniel Mudd, said in a statement. He said the company's losses reflected "the significant decline in home prices in a number of large regional markets and the growing number of borrowers struggling with their mortgages."
Mudd called 2008 "another tough year." Washington-based Fannie expects to lose money this year on eight to 10 of every 1,000 mortgages held on its $2.4 trillion book - a steep increase from four to six in 2007.
In addition to having to set aside an additional $2 billion in the fourth quarter for soured loans, Fannie also saw its profits eroded by $3.2 billion in losses from derivatives, the complex financial instruments it uses to hedge against swings in interest rates.
In morning trading, Fannie's shares fell $1.51 to $25.46.
http://money.aol.com/news/articles/_a/fannie-mae-posts-nearly-36b-loss-in-4q/n20080227093809990008
double bottom holding...
Fitch Downgrades FGIC-Insured Debt
Associated Press 02.26.08, 5:18 PM ET
NEW YORK - Fitch Ratings on Tuesday cut its rating on 24 classes of mortgage bonds insured by Financial Guaranty Insurance Co., the bond insurer Fitch downgraded last month, because the bonds are no longer supported by FGIC's top-notch rating.
In late January, Fitch Ratings slashed its financial strength rating on FGIC, a bond insurer owned by PMI Group Inc. and a handful of investment funds.
FGIC, which insures $315 billion in bonds, does not have access to enough cash to warrant a top-notch financial strength rating, Fitch said.
FGIC write insurance policies promising to repay bondholders when bond issuers default. Fitch cut FGIC's rating to "AA" to "AAA."
A bond that is insured typically is granted the same rating as the insurer that protects it. With FGIC now carrying a worse rating, Fitch downgraded 24 classes of bonds that rely on the insurer to guarantee payments.
The downgraded debt is residential mortgage-backed securities, or bonds that funnel payments from pools of home loans to investors. Fitch downgraded bonds issued by or funneling payments from Morgan Stanley (nyse: MS), Ameriquest and GMAC (nyse: GJM1`).
Fitch did not specify the market value of the downgraded debt.
Like FGIC, the downgraded bonds now carry ratings implying "high quality," whereas the previous ratings implied "maximum safety."
http://www.forbes.com/feeds/ap/2008/02/26/ap4700188.html
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
MBIA done with major capital raising CEO tells CNBCReuters
Tuesday February 26 2008
NEW YORK, Feb 26 (Reuters) - MBIA Inc is done with significant dilutive capital raising, the company's chief executive said on Tuesday.
Speaking on CNBC television, MBIA CEO Jay Brown said "(n)ever say never, but I think we're through raising significant dilutive capital."
Brown added later: "(W)e might need a little bit more."
Brown said he is hoping the company's market capitalization, which is now around $3 billion, will be closer to $10 billion in five or six years.
MBIA's main unit had its top credit ratings affirmed by Standard & Poor's on Monday and Moody's Investors Service on Tuesday.
Some critics argue the rating agencies are not paying enough attention to the potential risks lurking in MBIA's books. MBIA has active and vocal investors betting on the holding company's demise.
Brown, who last week returned to the CEO position at the world's largest bond insurer, said critics who contend the ratings agencies are ignoring problems at the company are "dead wrong."
http://www.guardian.co.uk/feedarticle?id=7339037
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
Monolines surge as top ratings secured
By Aline van Duyn and Saskia Scholtes in New York
Monday Feb 25 2008 20:25
US share prices staged a late rally on Monday after Standard & Poor's affirmed the top-notch credit ratings of beleaguered bond insurers MBIA (NYSE:MBI) and Ambac and said MBIA was no longer at risk of a downgrade.
However, S&P indicated that it could still downgrade Ambac, depending on the outcome of behind-the-scenes talks now being conducted between banks and rating agencies on a $3bn rescue plan for the bond insurer.
US stocks, which had been modestly higher on the day, rallied later on the S&P announcement, with the S&P 500 index closing up 1.4 per cent. MBIA shares gained 19.7 per cent. Ambac rose 15.9 per cent.
In a letter to shareholders MBIA, the biggest monoline, on Monday outlined its plans, saying it would stop writing new structured finance business for about six months and eliminate the quarterly dividend. It confirmed it would restructure the company to separate the municipal guarantee business from the structured finance business within five years. MBIA has raised $2.6bn in extra capital.
A group of eight banks, led by Citigroup (NYSE:C) and UBS (NYSE:UBS) , is preparing to inject up to $3bn into Ambac, the second-largest bond insurer. The money would be part of a plan to split Ambac's operations into a triple-A rated municipal bond business and a structured finance business with slightly lower ratings.
A downgrade of Ambac would potentially lead to downgrades on $550bn of bonds that it guarantees. Banks could be affected because a downgrade could reduce the value of Ambac guarantees on collateralised debt obligations and derivatives trades, such as credit default swaps.
MBIA, the largest bond insurer, has raised $2.6bn in additional capital, more than Ambac has attracted so far. MBIA is also discussing ways to restructure its business to ensure its ratings are not cut by Moody's, which still has the bond insurer on watch for downgrade.
Rating agencies Moody's and S&P have both come under pressure to assign new credit ratings to the proposed structure for Ambac before a deal to recapitalise the group is completed. The announcement of a deal to recapitalise Ambac could be delayed for up to another week by issue of whether new ratings will be issued.
"It is highly unusual for ratings agencies to be part of a transaction and there are numerous procedural issues that have to be worked through as they usually do not assign ratings until something is completed," said a person involved in the deal.
Stefan Jentzsch, head of investment banking at Allianz's Dresdner Bank, said it planned to support a rescue package "if what is now on the table comes to pass". He said Dresdner was ready to put up a sum in the low tens of millions of euros.
The potential deal comes just a month after Eric Dinallo, New York's insurance superintendent, called a meeting with top Wall Street firms urging them to consider a way to inject capital into bond insurers.
Banks have had to calculate whether costs of putting funds into Ambac would be less than the costs of writedowns associated with downgrades. Bond insurers are facing a surge in claims after guarantees on mortgage-related bonds have proved to be riskier than anticipated.
http://us.ft.com/ftgateway/superpage.ft?news_id=fto022520082031110049&page=1
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
Markets assess the costs of a monoline meltdown
By Aline Van Duyn and Gillian Tett
Published: February 20 2008 19:50 | Last updated: February 20 2008 19:50
In recent years the residents of Wilkes-Barre, a small city in Pennsylvania, have been nurturing dazzling dreams. For years their local ice rink lay vacant, while the park in which it stood suffered from neglect. Yet Thomas Leighton, the town mayor, had plans to turn the area into “the region’s premier recreational facility”.
Indeed, the local ice hockey team – dubbed the Wilkes-Barre/Scranton Penguins – were plotting to make the newly refurbished Ice-A-Rama their practice facility.
Monoline confusion triggers splitting headache - Feb-18US medical centre shuns muni bonds - Feb-18Now, however, the Penguins’ hopes are facing into the chill headwinds of credit turmoil. Although the underlying finances of his authority are in good shape, last week Mr Leighton told a congressional subcommittee in Washington that “under the current [bond] market conditions, this necessary development will be extremely difficult for the city of Wilkes-Barre to complete”.
The tale is one being echoed in many other unlikely corners of America – as well as other parts of the global financial system. When losses on securities linked to risky subprime mortgages started to appear a year ago, many bankers hoped that the problem would be easily “contained” – meaning that it would not spread beyond the most esoteric niches of finance on Wall Street or in the City of London.
Now, however, the rhetoric of containment is being replaced by a new buzzword: contagion. It has become increasingly clear that the losses in the credit world are being felt far beyond the subprime mortgages market. More pernicious still, it is also becoming clear that these defaults are creating some complex financial chain reactions – which, in turn, are hurting institutions such as the Wilkes-Barre authority.
The fundamental problem is that this decade’s wave of banking innovation has created a financial system that is not just highly complex but also tightly interlinked in ways that policymakers and investors sometimes struggle to understand. This is epitomised by the issue currently causing headaches for entities such as the Wilkes-Barre government – the increasingly precarious position of a group of companies known as the monoline insurers.
These companies essentially offer insurance to investors against the possibility that their bonds might default. They initially sprang up three decades ago to guarantee the municipal bond market – a line of business that has hitherto produced a steady, albeit unexciting income stream. Over the past decade, however, the monolines shifted their business into the realm of structured finance too, offering guarantees against the chance that complex bundles of mortgage-linked assets would default by writing derivatives contracts known as credit default swaps (CDS).
Until recently, the monolines insisted that this structured finance “sideline” was as safe as their main business of guaranteeing municipal bonds. However, in the past year default rates have risen sharply on subprime mortgages, with economists now estimating that as many as one in four of the mortgages written since 2005 will not be repaid – an unprecedented level of non-payment and foreclosure.
These defaults have already triggered more than $120bn (£62bn, €82bn) of writedowns at western banks. However, analysts now calculate that the monolines, too, could eventually face $34bn of losses as insurance contracts are activated. While this estimated hit – if it materialises – should be spread out over many years, it has caused huge alarm given that, in last year’s accounts, the monolines only had $48bn of funds on hand with which to pay claims. Indeed, credit rating agencies have already removed the all-important AAA tag from some small monoline groups and are threatening to downgrade the largest companies, most notably Ambac and MBIA.
This has caused losses for investors holding monoline equity, as the share price of companies such as Ambac and MBIA has plunged. It is also threatening to trigger painful new writedowns at banks, since a ratings downgrade of the monolines means institutions that bought insurance from them will no longer be able to assume that this protection is water-tight. What were considered to be risk-free securities, in other words, will suddenly become risky – at least on the banks’ books. Indeed, Moody’s Investors Service estimated this week that associated bank writedowns could range from $7bn to $30bn, with about 20 banks exposed.
The potential implications are so severe that Eliot Spitzer, governor of New York, warned last week that if the authorities did not soon produce effective action to address the monoline problem, the consequence “could be a financial tsunami that causes substantial damage throughout our economy”.
“All of a sudden, the world has been gripped by monoline fever,” observed a recent report from Citigroup, the investment bank. It says that investors are now scrambling to see if the monoline problems are the next example of the “glue which holds together the world financial system” coming apart.
However, the chain reactions extend well beyond Wall Street. As the monolines come under stress, the public-sector bond world also faces upheaval. In the UK, for example, a host of private finance initiative projects, such as hospitals, are being forced to rethink their funding plans. These public-private partnerships have relied on monoline companies such as Ambac to insure their bonds in recent years but can no longer rely on this protection.
Meanwhile, in the US, the monoline woes have caused parts of the municipal bond market almost to break down in recent weeks. The most dramatic sign of pressure has occurred in the $330bn auction-rate securities market, a sub-sector of the municipal bond world (see chart below). This market has arisen in recent years to match long-term funding needs with investors seeking short-term investments. For although municipal debt is typically issued with a long-term maturity – say, 10, 20 or even 30 years – in the ARM securities sector, investors can opt to sell the debt every week or month, when the interest rates are reset. This has proven very popular among mainstream investors, since ARM securities are typically insured by a monoline – meaning that they are ultra-flexible but also carry the all-important AAA tag.
However, in recent days the ARM market has essentially ground to a halt. This has led to a fall in the value of these securities, leaving holders such as companies and investors with potential losses. In the meantime, municipal borrowers are scrambling to refinance their debt elsewhere to avoid sharply higher interest costs. “Similar to many other mid-sized cities across the nation, we rely on monolines,” says Mr Leighton of Wilkes-Barre. “When they are faced with volatility in the market, there is inevitably volatility for us.”
Or as Congressman Spencer Bachus, the Republican representative for Alabama, puts it: “Unlike other events that have destabilised markets since the credit crunch began last summer – where the pain has been felt largely on Wall Street – the fallout from the troubles in the bond insurance industry is already hitting Main Street.”
Unsurprisingly, the finger-pointing has already begun. In the US the bond insurers are regulated at state level, and it seems that the regulators have been slow to recognise the scale of problems that have been developing in the monoline world. Creditsights, a debt analysis company, said the regulatory capital bases of the monolines grew by 29 per cent between 2003 and 2006 to $22bn. However, guarantees of structured finance – much riskier than the traditional municipal bond business – grew 175 per cent in that period to $1,600bn. “The industry got greedy,” says Rob Haines, an analyst at Creditsights.
Indeed, Eric Dinallo, the New York insurance superintendent, admits that regulators have failed fully to comprehend the link between ratings and the guarantees from bond insurers. As a result, regulation will be reformed to focus on ratings rather than on solvency, he says. “This [bond insurance] might be the only area of insurance where the ratings are as important as the solvency,” he says.
In the short term, however, the more immediate problem for policymakers is how to prevent the chain reaction inside the financial sector from extending even further. Frantic efforts are under way to shield the politically sensitive municipal borrowers from further pain – through discussions that involve the world’s biggest banks, billionaire investors including Warren Buffett and Wilbur Ross, sovereign wealth funds and an army of lawyers and advisers. This could result in the businesses of companies such as Ambac, MBIA and FGIC being split into two, to ensure that bond insurers can ringfence the riskier assets (such as mortgages) from the municipal guarantee business.
But although such a split currently seems attractive in political terms – most notably because it would enable policymakers to protect the municipal bond market in an election year – it will not necessarilly prevent further turmoil on Wall Street. On the contrary, as Jeffrey Rosenberg, analyst at Bank of America, says: “A split may limit losses in the municipal market, but it would likely exacerbate losses to structured finance ... To the extent that those losses further constrain financial institutions’ balance sheets, broader credit constaint may follow.”
That could create more potential chain reactions. For example, another issue that is raising levels of concern is the health of the wider credit default swap market. This sector has exploded in size this decade, as a swath of investors – such as mainstream asset managers – have used CDS to protect themselves from the risk of corporate default. Until the monoline companies started to face problems, few of these investors worried about whether CDS counterparties would be able to honour their contracts if defaults occurred.
But the monoline issue has raised anxiety about whether other counterparties in the CDS world, such as hedge funds, will be able to honour their contracts if corporate defaults rise. While the International Swaps and Derivatives Association, the main trade body, vehemently insists this risk should be offset by the fact that most trades are backed by collateral, levels of investor unease are nevertheless rising.
That, in turn, is contributing to a wider rise in anxiety about all manner of complex debt vehicles, many of which are also tied – directly or indirectly – into the CDS and monoline world. There is an alphabet soup of structured products that could unravel, such as tender option bonds (TOBs), which are linked to municipal debt.
Indeed, Tim Bond, analyst at Barclays Capital, likens current events to nothing less than the “demise of the shadow banking system” that has sprung up in recent years around the structured world.
Policymakers pray that this chain reaction of financial implosions can still be contained without sending the economy into a tailspin. After all, they point out, the processes that created the credit bubble have been marked by a circularity. Institutions such as banks, hedge funds or monolines have essentially been cutting contracts with each other, raising overall levels of debt; thus, the hope goes, if this complex network of financial flows is imploding, it may be the financial sector – not the real economy – that ends up bearing the greatest pain.
Nevertheless, the more that financial problems hit sectors outside Wall Street, the more danger there is of a loss of confidence among consumers and companies. Or, as Malcolm Knight, head of the Bank for International Settlements, recently observed: “The longer this [uncertainty] goes on, the greater the risk that this will create a negative feedback loop [with the real economy].” Economists and investors, in other words, now have every reason to watch closely to see what happens next to the Wilkes-Barre Ice-A-Rama – together with all the other corners of the US economy whose fate is now entwined with that of the monolines.
Lenders raise the bar on corporate buy-outs
A year ago, the Bank of England published a report discussing the similarities between the subprime mortgage market and the so-called leverage finance market, in which private equity firms raise capital to fund the purchase of target companies, writes Henny Sender. The bank identified signs of deterioration in the mortgage market and concluded that such episodes “could provide a warning of corporate stress to come”.
Today, that assessment looks prophetic. On the face of it, the factors that prompt a homeowner in Florida to default on a mortgage seem quite distinct from the pressures that might spell trouble for private equity groups such as Apollo Management and TPG in financing their buy-out of Harrah’s Entertainment, a gaming company in Nevada.
However, as the Bank of England observed, what the US mortgage market and corporate debt world have in common is that lending standards have crumbled in recent years – partly because banks have been repackaging this debt and selling it on to investors rather than holding it themselves.
Consequently, there are now rising fears that problems that have already unfolded in relation to mortgages could be replayed in the corporate debt world, with potentially painful implications for growth.
“Since the first subprime scare nearly a year ago, credit conditions have tightened for all types of loans,” note economists at Goldman Sachs in a recent report. “The impact of tighter credit conditions could directly subtract 1¼ percentage points from first-quarter growth and 2½ points from second-quarter growth.”
Part of the problem is that the investors who have been financing mortgages in recent years have often been the same group financing big buy-outs. These have both been driven by the same desperate need for yield – meaning that credit risks have been increasingly overlooked. “There is so much liquidity in the world financial system that lenders are making very risky credit decisions,” wrote Bill Conway, co-founder of Carlyle Group in a letter to his partners just over a year ago. “This debt has enabled us to do transactions that were previously unimaginable.”
Another reason for parallels between mortgage and corporate debt is that both asset classes have become sucked into a relatively new kind of financial engineering machine this decade, which has typically been taking up to 200 individual loans or bonds, slicing them and then creating new debt parcels, subdivided according to risk.
Many of the securities that emerge at the end of this complex “slicing and dicing” chain are ultra sensitive to market movements – meaning that even a small move in price can involve huge losses. Or, as the Bank noted last year: “The embedded leverage [in these instruments] . . . could magnify the market response if there was a particularly sharp deterioration in the performance of underlying assets.”
This meant that when losses started to emerge in the mortgage world last year, many investors panicked – and then pulled out of corporate debt as well. That, in turn, has created a supply-demand mismatch. Data from TPG, for example, suggests that there was six times more buy-out debt available in the summer of 2007 than there was in 2006.
As a result, the price of corporate debt has plunged – particularly for debt deals concluded over the past year. Today, the banks financing the big deals still in the works, such as the buy-outs of Clear Channel Communication and BCE, are looking at huge losses. Indeed, at least one bank in the underwriting group has already written Clear Channel down to 85 cents on the dollar.
Some investment bankers hope that if prices fall further – say to 80 cents on the dollar – more buyers will come into the market again. And they are doing their best to attract skittish purchasers. Recent deals have had so-called Libor floors, which made the new loans less vulnerable to rate cuts.
Today, private equity firms wanting to buy companies have begun writing equity cheques for the whole thing, reasoning that they can eventually go to the debt market to refinance, according to Doug Warner, a lawyer at Weil Gotshal & Manges in New York.
But the main ghost haunting the market is the uncertainty about the economy. If the economy really slows dramatically, corporate cash flows will dry up. Then, companies with heavy debt burdens will find it even harder to pay their debt – creating even more trouble ahead.
http://www.ft.com/cms/s/0/8d715b9e-dfe9-11dc-8073-0000779fd2ac,dwp_uuid=b6abe56e-d0c2-11dc-953a-0000779fd2ac.html
Banks to aid Ambac with up to $3bn
By Aline van Duyn and Ben White in New York
February 23 2008 00:20
A group of banks is preparing to inject $2bn to $3bn into the troubled bond insurer Ambac, which is racing against time to come up with fresh capital to avoid a sharp cut in its triple-A credit rating that could trigger wider financial market turmoil.
The money from banks would be part of a plan to split Ambac’s operations, people involved in the discussions said.
Ambac is also considering raising equity from shareholders and it is not yet clear how much capital it will need, or what credit ratings the split businesses will have. Talks between Ambac and the banks will continue this weekend, with a view to finalising a deal by early next week.
The banks looking at supporting Ambac include Citigroup, Wachovia, Barclays, Royal Bank of Scotland, Société Générale, BNP Paribas, UBS and Dresdner. They have the most exposure to guarantees supplied by Ambac on structured bonds and derivatives, the value of which could fall sharply, resulting in billions of dollars of writedowns if the insurer’s credit ratings drop far below the triple-A level.
Bond insurers have for decades guaranteed debt issued by municipal borrowers, lending them, in effect, triple-A credit ratings in exchange for a fee. Bond insurers, or monolines, have ventured into structured finance guarantees, including guarantees on complex debt instruments such as collateralised debt obligations. The subprime mortgage crisis has led to a jump in losses in this sector, threatening the triple-A credit ratings of Ambac and MBIA, the biggest monolines.
Municipal borrowers are being hit by the crisis of confidence in the insurers, whose guarantees back $2,400bn of bonds. With interest rates for some municipals rising sharply, regulators have called for a solution that will ensure the municipal business retains its triple-A rating.
Last month, banks were called in to meet Eric Dinallo, the New York insurance superintendent, who urged them to discuss possible action to prevent downgrades. Federal policymakers did not arm-twist banks to take part in a rescue. But a senior Treasury official said it had to “blow some smoke away” so market participants understood their “indirect interest”.
http://www.ft.com/cms/s/73450cf8-e187-11dc-a302-0000779fd2ac.html
Margin Calls in August '07
I plucked this post #msg-22037339 by roguedolphin from the "your Economy" board because it is so pertinent here
Margin Call
August 13, 2007
http://www.kunstler.com/mags_diary21.html
The seas were a mite choppy off Hedge Fund Island last week after all when the Federal Reserve started tossing life preservers of ready cash to the Big Fund Boyz bobbing and thrashing in the swells. Now, about that "money" -- which is, in essence, a bunch of extended lines of credit at the Fed's artificially-low official interest rate -- what actually happens to it? The simple answer is: it disappears into the same ocean of financial woe that the Boyz are drowning in.
The mere $38 billion that the Fed tossed out Friday afternoon, as the Dow was tanking down a few hundred clicks, will be used by banks and investment houses to cover losses in the synthetic securities they themselves created, and have been trading, during this psychotic final blow off of cheap energy capitalism. In essence, the Fed is buying worthless paper. The trouble is, there is so much more worthless paper out there that all the computers at the Federal Reserve could never generate enough pixelated cash to cover them in the life of this universe or several like it.
An additional problem: there is a practically inexhaustible supply of "dead" mortgages and corporate loans washing up on the pebbled beaches of Hedge Fund Island. No matter how bad the mortgage-and-credit-derived racket looks now, it is certain to only get worse as the dead mortgages and loans fester in the sun and the tropical foliage on Hedge Fund Island starts to wilt from the toxic fumes of all that decaying matter. This summer is only the beginning of a cycle of adjustable mortgage interest rate re-sets. The numbers go way up in the fall and are scheduled to continue rising well into the winter of 2008. How long do you think the Big Fund Boys can tread water?
What you're seeing now is a simple matter of financial sector players trying desperately to evade the consequences of their own actions. The fake wealth generated by the synthetic securities they created is now being recognized for what it is: a swindle. The hallucination is over. The collective denial that supported that hallucination is dissolving. The losses are become manifest. Even worse, the losses are growing exponentially because the synthetic securities were used as collateral to leverage far greater multiples of "positions," bets, and plays in a casino-like global electronic trading arena.
This is what happens when investment gets de-coupled from real productive activity and becomes an end in itself. It has been terrifically enhanced by computer programming. But no amount of digital legerdemain --with the "sugar-on-top" of accounting trickery -- can now hide the fact that there is no "value" there. What's more, the losses are going to have to show up somewhere. If you try to suppress them in one area, they'll pop up in another. If the Federal Reserve tries to cover the losses racked up by the Big Fund Boyz by giving "cash" away, they'll only succeed in destroying the value of the cash itself, i.e. the US dollar.
Now, few reasonable people can really imagine that the Fed would blunder into hyper-inflation. But the situation is so desperate that the Fed's mission to do what's necessary to rescue drowning banks may over-ride the prudent deployment of cash life preservers. As that occurs, foreign holders of the US Dollar may detect the impending loss of value of the dollar, and there would be a stampede to the redemption windows to get rid of them. That would leave the Federal Reserve (and by extension the American Nation) in a position of stark and implacable insolvency.
In any case, the US now stands on the brink of an unprecedented liquidation of assets. The mortgaged title holders to over-priced McHouses will have to liquidate their positions as "home-owners." The over-leveraged holders of credit-card debt will have to sell their Ford Explorers, bass boats, sports memorabilia (good luck with that shit) and flat-screen TVs. The retired dentists will have to dump their stocks and bonds. The corporations will have to sell off subsidiary operations, buildings, and corporate jets. Some colleges will just shutter. The Big Fund Boys will have nothing of value left in their portfolios to sell. They will just drown. Their heirs and assigns will then have to dispose of the house in Sagaponak, the 10-room apartment on Central Park West, and the family fleet of SUVs. The Big Boyz will take quite a few institutions with them -- the club-like banks and investment "houses" that employed them and went along with their mendacious shenanigans.
The upshot is that we are going to find ourselves a poorer nation. There will be far fewer people with money. There will be far fewer buyers of repossessed McHouses, bass boats, etc. Even the houses in Sagaponak and the Manhattan apartments will go cheap. The effort to pretend our way out of a financial crisis will fail. Sooner or later the recognition will set in that all that "boo-yah" was dreamed up. The United States swindled itself. We became a nation of such greed-crazed clowns that we committed financial suicide in an orgy of self-deception.
Anyway, that's how I see it this morning. The equity markets open in a half hour or so. The mood out there must be dark. The hands that hold the Starbucks cups must be trembling at the trading desks. I hasten to add that I think the turmoil and destruction can go on for quite a while. This slow-motion train wreck is not going to play out in just a week or two. And in case anyone forgets, in the background looms another storm at least as potent as the one now blowing through the financial markets: the gathering permanent global energy crisis (a.k.a. "peak oil"). Just because some Big Fund Boyz liquidated their positions on the oil futures market last week to try to cover their losses elsewhere does not mean that price of oil is going to keep going down. It may rest on the ledge in the $60 -$70 range for a spell, but you can be sure it will take flight again. And if it does as the dollar is crashing for other reasons, this will become a pretty disorderly nation in a very dangerous and unforgiving world.
credit: #msg-22037339
http://www.kunstler.com/mags_diary21.html
What a mess we're in!
MORICI: Silence Amid the Ruins
By PETER MORICI
February 14, 2008
Is Bernanke Headed for the Exit?
Today Ben Bernanke appeared before the Senate Banking Committee. In his testimony, he noted the shortages of credit, especially the reluctance of banks to extend credit to one another, and the inability of the banks to securitize Alt-A, Subprime and Jumbo mortgages. The latter makes all but Fannie Mae conforming mortgages and home equity loans too scarce.
In plainer terms, if you are not a prime borrower seeking a first mortgage of less than $417,000 you are having a tough time finding financing. The stimulus package will raise that limit but only for prime borrowers.
Since September, the Fed has lowered the target federal funds rate 2.25 percentage points but to little avail, because the bond market no longer trusts the major New York banks to package mortgages into securities.
Bernanke has simply not addressed this more fundamental structural problem that frustrates his monetary policy.
The large New York commercial and investment banks are operating with a flawed business model. Essentially, compensation for executives is based on the volume of securities transactions and is lavish. These bankers are encouraged to slice, dice and puree mortgages into unintelligibly complex securities, to support the high profits and compensation packages of recent years. Recently, even securities backed by fairly safe student loans have been greeted with skepticism, because of their arcane structures, intended to generate big bonuses for their engineers.
Historically, mortgage banking and the business loan activities of commercial banks did not support the kinds of profits and salaries earned at investment banks. The combination of commercial and investment banking over the last two decades has raised the expectations that those that underwrite mortgages and business loans should be compensated at levels comparable to those facilitating more complex merger, acquisition and investment activities. This has motivated the development of arcane, engineered mortgage- and other loan- backed securities.
The hard reality is that banks borrowing at 5 percent and lending at 7 percent cannot reward those that underwrite mortgage- and other loan-backed securities at the levels comparable to traditional investment banking. All the financial engineering under the stars can't change that math.
Bond buyers have figured out the value added in these complex securities is negative and risky. Banks like Goldman Sachs that sold these securities to clients while shorting the market are now viewed with great suspicion.
So far the banks, flush with infusions of capital from Sovereign Wealth Funds, have not had to make necessary adjustments in their business practices. Those sources of capital see no problem with the business practices of banks that managed to lose their stockholders one percent of GDP, because these funds have non-profit motivations for investing.
Bernanke needs to speak to these issues, and encourage the adoption of sounder business models. If he does not, the recession will be long and hard.
Bernanke has responsibility for encouraging the sound functioning of credit markets.
He is ignoring this task through silence, and he may have to be shown the door.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.
http://www.counterpunch.org/morici02142008.html
credit: #msg-26889068
Morgan Stanley CEO Gets $41.7M in 2007
Posted: 2008-02-15 18:26:23
NEW YORK (AP) - Morgan Stanley on Friday said Chief Executive John Mack received compensation valued at about $41.7 million in 2007, a regulatory filing showed, a year when the investment bank's profit plunged 57 percent.
Mack, one of the highest paid bankers on Wall Street, did not receive a bonus in 2007 because of the company's losses due to the subprime crisis. Morgan Stanley lost $3.59 billion during the fourth-quarter because of risky bets on mortgage-backed securities.
None of the executive committee members at Bear Stearns Cos., the fifth-biggest securities firm, are taking bonuses after a $1.9 billion write-down during the fourth quarter. Meanwhile, Merrill Lynch & Co. CEO Stan O'Neal was ousted from his job and didn't receive any 2007 bonus.
However, Mack did receive an $800,000 salary, stock awards valued at $40.2 million, and $399,153 of other compensation, according to a filing with the Securities and Exchange Commission on Friday. Among the perks was $355,000 spent on his personal use of the corporate jet.
Morgan Stanley reported in December that full-year profit fell to $3.21 billion from $7.47 billion a year earlier. The company is about two weeks from completing its first quarter of 2008, and more write-offs from the subprime crisis is expected.
Morgan Stanley, which has lost 20 percent of its market value this year, dropped 30 cents to $42.32 in composite trading on the New York Stock Exchange at 4 p.m.
http://money.aol.com/news/articles/_a/morgan-stanley-ceo-gets-417m-in-2007/n20080215182609990026
Look at the recent volume explosion in this stocks!
Delinquencies Rise at Countrywide
By ALEX VEIGA, AP
Posted: 2008-02-15 17:59:32
LOS ANGELES (AP) - Countrywide Financial Corp. said Friday home loan delinquencies and foreclosures rose in January as more borrowers struggled to make their mortgage payments.
The nation's largest mortgage lender and servicer said loan delinquencies as a percentage of unpaid principal balance increased to 7.47 percent last month from 7.2 percent in December and 4.32 percent in January 2007.
Loan servicers collect mortgage payments and distribute them to the owners of the mortgages. The Calabasas, Calif.-based lender services mortgages totaling about $1.48 trillion.
Foreclosures pending as a percentage of unpaid principal balance increased to 1.48 percent in January, from 1.44 percent in December and 0.77 percent in January 2007.
Delinquencies and pending foreclosures increased despite stepped up measures outlined by Countrywide in recent months to help borrowers manage their mortgage payments.
Mortgage loan fundings slipped 6 percent to $22 billion from $23.4 billion in December, and were down 41 percent from $37 billion a year earlier.
Still, the lender's average daily mortgage applications rose last month to $2.6 billion from December's $1.5 billion.
Interest rates have been falling this year, and that's fueled a spike in mortgage applications industrywide, particularly as homeowners look to refinance existing loans.
Countrywide's mortgage pipeline - loans in progress that have not been funded - stood at $51 billion at the end of January, up from $35 billion in December, the company said.
Following last summer's collapse of the subprime mortgage market, the lender has tightened underwriting criteria and all but ceased making subprime loans for borrowers with past credit problems.
It did not list a January figure for fundings of subprime mortgages. It funded $2.9 billion in subprime loans a year earlier.
Home equity loan fundings plunged to $872 million, down 93.6 percent from $3.6 billion a year earlier.
The lender's slate of adjustable rate mortgages fell by 79.5 percent to $2.8 billion, from $13.7 billion in January 2007.
Countrywide has been struggling amid a nationwide housing downturn and lingering credit crisis.
The company previously reported a loss of $422 million in 2007's fourth quarter, as higher defaults forced the lender to boost its provisions for anticipated losses.
In January, Bank of America Corp. agreed to purchase Countrywide for about $4 billion in stock. The transaction is projected to close in the third quarter.
Shares of Countrywide rose a penny to $6.93 Friday.
http://money.aol.com/news/articles/_a/delinquencies-rise-at-countrywide/n20080215175909990002
FGIC Expected to Split Operations
By MICHAEL GORMLEY, AP
Posted: 2008-02-15 17:23:37
ALBANY, N.Y. (AP) - New York regulators are eager to consider splitting Financial Guaranty Insurance Co.'s core bond insurance businesses to protect municipal credit ratings against costly downgrades and stem troubles in the debt markets.
In a statement Friday, FGIC said would like to organize a new domestic financial guarantee insurer in New York to "provide support for public finance obligations previously insured by FGIC."
Analysts said other bond insurers are likely to make similar moves to split their exposure to riskier financial instruments.
"Other bond insurers will be tempted to follow suit, especially the ones that have already been downgraded by at least one ratings agency," said Donald Light, a senior analyst at Celent of Boston, a financial research and consulting firm.
State Insurance Superintendent Eric Dinallo, who has spoken sympathetically about FGIC's need for a split of its municipal insurance business, said he hopes that won't happen to other mortgage insurers.
He said talks are going well with the other bond insurers, including MBIA Inc. and Ambac Financial Group Inc.
"There's a lot of interest and they're just going to have to figure out how to economically execute on it," he said. "But I think there's a much higher degree of optimism on those two companies."
Dinallo said rating agencies have given bond insurers a week or two to strike a deal.
Bond insurers have struggled in recent months as ratings agencies have worried the companies would not have enough capital to cover a potential spike in claims. Ratings agencies are worried rising delinquencies and defaults on mortgages will lead to an increase in defaults among bonds backed by the troubled loans.
That in turn would force insurers to pay out claims. Bond insurers pay principal and interest when issuers fail to make payments.
A ratings downgrade would make it more expensive for cities and towns to borrow money.
On Thursday, FGIC's critical financial strength rating was cut by Moody's to "A3" from "AAA." Bond insurers essentially need a "AAA" rating to book new business. Moody's said FGIC needs access to $9 billion to maintain the "AAA" rating, but the company currently has access to just $5 billion.
Standard and Poor's and Fitch Ratings had previously downgraded FGIC.
In its statement Friday, FGIC said it has been exploring various capital raising and other initiatives over the past several months.
"After careful consideration, the company has informed the New York state Insurance Department that it would like to begin the process of organizing a new domestic financial guarantee insurer in New York," the statement said.
"Once licensed, this new insurer would be used to provide support for public finance obligations previously insured by FGIC and to write new business to serve the municipal markets," the company said.
Dinallo said Friday that "without capital infusions this probably is the necessary outcome" for FGIC.
"That's sort of the endgame if we can't get capital infusions into these companies," he said.
Dinallo said word that FGIC may split its businesses stops the clock on any more downgrades. He said a decision on whether the split will be allowed will take weeks because of the complexity of creating the application and then reviewing it.
A day after he and other state officials testified at a congressional hearing on the bond insurers, Dinallo said the message from Congress was, "If you can solve it, solve it, but don't let the municipalities downgrade."
The insurance department has been working in recent months with bond insurers and banks to figure out ways to help the insurers maintain their "AAA" ratings and ensure their viability.
"I think it's just important that we demonstrate, or the company at least tries to demonstrate, there is a plan, that we have the capacity to save the ratings on the municipal side of the books," Dinallo said. "We want a private side solution that injects capital into these companies ... but failing that, we can't let the municipalities downgrade."
Associated Press Writer Michael Hill in Albany and Business Writer Stephen Bernard in New York City contributed to this report.
http://money.aol.com/news/articles/_a/fgic-expected-to-split-operations/n20080215172309990028
Credit Problems Far From Over
Comstock Partners, Inc.
Thursday, February 14, 2008
We cringe when we hear the guests on bubble TV claim that the credit crisis is almost over and that it has been exaggerated by fear-mongers. In reality the credit crisis is getting worse and spreading to as yet unknown areas. Each week seems to bring a new surprise that reveals an unexpected financial event and some new acronym for a security that few have ever heard of before. At first it was RMBS, CDO, CDO squared, SIV, ABCP and CLO. Now it’s TOB, VRDO, ARS, LevX and LCDY. Each revelation leads to new concerns, exposes new victims, creates the potential of even more writedowns and leaves everyone wondering where the next surprise is coming from.
As it turns out this week’s new problem are auction-rate securities (ARS), an obscure but important segment of the credit market. ARS are basically long-term debt that has been considered to be liquid since they are auctioned every week with the interest rate reset to current conditions. ARS comprise a $360 billion market of securities issued by municipalities, student-loan authorities, museums and many other entities. As a result of recent turmoil in the credit market, investors have largely withdrawn from the weekly auctions, causing the interest rate on the securities to soar. The major problem is that a lot of the ARS are insured by the troubled monoline insurers. In addition it is highly likely that a large number of investors are just avoiding complex securities that are not well understood, and are gravitating to more basic investments.
As a result of the turmoil, what was viewed as a highly-liquid instrument is turning out to be difficult to sell, and over $10 billion of ARS have been frozen including borrowings for Deerfield Academy, Carnegie Hall and De Young Museum. In addition the Michigan Higher Education student Loan Authority had to stop making student loans, affecting more than 100 Michigan colleges and universities. The Port Authority of New York and New Jersey found its interest rate jumping to 20% from 4.2% the prior week. Corporations, too, are major holders of these instruments. US Airways stated that the airline’s cash fund held $411 million ARS that failed to settle at auctions. Importantly, the ARS are yet another off-balance sheet asset of the banks that they may have to shift onto their books.
At the same time the monoline insurers are not out of the woods. Today, Moody’s cut the rating of FGIC by six levels from Aaa to A3, and said they may have to cut again. FGIC is the 4th largest monoline, and their rating was cut by Fitch last month. The ratings agency said that FGIC was $4 billion short of the amount of capital needed to justify an Aaa rating. Moody’s indicated that their assessment of MBIA and Ambac would probably be complete in the next few weeks. New York governor Eliot Spitzer today gave the leading monolines 3-to-5 days to come up with capital or face a breakup by state regulators. This would essentially strip them of their safe and profitable municipal bond insurance business and leave them with the toxic structured finance mess.
The subprime turmoil is still with us as well and, ominously, is not confined there. At a press conference yesterday Treasury Secretary Paulson said that in terms of subprime and resets, "The worst isn’t over, the worst is just beginning". According to the Mortgage Bankers Association the default on ALL outstanding home loans is 7.3%, the highest since records began being kept in the 1970s. Even the rate on prime loans has climbed to 4%.
Moreover, we are now seeing substantially higher default rates on credit card, auto loans and student loans. It doesn’t promise to get any better, and despite significant Fed ease, credit is actually getting tighter. Over the last six months there has been a sharp decline in the willingness of banks to make consumer installment loans. The percentage of banks tightening lending standards on business loans has also risen substantially. Mortgage loan standards have been tightened. The interest rate on bank loans has been going up while the cost of their funds has been dropping. All in all both the cost and availibility of funds has tightened. This creates a substantial headwind against an economy that is either already in recession or on the brink. In our view the dire credit situation is causing a major unwinding of debt that is always deflationary. As we head further into recession inflation, which is a lagging indicator, will become less of a concern while deflation will come to be seen as the greater threat.
http://www.comstockfunds.com/index.cfm/MenuItemID/29.htm
credit: #msg-26843909
Wells Fargo on bad auto loans
Wells Fargo (WFC) for example, reported last month that it charged off $1 billion in auto loans last year, 3.5% of its portfolio, compared with $857 million in 2006. The bank says it expects a higher write-off rate this year.
While the nation has been transfixed by rising home foreclosures, scant attention has been paid to what is usually a consumer's second-largest purchase: their car or truck.
An executive at another big auto auctioneer says that easy subprime car loans in recent years are a big reason for the flood of repossessed cars.
see #msg-26810227 for the full story
http://www.usatoday.com/money/autos/2008-02-13-repo-man_N.htm
Bond insurer woes could become market "tsunami": Spitzer
Thursday February 14, 8:27 am ET
WASHINGTON (Reuters) - The bond insurer problem must be fixed, or else it could become a "financial tsunami" that wreaks havoc on the broader economy, New York Governor Eliot Spitzer is due to tell the Congress Thursday.
A copy of Spitzer's prepared testimony was obtained by Reuters on Wednesday.
New York State Insurance Superintendent Eric Dinallo is working with banks on rescue plans for several bond insurers, which guarantee more than $2.4 trillion of debt and are expected to suffer big losses from insuring bonds linked to subprime mortgages and other risk assets.
Those losses threaten the top credit ratings that insurers need to win new business. If insurers are downgraded by ratings agencies, investors that can only hold top-rated bonds may have to sell billions of dollars of securities, lifting borrowing costs for cities and consumers alike.
About two-thirds of bond insurers' business is guaranteeing municipal debt, and one-third is insuring repackaged consumer debt.
Higher borrowing costs and general credit market difficulties "could be a financial tsunami that causes substantial damage throughout our economy," Spitzer said in the testimony prepared for delivery to a House of Representatives Financial Services subcommittee at 11:30 a.m. EST on Thursday.
Spitzer's comments echoed recent remarks from Deutsche Bank Chief Executive Josef Ackermann, who said that bond insurer downgrades could send shockwaves through financial markets.
Regulators hope to help bond insurers keep their top credit ratings, but are also looking at protecting only the insurers' municipal bond insurance segments, Spitzer said.
"We have been clear from the beginning that municipal investors cannot be allowed to suffer from problems caused by another sector of the market," he said.
BLAME IT ON BUSH
On Thursday, the New York Democrat in a CNBC interview laid blame for the subprime crisis and its broader fallout on the Bush Administration.
Spitzer recalled that several years ago the U.S. Office of the Comptroller of the Currency went to court and blocked New York efforts to investigate the mortgage activities of national banks. Spitzer argued the OCC did not put a stop to questionable loan marketing practices or uphold higher underwriting standards.
"This could have been avoided if the OCC had done its job," Spitzer said in the interview. "The OCC did nothing. The Bush Administration let the housing bubble inflate and now that it's deflating we're dealing with the consequences."
"The real failure, the genesis, the germ that has spread was the subprime scandal," Spitzer said. Fraudulent marketing and teaser rates that later ballooned were practices that should have been stopped.
"When mortgages are being marketed, there is a marketplace obligation to ensure the borrower can afford to pay back the debt," he said.
The subprime problem, he said, spread into other markets and is now causing pain for individuals, who may not be able to get mortgages, and giant bodies such as the Port Authority of New York and New Jersey, whose latest bond auction fell through, he said. He also linked the mortgage crisis to the current struggles of the bond insurers.
Yet Spitzer deflected questions about New York state's role 10 years ago in allowing bond insurers, which had long guaranteed safe public-sector bonds, to back risky mortgage bonds and complex structured debt.
(Reporting by Patrick Rucker in Washington and Dan Wilchins in New York; Writing by Dan Wilchins; Editing by Tomasz Janowski and Dave Zimmerman)
http://biz.yahoo.com/rb/080214/usa_economy_spitzer.html?.v=5&.pf=taxes
MBIA to urge curtailing short sellers
Wed Feb 13, 2008 1:59pm EST
NEW YORK (Reuters) - MBIA Inc (MBI.N: Quote, Profile, Research) plans to urge lawmakers and regulators to curtail what the bond insurer calls "the unscrupulous and dangerous market manipulation activities of short sellers," according to a copy of written testimony obtained by Reuters.
In the testimony, prepared for a February 14 hearing before the subcommittee of the U.S. House Committee on Financial Services, MBIA says the practice and dissemination of "half-truths and misleading information" should be "investigated and curtailed."
MBIA's testimony says the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises should work with the Securities and Exchange Commission.
The testimony specifically mentions Bill Ackman, founder of hedge fund Pershing Square Capital Management, which has been vocal about its short position in the bond insurers.
"MBIA notes that Mr. William Ackman is appearing on the hearing on February 14th as an 'industry expert.' Mr. Ackman is in fact not involved in the industry in any capacity except as that of a short-seller, and, accordingly, MBIA questions the characterization of Mr. Ackman's expertise," the testimony says.
An appendix to the testimony has a timeline of statements and actions by Ackman and other short sellers regarding the company going back to May 2007.
(Reporting by Dan Wilchins, editing by Leslie Gevirtz and John Wallace)
http://www.reuters.com/article/businessNews/idUSWEN393720080213
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
MGIC swings to $1.5B loss in 4Q
By EMILY FREDRIX, AP Business Writer
02/13/08
MILWAUKEE - Mortgage insurer MGIC Investment Corp. said Wednesday it lost almost $1.5 billion for the last three months of 2007 on higher home delinquencies and payouts. It also said it is looking for ways to boost its capital.
Chairman and chief executive Curt S. Culver said the company still doesn't see making money this year, if delinquencies and losses continue to rise and fewer homeowners get back on track with payments.
Its shares tumbled $1.22, or 8.6 percent, to $12.96 in morning trading Wednesday.
The Milwaukee-based company said it lost $1.47 billion, or $18.17 per share, in the fourth quarter compared with a profit of $121.5 million or $1.47 per share in the same period a year ago.
A survey by Thomson Financial indicates Wall Street analysts had expected the company to lose, on average, $6.77 per share. Those estimates typically exclude one-time items.
The company said it has hired an advisor to assist it in exploring alternatives for increasing its capital, though Culver said MGIC has enough money to pay claims.
The company announced late last month that it could pay $2 billion in claims this year, up from previous estimates of up to $1.5 billion. It finished 2007 paying out $870 million in claims, up from $611 million in 2006.
Home buyers typically must get mortgage insurance when they put down less than 20 percent of their home's value. When they miss payments, the insurers pay lenders. If homes end up in foreclosure, both lenders and insurers lose money.
Revenues for the fourth quarter were $399.1 million, up 8.7 percent from $367.2 million in the last three months of 2006. The company increased its net premiums written for the quarter nearly 25 percent to $380.5 million, up from $367.1 million in the same quarter in 2006.
MGIC finished 2007 with a loss of $1.67 billion, or $20.54 a share. In 2006, MGIC earned $564.7 million, or $6.65 a share. For the year, revenues rose to $1.69 billion, from $1.47 billion in 2006. New insurance written was $76.8 billion, compared to $58.2 billion in 2006.
MGIC had $211.7 billion primary insurance in force at the end of 2007, compared with $176.5 billion the previous year.
The company has been limiting its exposure to weaker housing markets by demanding higher credit scores and larger down payments. Starting March 3, MGIC said it will require at least 5 percent down on homes in so-called restricted markets. They include the entire states of Arizona, California, Florida and Nevada and major metro areas such as Washington, D.C., Detroit, Chicago, Boston and Atlanta.
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MGIC: http://www.mgic.com
http://news.yahoo.com/s/ap/20080213/ap_on_bi_ge/earns_mgic;_ylt=ArZ6EW.kwRompKxLla2SbeRv24cA
New Mortgage Rescue Goes Beyond Subprime
Monday February 11, 8:43 pm ET
By Marcy Gordon, AP Business Writer
Lenders Offer Broader Mortgage Plan, Extends to Borrowers of All Loans, Not Just Subprime
WASHINGTON (AP) -- With mortgage defaults surging and politicians urging the industry to do more, six lenders agreed to widen their effort to help borrowers of all loans -- not just subprime.
The plan, called Project Lifeline, is to be announced Tuesday by the Treasury Department and the Department of Housing and Urban Development, a person familiar with the plan said Monday evening, confirming earlier news reports and speaking on condition of anonymity because it had not yet been made public.
The plan will allow seriously overdue homeowners to suspend foreclosures for 30 days while lenders try to work out more affordable loans are worked out.
On a pilot basis, the plan will involve six of the largest mortgage lenders, in hopes that more lenders will sign on. The participants are:
Bank of America Corp.,
Citigroup Inc.,
Countrywide Financial Corp.,
JPMorgan Chase & Co.,
Washington Mutual Inc.
Wells Fargo & Co.
All six are involved in Hope Now, a Bush administration organized effort to freeze rates on some high-cost subprime mortgages for five years to aid borrowers whose teaser rates are jumping sharply higher. Since then, Treasury Secretary Henry Paulson has urged lenders to expand that effort to cover struggling homeowners with conventional mortgages.
The new plan applies to seriously delinquent homeowners, those whose mortgages are 90 days or more past due.
The Hope Now alliance, which includes lenders, investors and nonprofit groups, said last week that it helped nearly 8 percent of subprime borrowers in the second half of 2007 -- more than its original estimate.
The group said it helped 545,000 subprime borrowers with spotty credit in the second half of last year, compared with its January estimate of 370,000. That works out to 7.7 percent of 7.1 million subprime loans outstanding as of September 2007.
Among the subprime borrowers aided, 150,000 were helped through permanent-loan modifications, such as lower interest rates, while 395,000 negotiated repayment plans, which often involve a borrower getting back on track even after missing a few payments.
Consumer groups, however, point out that many borrowers still can't keep up, even after loan workouts. They say many of the borrowers in the Hope Now effort have negotiated short-term loan modifications or repayment plans, which often involve a borrower getting back on track after missing a few payments. A full-fledged refinancing at a lower rate is preferable, they say.
http://biz.yahoo.com/ap/080211/mortgage_mess_rescue.html
Western banks face backlash as they hand out begging bowl
Feb 7 2008
In China, for example, there are rising complaints that funds are foolish to shovel cash directly into risk-laden US banks when they could be using it in better ways, such as purchasing western commodity or manufacturing groups. “The Chinese are worried they are turning into [the source of] dumb money,” says one well-placed Asian financier, who partly blames the trend on the Blackstone saga, which produced significant paper losses for the Chinese investors.
http://wallstreetexaminer.com/blogs/winter/?p=1403
#msg-26654390
GMAC reports $724 million loss
GMAC LLC said Tuesday it lost $724 million in the final quarter of 2007 as the housing slump and disruptions in the credit and capital markets battered the lender's home mortgage division.
The Detroit-based lender got in the mortgage business in 1985 after decades of originating only car loans for parent company General Motors Corp. Trouble in GMAC's mortgage business, Residential Capital LLC, first surfaced in the latter half of 2006 when growing numbers of people began defaulting on home loans.
The automaker owns 49 percent of GMAC after selling the remainder of the business in that year to an investment group led by Cerberus Capital Management LP for $14 billion.
http://www.commercialappeal.com/news/2008/feb/06/daily-briefing/
Washington To Bond Insurers: Don't Expect A Bailout
Liz Moyer 02.07.08, 3:38 PM ET
In Washington D.C., regulators are trying to calm concerns that the ailing bond insurers could lead to another cascade of subprime-related calamity, and simultaneously trying to remind onlookers that a federal bailout of the bond insurance industry is not coming.
Thursday, Treasury Undersecretary Robert Steel was quoted at a meeting of Wall Street analysts as saying the department was monitoring the situation but didn't plan to directly intervene, calling it a "private market-oriented" situation.
Federal Reserve Chairman Ben Bernanke, acknowledging the many ways banks are exposed to the insurers as counterparties and creditors, also said in a Feb. 4 letter that he was monitoring the developments.
The letter, sent in response to questions submitted by Rep. Paul Kanjorski of Pennsylvania, chairman of the House subcommittee on capital markets, ends with the fed chairman saying, "we believe we have the appropriate tools to assess exposures to bond insurers of the banks we supervise."
The Securities and Exchange Commission, also responding to Kanjorski, said in a Jan. 30 memorandum that it is monitoring the impact on municipal issuers and money funds, and says the investment banks with big exposures to the insurers "are highly aware of and actively managing their exposures."
The industry is waiting to see whether banks will pull together and bail out some of the biggest bond insurers, which have been reeling because of their exposure to credit derivatives that have swiftly declined in value, potentially triggering insurance payments that would overwhelm their capital bases.
Any bank-organized bailout would be partly self-preservation. Some analysts estimate additional investment banking losses from exposure to the bond insurers of up to $70 billion, on top of the more than $100 billion hit they've already taken.
Rather than a $15 billion industrywide bailout, however, the talk now is more focused on solutions for individual firms, including Ambac and Financial Guaranty Insurance Co., which have been meeting with banks in recent days. An industrywide bailout was seen as too problematic, with difficulty getting banks to agree on how much each should pitch in to help.
Some bond insurers have been trying to raise capital to thwart a downgrade to their credit ratings, the effect of which would be to cripple new business. On Wednesday, MBIA (nyse: MBE) said it was upping its planned sale of stock to $750 million from $500 million, a move which the New York insurance regulator called "good progress."
New York's insurance superintendent, Eric Dinallo, has been asking Wall Street to come up with solutions to the crisis, which could affect $2.6 trillion worth of municipal bonds, about half of which are backed by insurance. At the very least, fewer competitors in the business--and bond insurers would need to maintain the highest rating to stay in the game--would raise the cost of bond issuance for many smaller cities and make some projects too expensive to finance.
Banks are exposed to the business themselves as counterparties on credit default swaps, but the exposures are concentrated at UBS (nyse: UBS), Merrill Lynch (nyse: MER) and Citigroup (nyse: C).
Analyst Meredith Whitney from Oppenheimer & Co. sees $30 billion to $70 billion in write-downs as a result of this exposure, but says because it is so limited to those three banks, an industrywide bailout seems unlikely.
The downgrades will come despite any private sector effort to help. On Thursday, Moody's Investors Service cut the financial strength ratings of XL Capital Assurance to single-A from triple-A.
http://www.forbes.com/home/wallstreet/2008/02/07/bonds-insurance-cmos-biz-wallst-cx_lm_0207insurers.html
Fitch Cuts Ratings on SCA-Backed Deals
Fitch Lowers Ratings on 10 Classes of Asset-Backed Securities Insured by Security Capital
January 24, 2008: 02:16 PM EST
NEW YORK (Associated Press) - Credit rating agency Fitch Ratings said Thursday it downgraded 10 classes of asset-backed securities tied to its downgrade of bond insurer Security Capital Assurance Ltd.
The ratings on the classes of securities were cut to "A" from "AAA" to match an earlier downgrade of Security Capital.
Fitch cut Security Capital's rating to "A" from "AAA" earlier Thursday, only a day after Security Capital scrapped plans to raise $2 billion in fresh capital to cover future potential claims.
All the securities downgraded remain on a negative watch, which means further downgrades are possible. Each was insured by XL Capital Assurance Inc., a financial guaranty subsidiary of Security Capital.
Shares of Security Capital tumbled 80 cents, or 21.1 percent, to $2.99 in afternoon trading
http://money.cnn.com/news/newsfeeds/articles/apwire/e1ee780fe7980aa741a5f3fd4dfd5bc5.htm
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Fitch Downgrades SCA-Insured Bonds
Associated Press 01.29.08, 3:55 PM ET
NEW YORK - Fitch Ratings cut its rating on more than 37,500 municipal bonds on Tuesday because of doubts about the insurer pledging to cover losses on the bonds.
Five days ago, Fitch Ratings downgraded Security Capital Assurance Ltd. (nyse: SCA - news - people ), a bond insurer based in Bermuda. Security Capital had abandoned plans to raise $2 billion to fortify its capital cushion, and Fitch said this dented the insurer's capacity to pay claims.
SCA writes insurance policies promising to repay bondholders when bond issuers default.
Because SCA's financial strength is not as sound, Fitch said, many of the bonds the company insures are not as safe. SCA insures more than $150 billion in debt.
Fitch downgraded 37,541 bonds insured by SCA's subsidiary, XL Capital (nyse: XL - news - people ) Assurance Ltd. The bonds include debt floated by such local government entities as the Bernards Township Board of Education in New Jersey, the Comanche County Consolidated Hospital District in Texas and the Wayne County Public Library in Ohio.
The market value of these bonds is likely to fall in the wake of the downgrade because of a greater implied risk of default. Fitch did not disclose the principal value of the downgraded bonds.
http://www.forbes.com/feeds/ap/2008/01/29/ap4588380.html
Moody's Cuts SCA's Rating
Moody's Slashes Rating on Security Capital Assurance, Threatening $150B in Debt
February 07, 2008: 04:01 PM EST
NEW YORK (Associated Press) - Moody's Investors Service cut its rating on Security Capital Assurance Ltd. on Thursday, imperiling the beleaguered bond insurer's prospects for new business and threatening the value of hundreds of billions of dollars in bonds.
Moody's cut Security Capital Assurance's financial-strength rating to "A3" from "AAA." The insurer's financial strength is now "high quality," whereas it was previously "maximum safety."
A bond insurer without top-caliber financial strength ratings will have trouble winning new business. Also, downgrades of a bond insurer are likely to drag the value of the bonds the company insures, because insured debt is only as safe as the reliability of its insurer.
Security Capital Assurance, based in Bermuda, writes insurance policies promising to repay bondholders when borrowers miss payments on their bonds. Moody's said in order to cover the claims the company is likely to face, Security Capital needs $6 billion in "claims-paying resources," or cash it can access. The company only has access to $3.6 billion, Moody's said.
Moody's expects to issue a list of SCA-insured bonds the ratings agency will downgrade because the company's balance sheet is not as sound. Security Capital insures $150 billion in debt.
After Fitch Ratings downgraded SCA, the ratings agency downgraded more than 37,500 bonds the company insures, including debt floated by government borrowers like the Bernards Township Board of Education in New Jersey and the Wayne County Public Library in Ohio.
The once-staid bond insurance industry used to insure mainly government bonds, which are relatively safe. Unsatisfied with the growth in this business, many insurers branched out to insure riskier debt, including some of the mortgage investments at the heart of the credit crisis gripping financial markets.
Because of expectations for higher claims, all three major ratings agencies have downgraded ACA Capital Holdings Inc., whose stock now trades for 70 cents.
Fitch has downgraded Ambac Financial Group Inc., SCA and Financial Guaranty Insurance Co., which collectively insure more than $1 trillion in debt. S&P has also downgraded FGIC.
Downgrades and the prospect for more have upended the bond insurance industry in the past year. Shares of MBIA Inc., which has not yet been downgraded, have tumbled more than 80 percent in the past year. Ambac's stock trades at less than $11, after topping $95 in May.
Shares of SCA gained 1 cent to $2.78 in afternoon trading Thursday. The stock has fallen more than 90 percent in the past year.
http://money.cnn.com/news/newsfeeds/articles/apwire/554633f738d364cf5ac860afb5b91465.htm
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Moody's Cuts SCA's Rating
Associated Press 02.07.08, 4:01 PM ET
NEW YORK -
Moody's Investors Service cut its rating on Security Capital Assurance Ltd. on Thursday, imperiling the beleaguered bond insurer's prospects for new business and threatening the value of hundreds of billions of dollars in bonds.
Moody's cut Security Capital Assurance's financial-strength rating to "A3" from "AAA." The insurer's financial strength is now "high quality," whereas it was previously "maximum safety."
A bond insurer without top-caliber financial strength ratings will have trouble winning new business. Also, downgrades of a bond insurer are likely to drag the value of the bonds the company insures, because insured debt is only as safe as the reliability of its insurer.
Security Capital Assurance, based in Bermuda, writes insurance policies promising to repay bondholders when borrowers miss payments on their bonds. Moody's said in order to cover the claims the company is likely to face, Security Capital needs $6 billion in "claims-paying resources," or cash it can access. The company only has access to $3.6 billion, Moody's said.
Moody's expects to issue a list of SCA-insured bonds the ratings agency will downgrade because the company's balance sheet is not as sound. Security Capital insures $150 billion in debt.
After Fitch Ratings downgraded SCA, the ratings agency downgraded more than 37,500 bonds the company insures, including debt floated by government borrowers like the Bernards Township Board of Education in New Jersey and the Wayne County Public Library in Ohio.
The once-staid bond insurance industry used to insure mainly government bonds, which are relatively safe. Unsatisfied with the growth in this business, many insurers branched out to insure riskier debt, including some of the mortgage investments at the heart of the credit crisis gripping financial markets.
Because of expectations for higher claims, all three major ratings agencies have downgraded ACA Capital Holdings Inc., whose stock now trades for 70 cents.
Fitch has downgraded Ambac Financial Group Inc., SCA and Financial Guaranty Insurance Co., which collectively insure more than $1 trillion in debt. S&P has also downgraded FGIC.
Downgrades and the prospect for more have upended the bond insurance industry in the past year. Shares of MBIA Inc., which has not yet been downgraded, have tumbled more than 80 percent in the past year. Ambac's stock trades at less than $11, after topping $95 in May.
Shares of SCA gained 1 cent to $2.78 in afternoon trading Thursday. The stock has fallen more than 90 percent in the past year.
http://www.forbes.com/feeds/ap/2008/02/07/ap4629325.html
Do Bond Insurers Need CPR?
Fears of a muni market meltdown may be overblown
February 6, 2008
by Matthew Goldstein
Just a few months ago, bond insurers blended into the background of Wall Street. Now, as the credit crisis plays out, MBIA (MBI), Ambac (ABK), and others that guaranteed subprime bonds are at the center of the drama. Vultures and hedge funds are circling their shares. Credit rating agencies are contemplating downgrades. And New York State Insurance Superintendent Eric R. Dinallo is feverishly searching for deep-pocketed investors to fund a bailout, making it seem as if the health of the U.S. financial system depends on it.
The fears, though, may be overblown. Certainly, if an insurer loses its vaunted AAA rating there will be fallout. The industry guarantees $800 billion in asset-backed securities, such as those troublesome collateralized debt obligations (CDOs), and more importantly, $1.5 trillion in municipal debt. But Wall Street has already taken billions in writedowns on risky subprime securities that insurers agreed to cover in the case of default. And given all the problems, insurers won't cover those fancy finance products anymore. Meanwhile, the muni markets, which state and local governments depend on to fund new roads and schools, are more resilient than regulators believe.
Plenty to Fill the Void
In fact, insurance on municipal bonds didn't exist before the mid-1970s. And the concept only caught fire after the 1994 bankruptcy filing of Orange County, Calif. Ever since, bond insurance has largely been used by local governments to put nervous investors at ease about the risk of defaults. By buying such protection, state and local governments, in effect, piggyback on the top-level ratings of bond insurers and thereby raise their own grades. For example, with insurance, tiny Chemung County in upstate New York can boost its normally low investment-grade rating to AAA—attracting big investors and lowering the interest rate it pays.
But critics, including some government officials, say a big chunk of muni bonds don't need coverage. Most large cities and states already have top grades from the rating agencies. Some 84% of the muni-bond insurance MBIA sold was purchased by cities with either an A or AA rating. And the risk of default by a municipality is minuscule. Even battered Orange County paid back its debts. So bond insurers, which collect some $2.3 billion a year in premiums from munis, have rarely shelled out a claim payment. "It's something of an artificial construct that so many munis have to be insured," says Frank Hoadley, Wisconsin's director of capital finance. "By and large, the decision is made by the investor." Adds Matt Fabian, managing director of research firm Municipal Market Advisors: "It's not about credit quality. It's just a bureaucratic cost municipal issuers have to pay."
If dominant players such as MBIA and Ambac are permanently sidelined by the credit turbulence, there seem to be plenty of others ready to fill the void for places like Chemung County. Warren E. Buffett, for one, decided to start his own muni bond insurance operation. And Dexia, a European bank, is pumping $500 million of new capital into its bond insurer, Financial Security Assurance, which has emerged relatively unscathed from the mortgage mess. That fresh backing has allowed FSA to capitalize on the problems of its peers. On Jan. 24, Chemung County tapped FSA to guarantee a $3.9 million offering after its previous insurer, Financial Guaranty Insurance (FGIC), was downgraded to AA. Since the summer, FSA has doubled its share of muni bond insurance, to 50%.
There's no doubt the fragility of the insurers has caused some disruptions. In January, muni bond issuance fell 48% from a year ago, to $16 billion, the worst month since September, 2001. Only about a third of the bonds had insurance, vs. the usual 50%. Prices for some municipal bonds remain unstable because the guarantees are in question. That dislocation has also helped roil the market for so-called auction-rate securities used by local governments and others to raise $250 billion in short-term financing.
Little Bailout Support
New York's Dinallo, a former prosecutor and architect of the 2003 Wall Street research settlement, will have to move fast to save the biggest insurers. The credit ratings of several, including FGIC and ACA Financial Services, have already been slashed. And on Jan. 18, Fitch Ratings downgraded Ambac to AA. Analysts says it's only a matter of time before Moody's Investors Service (MCO) and Standard & Poor's (MHP) lower the grades of Ambac and MBIA, which plans to raise $750 million to protect its rating. If the two are downgraded, the game is pretty much over for them, since munis are only interested in buying AAA protection. "Once a firm is downgraded to AA, it's hard for them to do any more muni business," says Fabian.
So far, though, New York's insurance chief is having a tough time finding support for a bailout of companies that, in part, got themselves into this mess by branching out into risky securities they had no experience insuring. Investments banks would seem to be natural backers of a rescue. If the ratings on insurers drop, guarantees on another chunk of risky debt could disappear, forcing more write-offs. Last month, Merrill Lynch (MER) took a $2.6 billion hit from exposure to CDOs after the ratings on ACA and others slumped.
But banks have been preemptively slashing the values on their subprime-linked securities, figuring many of those guarantees won't materialize. And unless the ratings of Ambac and MBIA fall several notches to junk status, the additional losses for big banks would total between $30 billion and $40 billion. It's not an insignificant sum. But it's still far less than the $100 billion in writedowns Wall Street has already taken. As a result, many banks may be calculating that any losses they suffer could be less than the tens of billions Dinallo is demanding to prop up Ambac and MBIA.
Investors, then, may have to brace for more pain, though it's not likely to be crippling. "A bailout is not going to happen," says Robert B. Lamb, a professor at New York University's Stern School of Business. "The downgrades are inevitable, and investors will have to take losses."
http://www.businessweek.com/magazine/content/08_07/b4071020418218_page_1.htm
A Credit Card You Want to Toss
February 7, 2008, 12:01AM EST
Bank of America abruptly notified cardholders in good standing their rates would skyrocket if they didn't opt out fast. Is BofA greedy or needy?
By Robert Berner
Credit-card issuers have drawn fire for jacking up interest rates on cardholders who aren't behind on payments, but whose credit score has fallen for another reason. Now, some consumers complain, Bank of America (NYSE:BAC - News) is hiking rates based on no apparent deterioration in their credit scores at all.
The major credit-card lender in mid-January sent letters notifying some responsible cardholders that it would more than double their rates to as high as 28%, without giving an explanation for the increase, according to copies of five letters obtained by BusinessWeek. Fine print at the end of the letter -- headed "Important Amendment to Your Credit Card Agreement" -- advised calling an 800-number for the reason, but consumers who called say they were unable to get a clear answer. "No one could give me an explanation," says Eric Fresch, a Huron (Ohio) engineer who is on time with his Bank of America card payments and knows of no decline in the status of his overall credit.
Bank of America spokeswoman Betty Riess confirms some bank cardholders could be receiving rate increases for reasons other than declines in credit scores, such as running higher balances with their Bank of America cards or with other creditors. She says the increases are part of a "periodic review" that assesses customers' credit risk. She declined to say if the Charlotte (N.C.) bank had changed its credit standards thereby bumping some consumers' rates or how many cardholders were being affected by the review. Bank of America has 40 million U.S. credit-card accounts.
Buzz about the letters is building on the Internet. Since mid-January Credit.com, a credit-card information site, has received 40 complaints from consumers Bank of America had notified of sharp rate increases, even though they were current on their bills, says Emily Davidson, a Credit.com researcher. Complaint sites My3cents.com and BankofAmericaBadforAmerica.org say they have also received similar complaints.
The so-called "opt-out" letters give borrowers the option of no longer using their card and paying off the balance at the old rate. But they must write Bank of America by later this month if they plan to do so -- otherwise their rates on existing and new balances automatically rise.
Arbitrary Criteria
What's striking is how arbitrary the Bank of America rate increases appear, credit industry experts say. In recent years, many card companies have turned to a practice called "risk-based pricing," where they will raise a regular paying consumer's rate because of a decline in the person's FICO score. FICO is a credit-risk score developed by Fair Isaac (NYSE:FIC - News) that includes a number of risk metrics the Minneapolis company doesn't disclose. Credit reporting bureaus supply creditors with FICO scores along with other data, such as late payments and debts owed.
In a December congressional hearing spearheaded by Sen. Carl Levin (D-Mich.), lawmakers slammed big card companies for using such pricing with customers who pay on time. By law, credit-card lenders can change terms as long as they notify borrowers. Even so, JPMorgan Chase (NYSE:JPM - News) and Citigroup (NYSE:C - News) announced ahead of Levin's hearing that they would stop the practice of raising card rates based solely on FICO scores.
But Bank of America appears to be taking an even more aggressive stance because, beyond credit scores, it is using internal criteria that aren't available to consumers. That makes the reason for the rate increase even more opaque. "Congress has faulted credit-card companies for lack of transparency in raising rates," says William Ryan, a financial industry analyst at Portales Partners, a New York-based research firm. "Bank of America is bringing it to a new level."
An Unjustified, For-Profit Move
Analysts also say they are surprised by the magnitude of the rate raises Bank of America is imposing on affected cardholders. Michael Jordan, 25, a software developer who lives in Higganum, Conn., says he received a letter from Bank of America in late January advising him that his card rate would rise from 9.99% to 24.99%. The software developer, who earns $80,000 per year, says he was "shocked" because his payments had been on time and his credit score hadn't changed in the last year. In fact, Jordan says, he has only $4,500 in overall outstanding credit-card debt on two cards and that, on the Bank of America card in question, he had paid down his balance to $3,000 from $3,700 last August. "His rate increase seems unjustified based on his credit profile," says David Robertson, publisher of The Nilson Report, a credit-card industry trade publication.
When Jordan called Bank of America about the higher rate, he says, the bank representative couldn't explain why his rate was going up. On a second call, he adds, the individual told him the reason for the increase was that he hadn't been paying down his balance fast enough, though he had lowered it by 19% in the last six months and was only now utilizing 54% of his $5,500 credit limit. Riess, the Bank of America spokeswoman, declined to discuss individual rate increases or to list all the criteria the bank was using as reasons to raise rates on existing cardholders.
Analysts say the bank's move is obviously aimed at shoring up profits. On Jan. 22 Bank of America reported a 95% decrease in fourth-quarter earnings due mostly to increases in loan-loss reserves for consumer credit, including rising card charge-offs and write-downs in mortgage-related securities. Bank of America faces another profit sinkhole with its pending acquisition of troubled Countrywide Financial (CFC). Portales' Ryan notes that boosting rates on existing credit-card holders is one of the quickest levers a bank can pull to try to boost earnings.
Anticipating Charge-Offs
Bank of America hasn't made it easy for consumers to reject the new rates. The letters require that consumers write Bank of America to agree to no longer use the card and pay off the existing balance at the old rate -- they can't telephone to do so, nor does Bank of America provide a form or a return envelope. Moreover, consumers don't have much time to respond. Cardholders say they got the letters in the latter half of January: four of the letters obtained by BusinessWeek require a written response by Feb. 19, while the fifth requires a response by Feb. 29. If the company doesn't get a response by those dates, rates automatically rise. A response, of course, assumes consumers read the letter from Bank of America as they sort junk mail. "It's a reasonable assumption that most don't," says Karen Gross, a legal scholar on consumer credit and president of Southern Vermont College.
Bank of America also benefits from consumers who do write in an agreement to pay off balances at the old rate and not use the card again, says Nathan Powell, a credit analyst at New York-based research firm RiskMetrics Group. The bank, he says, is clearly trying to protect itself from worsening credit-card charge-offs ahead, something analysts widely expect in the card industry as the economy deteriorates. Powell says the bank must have identified a list of other credit criteria besides FICO that it is using to screen cardholders and determine it's no longer worth new business if they don't accept the higher rate. So far, Bank of America's charge-off rates have risen in line with the credit-card industry, up to 5.08% of receivables at the end of the fourth quarter from 4.57% a year ago. "The bank doesn't want to get behind the curve," Powell says.
"Unacceptable" Hikes
Bank of America is trying to get ahead of Amanda Pennington, 29, of Euless, Texas. She says the bank raised her credit limit three months ago from $5,000 to $8,000 because of her strong payment history. Then she got the letter from the bank in mid-January notifying that her rate would rise from 15.74% to 25.99%. When she called, she says, the bank told her it was raising her rate because her balance was now too high, though it was still under the higher new limit the bank had previously granted. After paying tuition for a community college course, transferring another balance, and paying for daily expenses, Pennington's Bank of America debt now stands at $7,500. Bank of America declined to comment on individual customers.
Adam Levin, CEO of Credit.com and former head of New Jersey's Division of Consumer Affairs, says he is surprised Bank of America would risk bad public relations with its rate increases, given the congressional hearings in December. The bank risks alienating new customers and existing ones by being so brazen, he says, adding, "Either Bank of America has more financial troubles than it is willing to admit or it has a level of institutional arrogance that is unacceptable."
http://www.businessweek.com/bwdaily/dnflash/content/feb2008/db2008026_105146.htm
Charge: Freddie and Fannie taking on too much debt
The housing slump has compelled the two entities to buy up mortgages on the secondary market that banks are backing away from.
By Les Christie, CNNMoney.com staff writer
February 7 2008: 11:17 AM EST
NEW YORK (CNNMoney.com) -- The increased share of housing debt taken on by Freddie Mac and Fannie Mae during the housing slump has put the two government sponsored enterprises at risk, it was charged Thursday.
The two outfits are "reducing risks in the market, but concentrating mortgage risks on themselves. These risks are beginning to take their toll," said James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie. He was speaking Thursday at a Senate Banking committee on regulatory reform.
Freddie will report its first ever annual loss for 2007 at the end of February, while Fannie, is expected to report its first loss in 22 years for the year. As the sublime crisis has grown, banks have backed away from buying mortgages in the secondary market. This has left Fannie and Freddie, which do the same thing, to pick up the slack.
As a result the two government sponsored entities (GSEs) saw the housing debt they carry grow 16 percent, while Federal Home Loan Banks loans swelled to $6.3 trillion, more than the total public debt of the United States, according to Lockhart.
Some experts worry that if Fannie or Freddie take on too much debt and fail, that the government would have to bail them out using taxpayer money.
"The conforming market supported by Freddie Mac (FRE, Fortune 500) and Fannie Mae (FNM) is the only well-functioning segment of the mortgage market," said Richard Syron, CEO of Freddie Mac. "We're experiencing greater losses as house prices decline, but that is not surprising since this is the market we were created to support."
And Daniel Mudd, Fannie's CEO agreed. "Our business is meeting the increased demand for liquidity and our overall credit book has held up relatively well," he said. "Yes, these are tough times, but that is when you want a Fannie Mae."
But Lockhart argues that the GSEs require more regulatory oversight as their market share grows, in order to maintain the confidence of both the public and investors as the GSEs work to meet their important housing mission.
http://money.cnn.com/2008/02/07/real_estate/raise_GSE_cap_limits/index.htm?source=yahoo_quote
Just plain UGLY - how can this play out without a depression
Global Credit Market Dislocation Watch:
January 31 - Bloomberg (Jody Shenn and David Mildenberg): "Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's."
January 30 - Bloomberg (Jody Shenn): "Standard & Poor's said it cut or may reduce ratings of $534 billion of subprime-mortgage securities and collateralized debt obligations as default rates rise. The downgrades may extend losses at the world's banks to more than $265 billion, S&P said. The securities represent $270.1 billion, or 47%, of mortgage bonds rated between January 2006 and June 2007... The...company also said it may cut 572 CDOs valued at $263.9 billion."
January 31 - Bloomberg (Christine Richard): "MBIA Inc....posted its biggest-ever quarterly loss and may raise more capital after a slump in the value of subprime-mortgage securities. The fourth-quarter net loss was $2.3 billion, or $18.61 a share, raising concern that the...company will lose its top credit rating."
February 1 - Bloomberg (Mark Pittman): "Moody's... may downgrade some bond insurers in the next few weeks as it reassesses the extent of losses from subprime mortgage securities. The industry review will be completed by late February and ratings may be cut on some companies earlier if they can't raise capital... 'Our estimate of capital needed to support the mortgage-related risk of some guarantors has risen significantly,' Moody's analysts led by Stanislas Rouyer said..."
January 29 - Bloomberg (Jody Shenn): "The market for U.S. collateralized debt obligations remained shut for a fourth week, according to JPMorgan Chase & Co., on concern that ratings companies haven't adequately assessed the securities. Demand for debt created by slicing pools of assets into securities stalled as some top-rated classes of mortgage-linked CDOs lost all their value amid surging U.S. foreclosures and as bondholders faced unprecedented downgrades on home-loan bonds."
January 31 - Financial Times (Michael Mackenzie): "The US high-yield debt market remains effectively closed for business, with the amount of money borrowed by companies in January the lowest for that month since 1990... The moribund high-yield activity comes at a time when Wall Street has still not placed some $250bn in bank loans and high-yield bonds. An inability to borrow fresh money can lead to liquidity problems for highly indebted companies, and ultimately to higher levels of corporate defaults."
February 1 - Bloomberg (Jeremy R. Cooke): "U.S. state and local governments sold about $17 billion of tax-exempt bonds in January, the least since September 2001, as bond insurers' weakening credit and rising debt costs damped municipal borrowing."
January 30 - Bloomberg (Yalman Onaran and Bradley Keoun): "Merrill Lynch & Co., the world's largest brokerage, plans to exit the business of underwriting collateralized debt obligations and other structured credit products after the securities led to a record loss. 'We are not going to be in the CDO and structured-credit types of businesses,' new Chief Executive Officer John Thain said... The market for CDOs, which repackage assets into new securities with varying degrees of risk, has been frozen since last July when two Bear Stearns Cos. funds that invested in them collapsed."
January 30 - Bloomberg (Christine Richard): "Financial Guaranty Insurance Co., the world's fourth-largest bond insurer, lost its AAA credit rating at Fitch Ratings after missing a deadline to raise capital... The loss of the AAA stamp jeopardizes ratings on bonds Financial Guaranty insured and limits the company's ability to generate new business."
January 28 - Bloomberg (John Glover): "A default by bond insurers such as ACA Capital Holdings Inc. may trigger a 'disaster' in the credit-default swaps market, according to Bank of America... ACA Capital, which guarantees more than $75 billion of debt, may face delinquency proceedings from Maryland Insurance Administration because it can't pay $60 billion of credit-default swaps. The contracts, based on bonds and loans, are used to speculate on a company's ability to repay debt and the buyergets face value in exchange for the underlying securities or the cash equivalent should a borrower default. 'We see huge potential problems for settling CDS contracts,' ...analyst Glen Taksler wrote...
January 30 - Bloomberg (Adam Haigh and Eric Martin): "Citigroup Inc., Merrill Lynch Co., UBS AG and other banks may be forced to post up to $70 billion in writedowns should bond insurers lose their top credit ratings, according to Oppenheimer & Co. analyst Meredith Whitney... 'The fate of the monoline insurers is of paramount importance to financial stocks,' said New York-based Whitney. 'When it becomes clear, as we expect it will, that more charges are on the horizon, we believe the market will take another turn for the worse.'"
January 30 - Bloomberg (Warren Giles): "UBS AG, Europe's largest bank by assets, reported a record loss after about $14 billion of writedowns on assets infected by subprime mortgages in the U.S."
January 30 - Bloomberg (Neil Unmack): "Morgan Stanley, the second-biggest U.S. securities firm, wrote down $169 million after helping its money funds by taking on bonds issued by structured investment vehicles. Morgan Stanley bought $1.06 billion of SIV bonds... Banks and money managers bailed out money funds that bought debt from SIVs after losses caused by the collapse of the U.S. subprime mortgage market threatened to push their value below 100 cents on the dollar, known as 'breaking the buck.'"
January 29 - Bloomberg (Mark Pittman): "A collateralized debt obligation backed by subprime mortgages collapsed after a forced sale of assets didn't yield enough to pay back $282 million in notes. Standard & Poor's lowered the rating of Visage CDO II Ltd. notes to D, its lowest rating and signifying a default. Two of the issues totaling $160 million were given an AAA rating a year ago."
more... #msg-26498806
see also....
http://www.investopedia.com/features/crashes/crashes2.asp
http://news.google.com/archivesearch?q=depression&btnG=Search+Archives&scoring=t
Crisis in Bond Insurance
The nonlinear phase of the adverse feedback loop from financial markets to the real economy was made more tangible on January 18, when the Fitch Rating Agency cut the rating on the insurance unit of Ambac Financial Group from AAA to double AA. The seemingly modest downgrade--laughable since markets are pricing Ambac's paper as junk bonds--has potentially devastating effects for financial markets. Ambac is--along with MBIA and several other firms--a bond insurer that in effect sells credit rating boosts to municipalities and other weaker borrowers by guaranteeing to pay principal and interest on their loans. If the mortgage insurer loses its AAA rating, so too do its insurees, whose liabilities, held as assets by banks, investment banks, and pension funds, must then be written down in value. The bond insurers have "insured" about $2.3 trillion, approximately $1.3 trillion of which is tied to municipal debt issues and $1 billion of which is tied to structured finance exposure in the form of complex derivative securities.
Markets have been deeply concerned about the mortgage insurers since last summer when, for example, Ambac's shares were valued at about $90 each. The first wave of market turmoil that emerged in August took the shares down by about 30 percent to just over $60 per share. During the last half of October, Ambac shares fell more sharply, by about 60 percent to about $25--a move that coincided with the start of a weaker stock market. Between late December and January 18, Ambac shares collapsed yet again, falling another 75 percent in value. Much of the last drop--from $21 per share to $6.20 per share--occurred between January 16 and 18, signaling a crisis for Ambac and other bond insurers whose shares moved down in tandem with Ambac's. The price declines were tied to the actual reduction in Ambac's rating and the expected reduction in MBIA's rating.
Tamara Kravec, an analyst at Banc of America Securities, wrote on January 18: "The destruction of the bond insurers would likely bring write-downs at major banks and financial institutions that would put current write-downs to shame."[4]
The new crisis initiated by the near-collapse of bond insurers adds to the threat of an accelerating, adverse feedback loop from the financial sector to the real economy. Global equity markets fell by more than 5 percent on January 21 after news spread of the possible collapse of U.S. mortgage insurers. Such an exacerbation of downward momentum in financial markets and the real economy threatens to produce a recession far more severe and protracted than is currently expected or priced into asset markets. Investor risk appetite would be sharply curtailed and liquidity preference would be sharply elevated by the emergence of a nonlinear, adverse feedback loop.
The process whereby an endogenous cycle of risk appetite of investors, households, and businesses exacerbates the cyclical movements in financial markets and the real economy has been explored in academic literature. At a recent Philadelphia Federal Reserve Policy Forum, John Geanakoplos of Yale University made a presentation entitled "The Leverage Cycle," which explored how endogenous flights to liquidity during periods of enhanced market volatility can intensify cyclical behavior. While this brief characterization does not do full justice to the innovative work by Geanakoplos or other authors working in the field, the fact that signs of risk aversion are emerging rapidly in the financial sector, despite substantial efforts by the Fed to ease liquidity conditions, suggests that the economy and financial markets in the United States, and perhaps globally, are exposed to the risk of enhanced volatility.
more at #msg-26498567
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
Private equity firms unlikely to rescue Ambac and MBIA
By Henny Sender and Aline van Duyn in New York
Published: February 4 2008 02:00
Leading private equity firms are unlikely to participate in any recapitalisation of Ambac and MBIA, increasing the pressure on banks to come up with a rescue package for the troubled US bond insurers.
A number of firms, including Bain Capital, Carlyle Group, Kohlberg Kravis Roberts and TPG, have looked at investing in the cash-strapped groups, which guarantee the value of everything from municipal bonds to the most complicated mortgage securities. These investors have all concluded that the risks are too great, according to people familiar with their thinking.
This puts more pressure on the banks to provide rescue financing for Ambac and MBIA. Some large banks and securities firms could face large writedowns on mortgage securities, as well as derivatives, if the bond insurers lose their triple-A credit ratings.
A group of eight banks is considering a plan to inject capital into Ambac, which needs at least $1bn (£510m). Several banks are also believed to be talking to MBIA, which needs at least $500m. It is likely that any solutions - a top priority for regulators - will be crafted for each bond insurer, rather than as a general bail-out.
The reluctance of big private equity firms to become involved comes after they looked closely at the two large monolines. They also studied the experience of Warburg Pincus, which committed $1bn to MBIA in early December at what seemed an attractive price, only to see MBIA's share go into freefall. Additionally, they noted that Blackstone, which has a minority stake in FGIC, had so far declined to put more money into that troubled bond insurer.
"If we worry that we can get shot from the shadows by something we can't see coming, it is not for us," says the managing director in charge of financial service investments for one of the leading private equity funds.
"The financial guarantors pass neither the shadow test nor the ability-to-understand test."
The next two to four weeks will be vital for the bond insurers because the biggest ratings agencies have made it clear they are very close to cutting their ratings.
www.ft.com/monolines
http://www.ft.com/cms/s/0/d9614eca-d2c3-11dc-8636-0000779fd2ac.html?nclick_check=1
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
S&P warns sub-prime losses may hit $265bn
By Angela Monaghan
Last Updated: 1:34am GMT 01/02/2008
Losses from securities backed by sub-prime mortgages could balloon to more than $265bn (£133bn), ratings agency Standard & Poor's has warned.
The latest news and analysis on the credit crisis
S&P has downgraded or placed on credit watch $534bn (£268bn) worth of assets related to the ailing US sub-prime mortgage market, which the agency has warned will trigger further write-downs by a swathe of banks.
The agency, which has itself faced criticism over the ratings it gave some sub-prime debt, expects that a further $175bn (£88bn) will be written down by US banks and other financial institutions.
About 46pc of the securities backed by sub-prime loans that it rated in 2006 and during the first half of 2007 have now been downgraded or placed on credit watch. Thirty-five per cent of its outstanding rated collateralised debt obligations have also been placed on credit watch.
Announcing the changes S&P warned: "Many investors whose investment guidelines do not allow them to hold lower rated instruments could be forced to divest, creating the potential for an imbalance in the markets."
However, S&P is not expecting the big banks and institutions that have already written the $90bn to reveal any more sub-prime related losses. Instead, the agency reckons the losses will be incurred by smaller players "that have yet to feel the full extent of the value impairments on securities held", as well as some of the large European banks that have not yet reported.
In the US, the losses will move to regional banks, credit unions and federal home loan banks and some of the Asian banks are also exposed.
S&P said that its review lead to some of the banks being re-rated, although most likely that would be limited to a "one-notch downgrade."
It added: "Another issue is the potential for a ripple impact on the broader financial markets. It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks."
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/31/bcnsub131.xml
Eight banks join to rescue MBIA, Ambac, others: CNBC
Fri Feb 1, 2008 10:54am EST
NEW YORK (Reuters) - Eight large banks have joined forces to seek a rescue plan for MBIA Inc (MBI), Ambac Financial Group Inc (ABK) and other troubled bond insurers battered by the global credit crunch, CNBC television said on Friday, citing an unnamed source.
Shares of MBIA rose $1.70, or 11 percent, to $17.20 in trading before the market opened. Ambac rose $1.78, or 15.2 percent, to $13.50. The cost of protecting MBIA and Ambac debt against default fell, indicating that investors see less risk.
The $2.5 trillion bond insurance industry is struggling with mounting losses and capital shortfalls, jeopardizing the "triple-A" credit ratings that insurers such as MBIA and Ambac have long held and depended on to function normally.
CNBC said the banks include Barclays Plc (BARC), BNP Paribas (BNPP), Citigroup Inc (C), Allianz's (ALVG.DE) Dresdner Bank, Royal Bank of Scotland Group Plc (RBS.L), Societe Generale (SOGN.PA), UBS AG (UBSN.VX) and Wachovia Corp (WB).
The banking industry itself has suffered more than $100 billion of write-downs in the last year related to mortgages and other complex debt.
Representatives of Citigroup and UBS declined to comment. Wachovia had no immediate comment. The other banks, Ambac and MBIA did not immediately return requests for comment.
Bond insurers got caught after venturing beyond writing coverage for bonds typically used to finance hospitals, roads, schools and sewer systems.
Instead, to increase profit, they chose to also underwrite structured products, including securities backed by risky subprime mortgages.
Their decisions backfired last year as credit markets tightened, homeowner defaults soared, and the value of those securities sank.
Unless the market or the insurers stabilize, investors may unload hundreds of billions of dollars of bonds, raising borrowing costs and ultimately burdening taxpayers. It could also result in hundreds of billions of dollars of additional write-downs at banks worldwide, analysts have said.
Regulators including New York Insurance Commissioner Eric Dinallo have been meeting with industry participants to discuss a rescue. Dinallo was not immediately available for comment.
Credit rating agencies have taken away their triple-A ratings from a handful of bond insurers.
On Thursday, MBIA reported a record $2.3 billion quarterly loss and said it would look for new capital, but expected to retain its triple-A rating.
Standard & Poor's nevertheless put that rating on review for downgrade, joining Moody's Investors Service.
In Friday morning trading, the cost to protect MBIA debt against default fell to 14 percent upfront plus 500 basis points (5 percentage points) a year, from 17.5 percent upfront plus 500 basis points, according to CMA DataVision.
Ambac's debt protection costs fell to 14.5 percent upfront plus 500 basis points, from 18.7 percent upfront plus 500 basis points.
(Reporting by Dena Aubin, Christian Plumb, Neil Shah, Jonathan Stempel and Dan Wilchins; Writing by Jonathan Stempel; Editing by Steve Orlofsky and Dave Zimmerman
http://www.reuters.com/article/ousiv/idUSWEN372920080201
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
Merrill to Repay Massachusetts City for CDO Purchase
(Update1)
By William Selway
Feb. 1 (Bloomberg) -- Merrill Lynch & Co. agreed to pay Springfield, Massachusetts, $13.9 million to settle a dispute over collateralized debt obligations that tumbled in value.
The money will reimburse Springfield for the cost of the CDOs, securities tied to home loans and other debts shunned by investors as losses on subprime mortgages mounted. New York-based Merrill said it agreed to the refund after discovering the purchase was made without the city's consent.
``My focus all along has been to recoup these funds for the taxpayers of Springfield,'' Springfield Mayor Domenic Sarno said in a statement released last night. ``In my view, Merrill Lynch has now done the right thing.''
Local government agencies from Florida to Washington state have lost money buying securities such as CDOs that are backed by collateral no one wants. The market for CDOs has collapsed amid surging subprime defaults that have hurt their credit ratings, making the securities difficult to sell.
Merrill Chief Executive Officer John Thain said this week that the firm will cut back on packaging home loans and consumer debts into securities because demand for the products has eroded. Similar securities have also saddled Wall Street banks with at least $133 billion in credit losses and asset writedowns, threatening to undermine the bond insurance companies that guaranteed the debts would be paid.
Documents, Testimony Sought
Springfield bought its CDOs between April and June of last year from Merrill, according to city records. The value of those securities fell to $1.3 million in November. Massachusetts Secretary of State William Galvin's office subpoenaed documents and sought testimony last month from Merrill regarding the sale of the CDOs.
State Attorney General Martha Coakley said her staff ``will continue to review this matter to determine if additional action by our office is necessary.''
Merrill, the world's largest brokerage, sold Springfield investments in S Coast FD V CDO, TABS CDO, and Centre Square CDO, according to city records.
``After carefully reviewing the facts, we have determined the purchases of these securities were made without the express permission of the city,'' Merrill said in a statement. ``As a result, we are making the city whole and we have taken appropriate steps internally to ensure this conduct is not repeated.''
To contact the reporter on this story: William Selway in San Francisco at wselway@bloomberg.net
Last Updated: February 1, 2008 08:20 EST
http://stoxrox.com/MerrilltoRepayMassachusettsCity/tabid/337/language/en-US/Default.aspx
Countrywide rises as BofA affirms merger
By Stacy-Marie Ishmael in New York
January 29 2008 19:19
Shares in Countrywide Financial rallied on Tuesday after Bank of America reaffirmed plans to buy the lender, which earlier reported a fourth-quarter net loss of $422m.
Ken Lewis, chief executive of the bank, attempted to dispel investor concerns that the merger might not be completed. “Everything is a ‘go’ to complete this transaction,” he said.
Mr Lewis said Countrywide’s results were consistent with its expectations and reflected a “dramatic” improvement in the fundamentals of the mortgage business. “The items driving the loss were consistent with our due diligence and transaction price,” he said.
Shares in Countrywide rose 6.4 per cent to $6.33 by mid-afternoon. Bank of America’s $4bn offer values each share at about $7.19.
Countrywide’s quarterly loss, which compares with net income of $622m in the same period last year, comes in spite of chief executive Angelo Mozilo saying in October that the company would return to “significant” profitability, after reporting a third-quarter loss of $1.2bn. “While considerably improved from the previous quarter, [fourth-quarter results] were adversely impacted by further credit deterioration across the industry and continued illiquidity in the secondary mortgage markets,” Mr Mozilo said.
The lender said it had experienced higher-than-expected increases in delinquency rates during the quarter, while worsening conditions in the housing market forced it to raise estimates of future defaults.
Countrywide said borrowers fell behind on payments on more than a third of the mortgages in its $1,476bn loan-servicing portfolio.
The company increased its reserve for credit losses to $1.9bn at the end of last year, a seven-fold increase compared with the same period in 2006. The lender also recorded an impairment charge of $831m during the quarter, linked to so-called HELOC securities, which are backed by risky home equity lines of credit.
Continued deterioration in the credit markets resulted in a mark-to-market loss of $394m on loans transferred to a held-for-investment portfolio.
Countrywide said that it expected weakness in the housing market would continue to hurt its mortgage business throughout 2008. As a result, the lender said it had cut 11,000 jobs since last July, and incurred restructuring charges of $145m for the year, $87m of which was recorded in the fourth quarter. Countrywide’s board of directors declared a dividend of $0.15 on its common shares, payable on February 29.
http://www.forbes.com/feeds/ap/2008/01/30/ap4591693.html
Ambac Financial cuts Quarterly Dividend
Associated Press 01.30.08, 8:43 AM ET
NEW YORK -
Troubled bond insurer Ambac Financial Group Inc. on Tuesday officially approved a quarterly dividend of 7 cents, two-thirds less than its previous payment.
Ambac cut the dividend as part of plan to preserve capital to ensure its crucial "AAA" financial strength rating. The plan initially included raising more than $1 billion in capital, but Ambac scrapped that part of the plan saying market conditions were not conducive.
Bond insurers are facing mounting pressure from ratings agencies to raise fresh capital to hold in reserve to protect against future claims. As mortgage delinquencies and defaults have increased, ratings agencies have worried bonds backed by the troubled loans would default as well, leading to an unmanageable spike in claims.
Bond insurers such as Ambac pay principal and interest on bonds when the issuer can no longer make payments.
Fitch Ratings cut Ambac's rating to "AA" from "AAA" and both Standard & Poor's and Moody's Investors Service are reviewing Ambac's rating. Bond insurers typically need "AAA" ratings to attract new business, so ratings downgrades would likely drastically reduce Ambac's business, further straining earnings potential.
The dividend will be paid on March 5 to shareholders of record as of Feb. 11.
http://www.forbes.com/feeds/ap/2008/01/30/ap4591739.html
Bond insurer charts (ACAH ABK MBI SCA) ... #msg-26226667
UBS hit by further $4bn writedown
By Haig Simonian in Zurich
January 30 2008
UBS, one of the biggest casualties of the US subprime crisis, on Wednesday revealed a further $4bn in writedowns on its portfolio of troubled mortgage-related securities.
The surprise announcement, coming ahead of the Swiss bank’s annual results on February 14, means UBS will report a net group loss of about SFr4.4bn ($4bn) for 2007.
UBS said the full-year loss, which it had signalled when disclosing initial fourth-quarter subprime writedowns of $10bn last month, stemmed from additional losses on its portfolios in recent weeks and a very weak trading period in the fixed income, currencies and commodities division of its investment bank.
The latest writedowns take to $18bn the total UBS has lost in 2007 on its large holdings in US mortgage-related securities, including $4bn of writedowns reported in the third quarter.
The bank, once renowned for its caution and rigorous controls, surprised investors last year after it emerged that it held more than $40bn in subprime-related paper through positions taken by Dillon Read Capital Management, its now-closed internal hedge fund, and its conventional fixed income trading activities.
The latest writedown will increase speculation over the future of Marcel Ospel, UBS’s chairman, who has faced calls to step down. Mr Ospel has fiercely resisted the pressure, however, and has received backing in particular from the government of Singapore, one of the bank’s two new strategic investors.
Shares in UBS fell 1.6 per cent to SFr46.04 in early Zurich trading.
UBS’s terse announcement gave no details of its remaining book and said further information would come out at its results presentation next month.
The bank said only that it had suffered $12bn in writedowns in the fourth quarter on subprime paper, and $2bn on “other positions related to the US residential mortgage market.”
To rally support for its plans to raise SFr13bn by selling shares to Singaporean and Saudi Arabian investors, the bank said its BIS Tier I capital ratio – a key measure of its financial strength – amounted to 8.8 per cent at the end of December. That figure reflected its full losses and efforts to reduce risk, as well as capital raising plans such as a mandatory scrip dividend and the sale of treasury shares.
However, the 8.8 per cent, which is well below the 11-12 per cent ratio the bank has as its goal, did not include the additional financing from the sovereign wealth funds, explaining its concern to raise the extra capital.
http://www.ft.com/cms/s/0/ff9d43e8-cf01-11dc-854a-0000779fd2ac.html
Banking Write-Downs
Associated Press 01.30.08, 8:35 AM ET
NEW YORK -
An Oppenheimer and Co. analyst said banks could write down an additional $40 billion in assets this year, and possibly as much as $70 billion, on the impact of further downgrades of major bond insurers by credit rating agencies.
The majority of those writedowns would be concentrated among Merrill Lynch & Co., Citigroup Inc. and UBS AG, according to Oppenheimer analyst Meredith Whitney.
Whitney said the companies would be forced to reduce the book value of the bonds they hold if ratings agencies, such as Fitch Ratings, take a more negative view of bond insurers like Ambac Financial Group Inc. and MBIA Inc.
Fitch downgraded Ambac's financial strength earlier this month, and Whitney thinks further downgrades are increasingly likely. She added that the government will not bail out the banks if the insurers are downgraded.
Ambac and MBIA insure bonds that are held by Merrill and other banks. If the insurers fail, the value of the bonds decreases, and the banks would have to write down that value.
On Wednesday, UBS said it will take a $14 billion write down in the fourth quarter, with most of the losses coming from bad bets on the U.S. subprime mortgage market.
In a separate note, Whitney downgraded Merrill Lynch shares to "Underperform" from "Perform," and said she sees the risk of as much as $10 billion in write-downs in the event of bond insurer downgrades.
She cut her 2008 profit estimate on Merrill to $4.50 per share from $4.88, and said the stock is expensive. Shares finished at $57.47 Tuesday, and Whitney said they should be priced under $44.
http://www.forbes.com/feeds/ap/2008/01/30/ap4591693.html
US bond insurers expected to fall further
By Aline van Duyn and Saskia Scholtes in New York
January 29 2008 21:13
Large numbers of investors are continuing to ‘short’ shares in Ambac and MBIA, the two biggest US bond insurers, suggesting expectations of further share price falls despite growing efforts by regulators to push through a rescue plan for the sector.
According to Data Explorers, which tracks short selling, the percentage of shares on loan relative to the market capitalisation of Ambac stood at 40 per cent last Thursday. For MBIA, the proportion was 39 per cent.
Efforts to shore up US bond insurers gathered pace this week as New York state regulators appointed investment bankers to advise on a rescue plan that could include back-up credit lines.
Perella Weinberg, an advisory firm based in New York, has been hired as a financial adviser by the New York state insurance superintendent department. Regulators are talking to banks about providing back-up credit lines for the bond insurers. In addition, they are talking to other parties, including private equity firms and billionaire investors such as Wilbur Ross and Warren Buffett, about providing fresh equity capital for insurers such as Ambac and MBIA.
The rescue efforts come amid concerns that bond insurers are running out of time to reassure rating agencies that they have enough capital to deal with losses related to guarantees of bonds exposed to subprime mortgages.
Debt markets are pricing in the likelihood that bond insurers will lose their triple-A status.
Those going short include Bill Ackman, head of Pershing Square Capital Management LP, a New York hedge fund that has been betting heavily for years against bond insurers.
Current short levels are below the highest proportion of borrowed shares reached at the beginning of January for the bond insurers. However, they still represent a very high level of borrowing.
Even in other cases where shares have been shorted, such as those of UK bank Northern Rock last year, the proportion of shares on loan to market capitalisation rarely reaches the levels on Ambac and MBIA. Data Explorers said that Northern Rock’s borrowed shares peaked at about 22 per cent of market capitalisation in September of last year.
The threat of further downgrades for the bond insurers has sparked concerns about the broader fallout for holders of insured bonds, particularly municipal money market funds.
”Over the last eight weeks, money market fund managers have been looking to reduce risk and their exposure to insured bond programs, and they have been exercising their right to put these back to the brokers,” said Said Rafat, managing director at Fitch Ratings.
http://www.ft.com/cms/s/0/84a403ec-cead-11dc-877a-000077b07658.html
See the bottom of the following post for charts of the bond insurers (ACAH ABK MBI SCA) ... #msg-26226667
BofA CEO: Bond Insurer Meltdown a Systemic Risk
Tue Jan 29, 2008 1:02pm EST
NEW YORK (Reuters) - Any meltdown of a large bond insurer would pose a systemic risk, Bank of America Corp (BAC) Chief Executive Ken Lewis said at a conference on Tuesday.
The bond insurers, which guarantee more then $2 trillion of securities and are expected to make big payouts on bonds linked to subprime mortgages, are struggling to raise capital and keep their top credit ratings.
"A big meltdown would pose systemic risk," Lewis said, adding that Bank of America is now giving less weight to insurance when figuring out the value of insured bonds.
http://www.reuters.com/article/bondsNews/idUSWEN363020080129
To see charts of the bond holders see the bottom of post... #msg-26226667
WaMu CEO sees boost from Fed rate cuts
By JESSICA MINTZ
The Associated Press January 29, 2008, 12:04PM ET
Washington Mutual Inc. said Tuesday that higher-than-expected net interest income in 2008, along with its exit from subprime loans and a renewed focus on bank-branch customers, will help carry the thrift through what promises to be a difficult year.
Investors heartened by his optimism sent WaMu shares up 66 cents, or 3.9 percent, to $17.52 in morning trading.
"We expected the correction (in the housing market) would likely be softened by continued economic growth, low unemployment, historically low interest rates," Chief Executive Kerry Killinger told analysts at a Citi Investment Research conference in New York. "However, that has not been the case."
WaMu, the country's largest savings and loan, swung to a loss in the final quarter of 2007 after writing down $1.6 billion to account for the sinking value of its home loan portfolio, and setting aside $1.53 billion to cover future loan losses.
The thrift had said previously that the higher provisioning for loan delinquencies would continue through 2008, at a rate of up to $2 billion per quarter.
Killinger did not directly raise the amount WaMu expects to set aside for loan losses, but he walked analysts through several scenarios on Tuesday that indicated higher-than-expected delinquencies are possible.
Anecdotally, the CEO said troubled borrowers are moving from 30 days late with a payment to foreclosure "a little faster," but said there were no data available.
On a positive note, Killinger outlined several factors he expects to help offset the bite that delinquencies will take from WaMu's results in 2008.
For one, the CEO said further rate cuts by the Federal Reserve would increase WaMu's net interest income, or a chunk of its revenue made up by subtracting how much it costs to borrow money from how much it charges to lend money.
Killinger estimated that every quarter-percent rate cut by the Fed will add $150 million to the thrift's net interest income.
"We are encouraged by aggressive actions by the Fed," and by the Bush administration's proposed economic stimulus package, Killinger told analysts. However, he said, "It's too early to assess how these particular actions are going to impact housing prices."
The Fed, which surprised markets last week with a cut of three-quarters of a percentage point to 3.5 percent, began a two-day meeting Tuesday expected to result in another cut of as much as half a point.
Killinger emphasized WaMu's late 2007 decision to shut down its subprime mortgage lending operation and other high-risk businesses and focus on products the company offers at its bank branches and online -- checking and savings accounts, credit cards and loans whose target customers have better credit, on average, than the subprime borrowers.
In that vein, Killinger announced that WaMu will open 100 to 150 new bank branches in 2008, in cities where the thrift already has a presence.
The CEO said WaMu expects to add more than 1 million net new checking accounts this year, and that all the company's business divisions will focus on selling products through the branches and the retail Web site "like never before."
Killinger also emphasized that WaMu has plenty of cash and access to funding to get through the fiscal year, and that he would continue to work toward turning the company back around.
"We are committed to making whatever changes are necessary to speed our return to profitability," he said.
(This version CORRECTS that WaMu plans to open 100 to 150 new branches, not 150 to 200)
http://www.businessweek.com/ap/financialnews/D8UFLQE01.htm
Bond Insurer Bailout Plan May Be `Too Late,' CreditSights Says
By John Glover
Jan. 29 (Bloomberg) -- New York Insurance Superintendent Eric Dinallo's attempt to bail out bond insurers is ``coming too late in the game' to stave off ratings downgrades, CreditSights Inc. analysts said in a report.
Dinallo wants to bolster bond insurers' capital with a $15 billion guarantee fund supported by contributions from banks and securities firms, according to the New York-based bond-research firm. Setting up the fund and gaining the backing of the banks is likely to be overtaken by events, CreditSights said today.
``Given the number of competing interests and levels of commitment of participants involved, we think it is unlikely that an agreement sponsored by Dinallo could be hammered out within the appropriate timeframe,' Rob Haines, Craig Guttenplan and Joe Di Carlo wrote. ``In the offchance that any deal could be solidified, the rating agencies are likely to have already taken action.'
Bond insurers including MBIA Inc. and Ambac Financial Group Inc., the two largest, have guaranteed about $2.4 trillion of securities issued by U.S. cities and states and bonds backed by mortgages, credit cards and other assets. The industry has been seeking capital since November when Fitch Ratings and Moody's Investors Service began reviewing the effect of rising defaults on subprime mortgage securities guaranteed by the insurers.
Dinallo's department hired investment bank Perella Weinberg Partners to advise it on the financial stability of bond insurers and how to protect their customers, the Wall Street Journal reported today, citing people familiar with the matter.
Ratings Cut
Fitch Ratings cut the AAA ranking on the financial guarantee units of Ambac in New York and Bermuda-based Security Capital Assurance Ltd. earlier this month. The ratings company is due to rule on whether Financial Guaranty Insurance Co., the fourth- largest bond insurer, has raised enough capital to preserve its AAA rating.
``We are expecting to see a downgrade of FGIC any day now,' CreditSights said.
FGIC in Stamford, Connecticut may have its ratings cut by as many as four levels to A+, according to Michael Cox, an analyst at Royal Bank of Scotland Group Plc, wrote in a report published today. The insurer's rankings may be reduced today, he wrote.
The bond insurers, which began by guaranteeing the notes sold by U.S. municipalities to fund roads and schools, stumbled as they expanded into structured finance such as collateralized debt obligations. CDOs repackage pools of bonds, loans and credit-default swaps and slice them into separate pieces of varying risk and return.
Lower ratings for the insurers may cause a new round of writedowns on debt holdings at the world's financial companies, potentially forcing banks to raise another $143 billion to bolster capital, analysts at Barclays Capital said last week.
Credit Writedowns
Merrill Lynch & Co. wrote down $1.9 billion of securities and Canadian Imperial Bank of Commerce had to sell more than C$2.75 billion ($2.7 billion) in stock to cover losses after the credit rating of ACA Capital Holdings Inc.'s financial guaranty business was cut 12 levels to CCC by S&P.
Ratings cuts for other bond insurers will be ``much, much smaller than those for ACA, given their stronger starting capital position,' Bank of America Corp. analysts led by Jeffrey Rosenberg wrote in a report yesterday.
Saving the bond insurers ``will ultimately require a broader multi-faceted regulatory response,' CreditSights said. In the meantime, the most likely sources of cash infusions are ``white knight investors' such as billionaire Wilbur Ross, who has expressed interest in buying Ambac, according to the analysts.
To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net
Last Updated: January 29, 2008 08:00 EST
for charts, see bottom of post... #msg-26226667
Dollar dips as fears rise ahead of bank earnings
Mon Jan 14, 2008 4:53pm EST
NEW YORK (Reuters) - The dollar fell on Monday to its lowest level in seven weeks against the euro and yen on fears that weak U.S. corporate earnings will push the economy closer to recession, requiring the Federal Reserve to slash interest rates.
Some of Wall Street's largest banks will be reporting their earnings this week, beginning with Citigroup on Tuesday, and currency dealers will be watching for indications of how much the credit crisis is damaging their bottom lines and increasing the risk of prolonged economic weakness.
Federal Reserve Chairman Ben Bernanke's comments last week that the central bank stood ready to take "substantive additional action" to maintain growth cemented expectations for a half-percentage point cut in the Fed's benchmark interest rate to 3.75 percent.
Futures are also reflecting a 50/50 chance that the Fed could reduce its interest rate by three-quarters of a point between now and the central bank's January 29-30 policy meeting, giving a fresh reason for dealers to sell dollars.
"It's the reality that the Fed is going to cut 50 and there's an interest-rate play between the currencies," said Andrew Goldberg, managing director of foreign exchange with BNP Paribas in New York.
The euro rose as high as $1.4914, according to Reuters data, breaching the $1.49 level for the first time in seven weeks and closing in on a record high of $1.4966. It last traded at $1.4865, up 0.6 percent from late Friday.
A 50-basis point cut would put the benchmark U.S. rate below the key euro-zone interest rate for the first time in more than three years. In contrast to the Fed, euro zone policy-makers have remained hawkish, stressing risks from inflation.
The dollar fell to a record low of 1.0888 Swiss francs, before paring losses. It last traded at 1.0925 Swiss francs, down 0.8 percent.
Against the yen, the dollar tumbled to a seven-week low of 107.37 yen. It last traded around 108.21 yen.
Although analysts say a rare inter-meeting cut by the Fed is unlikely, expectations of such a move could get a boost if U.S. banks announce big write-downs linked to the troubles in the subprime mortgage market and consequent global credit crunch.
Citigroup is first in line this week among the banks to report fourth-quarter earnings. The bank could write down as much as $24 billion and cut up to 24,000 jobs, CNBC television said on Monday.
If Citi's earnings come in well below expectations, the dollar as well as currencies that typically do well when investors are more willing to take risks will probably weaken, dealers said.
Weak earnings may have an "impact on confidence and expectations for fed funds (interest rates), and that is spilling over into FX markets," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
The Australian dollar, which has one of the highest interest rates among the 10 most traded developed currencies, was trading higher, supported by record-high gold prices and strong domestic data. It rose to a two-month high of US$0.9003, while the New Zealand dollar also was up, rising 1 percent to US$0.7905.
Sterling was flat at $1.9555.
In addition to corporate earnings, investors will be on the lookout for December U.S. retail sales and consumer inflation data. Since consumer spending makes up around two-thirds of output, any weakness in retail sales or upward price pressures will be viewed as negative for growth and for the dollar.
http://www.reuters.com/article/hotStocksNews/idUST32987020080114
WaMu says net interest income will top forecast
Tue Jan 29, 2008 8:37am EST
NEW YORK, Jan 29 (Reuters) - Washington Mutual Inc (WM) Chief Executive Kerry Killinger said on Tuesday he expects the savings and loan's net interest income to exceed current company estimates.
Killinger said he expects a "significant increase" in 2008 net interest income, which is the difference between revenue on loans and the cost of servicing customer deposits.
Speaking at the Citi Financial Services Conference in New York, Killinger said he expects WaMu's net interest margin to top the company's current forecast of 2.90 percent to 3.05 percent. Aggressive rate cuts by the Federal Reserve would help boost that margin, Killinger said. (Reporting by Tim McLaughlin, editing by Gerald E. McCormick)
http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSWEN362120080129
Capstead Mortgage bucking the trend?
]]
Capstead Mortgage Corporation Announces Pricing of Public Offering of Common Stock
January 28, 2008 - 6:33 PM EST
Capstead Mortgage Corporation (NYSE:CMO) announced today the pricing of an underwritten public offering of 8,000,000 shares of its common stock at a price to the public of $15.50 per share. Capstead has granted the underwriters a 30-day option to purchase up to an additional 1,200,000 shares of common stock to cover over-allotments, if any.
Capstead intends to use the net proceeds from this offering to finance purchases of additional adjustable-rate mortgage, or ARM, Fannie Mae, Freddie Mac or Ginnie Mae-guaranteed residential mortgage-backed securities, on a leveraged basis, and for general corporate purposes.
Capstead expects to close the transaction on or about Friday, February 1, 2008 subject to the satisfaction of customary closing conditions.
Bear, Stearns & Co. Inc. and Deutsche Bank Securities Inc. are acting as joint book-running managers for the offering, with Keefe, Bruyette & Woods, Inc. and JMP Securities LLC acting as co-managers. Information about the offering is available in the prospectus supplement and the accompanying prospectus of the offering filed with the Securities and Exchange Commission. Copies of the prospectus supplement and the accompanying prospectus can be obtained from Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, New York 10179, Attention: Prospectus Department (telephone number: 1-866-803-9204) or Deutsche Bank Securities Inc., 100 Plaza One, Jersey City, NJ 07311, Attention: Prospectus Department (telephone number: 1-800-503-4611; email: prospectusrequest@list.db.com).
All of the shares are being offered by Capstead from its existing shelf registration statement. This press release shall not constitute an offer to sell or a solicitation of an offer to buy shares of common stock, nor shall there be any sale of shares of common stock in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.
About Capstead
Capstead Mortgage Corporation, formed in 1985 and based in Dallas, Texas, is a self-managed real estate investment trust for federal income tax purposes. Capstead’s core strategy is managing a leveraged portfolio of residential mortgage securities consisting almost exclusively of ARM securities issued and guaranteed by government-sponsored entities, either Fannie Mae or Freddie Mac, or by an agency of the federal government, Ginnie Mae. Agency-guaranteed securities carry an actual or implied AAA credit rating with limited, if any, credit risk. Capstead may also augment its core portfolio with investments in credit-sensitive commercial real estate-related assets.
Shares Outstanding: 30.92M
House Of Cards: The Mortgage Mess
Steve Kroft Reports How The Mortgage Meltdown Is Shaking Markets Worldwide
Jan. 27, 2008
(CBS) It was another nervous week for the world's financial markets and for Wall Street. In the last six months, Americans have seen their investments shrink, their property values plummet, and the country edge closer towards a recession. At the heart of the problem is something called the subprime mortgage crisis, which began last summer and continues to ricochet through the economy.
It sounds complicated, but it's really fairly simple. Banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. It sounds like a shell game or Ponzi scheme; in some ways, it was a house of cards rife with corruption, greed, and negligence.
And as correspondent Steve Kroft reports, it started in places like Stockton, Calif.
------------
Stockton is a city of 280,000 people in the Central Valley; 80 miles east of San Francisco and 80 miles north of San Jose. In many ways, this is ground zero for the current financial crisis and a microcosm of everything that went wrong.
A few years ago, it was one of the hottest real estate markets in the country; today it is the foreclosure capital of America.
Real estate agent Kevin Moran represents 102 properties and says all of them are in foreclosure.
Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses.
"If you see a 'for sale' sign in this neighborhood, that probably is a sign of distress, right?" Kroft asks.
"I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains.
The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities.
"The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender."
As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over.
"Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole.
"We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts.
Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000.
Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy.
"What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets.
"I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says.
"When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains.
Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.
But Jerry Abbott, who runs the Coldwell Banker office in Stockton, says it didn’t concern the borrowers, many of whom were getting mortgages for more than their houses were actually worth.
"They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow."
"So, they were getting paid to buy a house?" Kroft asks.
"They were getting paid to buy a house. Yes. Yeah," Abbott says.
And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans.
"Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says.
Abbott says borrowers got the money, without a down payment.
Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'" Grant says.
"And he got a cut, too?" Kroft asks.
"Yes, oh, yes. Everyone gets a cut," Grant says.
Almost all of the people involved in the transactions made huge amounts of money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.
Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.
"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.
It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.
All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.
It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200.
"Did you understand any of this?" Kroft asks.
"No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork.
"But you knew this was a big decision, right? You were borrowing hundreds of thousands of dollars," Kroft remarks.
"I didn't really look at it like that," Fontenot says.
"How did you look at it?" Kroft asks.
"I looked at it as far as my family. I can get my family off of this block," he replies.
"And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different."
But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them.
"The house keeps going down, payments keep going up. Where's the logic in that? And how can we fix it? I mean, that's what this whole thing's about for us is how can we fix this? And if we can't fix it, then what do we do?" Matt Valdez asks.
"Why pay a $3,200 payment on a 1200-square-foot home? It makes no sense," Stephanie Valdez adds.
"That's what you agreed to do when you bought the house," Kroft points out.
"Fine. If the value is going up. But we're not going anywhere. The price or the value is going down. It makes no sense because we will never be able to refinance and get a lower payment. There's no way," Stephanie Valdez replies.
"You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks.
"You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" she says.
There is a certain cold logic to just walking away.
Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing.
"Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt."
"Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says.
"Just a business decision," Kroft says.
"A business decision that has to be made," Moran agrees.
"It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says.
Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table."
"What do you mean?" Kroft asks.
"Lenders and borrowers," Grant says. "Everyone was gaming the system."
That is not to suggest that there aren’t huge losers in all this and much suffering and particularly hard-working people who have lost their dream. Home values are plummeting, and the housing sector - one of the largest and most vital parts of the American economy - has ground to a standstill, pushing the country towards recession.
The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them.
"That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says.
The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them.
"Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says.
"How much on the dollar, do ya think?" Kroft asks.
"Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says.
Asked how many of these securities are out there, Grant says, "A trillion with a T-plus."
Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety."
It’s that anxiety that spooked the world’s stock markets last week, that and the knowledge that things are likely to get worse, at least for a while.
"Still houses going into foreclosure?" Kroft asks Kevin Moran.
"Yeah. I don't think we're 40 percent into this. I think we've got a long way to go," he predicts.
There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes.
The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board.
"Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."
"It's still spreading?" Kroft asks.
"Yeah," Grant says.
---
In the past few months, Wall Street's top investment banks have written off more than $120 billion in losses related mortgage backed securities, and some are now under new management.
Two of the fired CEO's responsible for the biggest losses rode off into the sunset with some free money of their own. Charles Prince of Citigroup collected $29 million on his way out the door; Stan O'Neal of Merrill Lynch left with $161 million.
http://www.cbsnews.com/stories/2008/01/25/60minutes/main3752515_page4.shtml
Moody's Drops IndyMac
By Laurie Kulikowski
TheStreet.com Staff Reporter
1/23/2008 4:15 PM EST
Moody's Investor Services is dropping coverage of troubled lender IndyMac Bancorp (IMB), which had essentially junk-status ratings.
IndyMac, one of the few remaining independent mortgage lenders at this point, had maintained a single B rating for its holding company, while its bank subsidiary had a D-minus rating when it came to financial strength. Moody's also rated IndyMac's deposits at Ba3 and had a negative outlook on the Pasadena, Calif.-based firm.
Moody's cited "business reasons" as the reason for the withdrawal. A spokesman referred additional comments to Moody's withdrawal policy, available on the agency's Web site, and declined to comment further on the decision.
"Under certain circumstances, Moody's will withdraw a rating for an issuer or an obligation for reasons unrelated to the adequacy of information, or bankruptcy or reorganization status of the credit," according to the policy. "When this occurs, Moody's will balance the market need for a rating against the resources required to maintain and monitor a rating."
IndyMac did not immediately respond to a message. The lender in early December said it was exploring a "variety of capital-raising alternatives," including a possible deeper cut to its dividend. It had slashed its dividend in half to 25 cents in September, amid the deteriorating mortgage market.
IndyMac also said it expected to report a fourth quarter loss. The lender is expected to report results Feb. 12.
Shares were falling 29 cents, or 6.2%, to $4.41 on late Wednesday.
http://www.thestreet.com/_yahoo/newsanalysis/financial-services/10400106.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
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Living in a Bubble? a massive housing bubble: #msg-26227381 Subprime lenders have been both blessing and bane in the housing industry for many years, enabling lenders to rake in huge profits while saddling consumers with exorbitant loan terms and high interest rates. Now, as the housing market slows to a crawl, many subprime lenders are collapsing faster than homes made of substandard materials, and the signs point to even more pain in the housing market as a result
AHMIQ AMOA ANH C CFC DFCLQ ETFC FBC FHN FMNT FMT FRE HCM IDMCQ IMB IMPM KFN LUMCQ MTB NOVS RAMR SLM SOV TARRQ THMR WB WAMUQ WFC
AHMIQ - American Home Mortgage #board-9990 http://www.americanhm.com
AMC - American Mortgage Acceptance http://www.americanmortgageco.com
ANH - Anworth Mortgage Asset Corp. http://www.anworth.com
BAC - #board-6675 Bank of America, "...the second-largest U.S. bank..." http://www.BankofAmerica.com "...the nation's biggest credit card business..."
C - Citigroup Inc. #board-428 "Citigroup, the biggest bank in the United States" http://www.citigroup.com
CFC - Countrywide Financial Corp. #board-9998 ".. the biggest U.S. mortgage lender..."
http://www.countrywide.com "...originated one out of every six residential mortgages..."
DFCLQ - Delta Financial Corp. #board-1894 http://www.deltafinancial.com
ETFC - E TRADE Financial Corp. #board-10096 http://www.etrade.com
FBC Flagstar Bancorp Inc.
FHN First Horizon National Corp
FMNT - Fremont General Corporation #board-10062 http://www.fremontgeneral.com
FNM - Fannie Mae "Together Fannie Mae and Freddie Mac own or guarantee about 40 percent of the $11.5 trillion US home loan market." "Fannie, the No. 1 financer and guarantor of U.S. home loans"
FRE - Freddie Mac "Freddie Mac, the second-largest source of money for U.S. home loans behind Fannie Mae"
HCM - Hanover Capital Mortgage Holdings Inc. #board-10080 http://www.hanovercapital.com
IMB - IndyMac Bancorp Inc. #board-10092 http://www.indymacbank.com "IndyMac, the nation's ninth largest originator of mortgages" "the second-biggest independent mortgage company"
IMH - Impac Mortgage Holdings #board-10019 http://www.impaccompanies.com
KFN - KKR Financial Corp. #board-10088 http://www.kkrfinancial.com
LEND - Accredited Home Lenders Holding Co #board-8673 http://www.accredhome.com
LUM - Luminent Mortgage Capital Inc. #board-9991 http://www.luminentcapital.com
MTB - M&T Bank Corp . http://www.mandtbank.com
NCC - National City Corp. http://www.nationalcity.com
NOVS - NovaStar Financial Inc. #board-6258 http://www.novastaris.com
RAMR - RAM Holdings Ltd. #board-10081 http://www.ramre.bm
SLM - Sallie Mae
SOV - Sovereign Bancorp
Banco Santander, S.A. (NYSE: STD) and Sovereign Bancorp Inc., ("Sovereign") (NYSE: SOV), parent company of Sovereign Bank ("Bank"),
announced today that Banco Santander will acquire Sovereign in a stock-for-stock transaction. Santander currently owns 24.35% of Sovereign's
ordinary outstanding shares.
TARR - Tarragon Corp. #board-5951 http://www.tarragoncorp.com
TMA - Thornburg Mortgage Inc. #board-10082 http://www.thornburgmortgage.com
WB - Wachovia Corp. #board-6206 "...the nation's fourth-largest bank..." http://www.wachovia.com
WM - Washington Mutual Inc. #board-11133 "..the largest U.S. savings and loan.."
"...The nation's second-largest mortgage lender in 2003, WaMu dropped to sixth place last year..." http://www.wamu.com
WFC - Wells Fargo & Company #board-6335 "...the nation's fifth largest bank..." "...Wells Fargo made more than $200 billion in home loans from January to September in 2007, making it the second largest home loan lender, following Countrywide Financial, which is cutting 12,000 jobs after losing $1.2 billion in the third quarter..."http://www.wellsfargo.com
[ [ ] ][] ]
A dollar crisis leading to a depression... http://www.youtube.com/v/HTkPYnNmOBM
Mortgage Meltdown of 2007 - The Perfect storm http://www.youtube.com/watch?v=oGQT9LGL6u0
SIV's explained, lol http://www.youtube.com/watch?v=SJ_qK4g6ntM
http://housingpanic.blogspot.com
Bond (CDO) insurance companies (ABK MBI ACAH SCA)
] ] ]
Solar Stocks #board-11148
Peak Oil #board-6609
Real Estate Bubble #board-7285
Subprime Fallout #board-10886
HomeBuilders #board-1680
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