Subprime Not Over For Banks [Housing Tracker

Quote of the Day 

"Banks are what's weighing on the market." -  Steve Goldman, market strategist at Weeden & Co, citing the Goldman Sachs retraction of a pending financials rally.  (Reuters, June 23^rd)

Subprime Fallout and Banks 

After a Rough Week, the Bottom May Be Near.  “Citigroup (C) warned of "substantial" write downs in its Q2 related to toxic collateralized debt obligations. Fifth Third Bancorp (FITB) became the latest regional bank to cut its dividend, raise capital and, worse, warn that its loan losses will be greater in 2009 than… this year’s... All of which added fuel to a steady stream of reports throughout the week urging caution toward regional banks. Goldman Sachs, Friedman Billings & Ramsay, Stifel Nicolaus, and Merrill Lynch analysts cut estimates and price targets on many regional banks, including Suntrust (STI), Wachovia (WB), Regions Financial (RF) and Bank of America (BAC).”  (Barron’s, June 23^rd) 

Bond Insurers Want $125bn Of Cover Wiped Out. “Bond insurers such as Ambac (ABK), MBIA (MBI) and FGIC are talking to banks about wiping out $125bn of insurance on risky debt securities [to] limit the financial damage surrounding the bond insurers. Discussions about “commuting” these insurance contracts, which were sold by bond insurers to banks in the form of credit default swaps, have taken on a renewed sense of urgency amid a rash of ratings bond insurer downgrades... If agreements are struck about the value of these CDS contacts… it could be significant for the entire financial system, clogged up by the uncertainty around the value of derivatives and complex bonds linked to mortgage-backed securities.”  (Financial Times, June 22^nd) 

More Bear Stearns Mortgage Traders Move, Shift Firms.  “JPMorgan Chase & Co. (JPM) had said publicly that it wanted to retain top executives and traders from its completed acquisition of Bear Stearns (BSC) earlier this month, is finding that goal much harder to achieve than it might have originally thought. Bloomberg: Both Scott Eichel and Jeffrey Verschleiser, two of Bear Stearns’ top (remaining) mortgage traders [are] the latest to beat a path for the exits. Eichel was co-head of mortgages and asset-backed bond trading when Bear Stearns nearly imploded, while Verschleiser was co-head of Bear Stearns’s mortgage-trading business until late last year — actually replacing Eichel at the firm.”  (Housing Wire, June 23^rd) 

CapitalSource Sells $1.5 Billion in Agency MBS.  “CapitalSource Inc. (CSE), the REIT with banking aspirations tied to a pending acquisition of retail banking branches of bankrupt Fremont General Corp., said Monday in a SEC filing that it has been unloading agency mortgage-backed securities at a frenetic pace since the start of April, selling $1.5 billion in the latest attempt to deleverage. The company also sold $591.4 million in agency MBS during Q1, by way of comparison. The $1.5B sale generated a loss of $36.1 million, CapitalSource said.”  (Housing Wire, June 23^rd) 

New Crisis Threatens Healthy Banks.  “Increasing struggles by consumers and businesses to make payments on a variety of loans, not just mortgages, are setting off a new wave of trouble in the financial sector that is battering even institutions that had steered clear of the subprime-home-loan debacle. Late payments on home-equity loans are at a record high, according to fresh data from the Federal Deposit Insurance Corp. The delinquency rates on loans for cars, small businesses and construction are spiking to levels not seen in a decade or more. Unlike last year, when soaring mortgage defaults sparked a crisis of confidence in the financial system, the root of these problems is the downturn in the broader economy.”  (Washington Post, June 22^nd) 

In Bear Stearns Case, Question of an Asset’s Value.  “Two executives who oversaw Bear Stearns [mortgage-related] hedge funds, Ralph R. Cioffi and Matthew M. Tannin, did not disclose that the funds were plunging in value until it was too late, authorities say… As the mortgage market slumped last spring, authorities say, Mr. Cioffi valued one of his funds as having lost 6.5% in April. But colleagues at Bear placed far lower values on investments in that fund. They said the fund had lost 18.97%. All across Wall Street… many banks are struggling to value the assets they hold, raising doubt among many investors about those companies’ financial health.”  (NY Times, June 20^th) 

Citigroup to Record More Write-Downs.  “Citigroup’s CFO warned Thursday that [its] second-quarter results will suffer from a fresh round of "substantial" write-downs from failing mortgage investments. CFO Gary Crittenden also predicted Citigroup will continue to rack up losses on its exposure to leveraged loans and bond insurers, and it will keep beefing up its reserves to cover bad loans, which "could have a meaningful impact on our results for the remainder of the year." Mr. Crittenden said he expects Citigroup's second-quarter write-downs "to be less than they were" in Q1’08, when it logged about $15 billion of write-downs and other losses, dragging the company to a $5.1B net loss.” (Wall St. Journal, June 20^th) 

With Friends Like Angelo . . .  “The revelations about Christopher Dodd, Democrat of Connecticut, and Kent Conrad, Democrat of North Dakota, [who] turned up on the “Friends of Angelo” V.I.P. list at Countrywide Financial Corporation (CFC) are particularly troubling since the two senators are principals in trying to pass emergency legislation to address the damage from the mortgage crisis… Mr. Conrad says after the details surfaced, he quickly donated his $10,700 windfall to charity. Mr. Dodd says he was aware of his V.I.P. status when he sought two loans from Countrywide but thought it was a mere courtesy.” (NY Times, June 22^nd) 

Six Quotes from Fannie Mae on the Mortgage Industry.  “Steve Swad – EVP and CFO: From Fannie Mae’s recent conference call:  “Our Alt-A book is a very key area of focus for the company. [As] 43% our credit losses in Q1 came for Alt-A book. We expect our Alt-A book will continue to drive an out-sized portion of our overall credit losses. But there are a few important distinguishments between our Alt-A book and the PLS Alt-A securities in the market. For example… for the 2005 through 2007 vintages, cumulative default rates at our Alt-A book were approximately one-half the default rates in the overall PLS Alt-A market.”  (Robert Lakin in Seeking Alpha, June 20^th) 

Hedge Funds Learn To Profit From Higher Volatility. “Hedge fund returns look set to pick up this year after a poor start, as managers learn the painful lessons of recent months and feel well positioned to profit from opportunities arising in credit and equity markets. Having cut back the leverage that caught out some funds last year and rebuilt computer-driven models hit by a vicious circle of selling last summer, funds now see opportunities amid high market volatility and a greater chance of corporate default… Hedge fund manager John Paulson said he sees a $10 trillion opportunity appearing in distressed debt and good value in higher quality mortgage debt.”  (Reuters, June 19^th) 

Fallout From Bad Loans Rocks Regional Banks.  “Home mortgages and other loans… are souring so fast that many of the lenders are scrambling to prop themselves up. If the pain worsens — and many analysts say it will — some of these banks… may eventually seek out suitors, most likely large national rivals. For now, however… stock market investors are deserting them en masse. On Wednesday, Fifth Third Bancorp’s share price plunged 27% to $9.26, its lowest level in more than a decade, after the bank said it would cut its dividend and seek to raise $2 billion. Other financial stocks, particularly regional banks’ shares, also tumbled.”  (NY Times, June 19^th) 

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Comments

[buyitcheap:]

Many of these banks have standby facilities with their clients who have the VRDOs outstanding. What will happen to the banks balance sheets when their clients start to use the facilities to "guaranty" their VRDOs to stabilize their rates?

2008 Jun 24 07:03 PM