Subprime Pressure Up On IndyMac, Fannie & Freddie [Housing Tracker]

Quote of the Day 

"These guys have a long track record of not cutting dividends. The fact that they're cutting now is an indication of how tough the situation is." - Kevin Shacknofsky, portfolio manager of the Alpine Dynamic Dividend Fund, on companies with traditionally fat dividends that are increasingly cutting them to stay afloat during the credit crisis. (Washington Post, July 6^th)

Subprime Fallout

Indymac Halts Lending, Will Cut Half Its Workforce.  “IndyMac Bancorp Inc. (IMB), [unable to raise capital] has stopped accepting new loan submissions or rate locks, and will lay off 3,800 employees -- about half of its workforce. IndyMac Chairman and CEO Michael W. Perry: IndyMac produced $9.6 billion in new mortgage loans in Q1, down 62% from Q1’07, while nonperforming loans held for investment climbed to $1.8B, or 6.51% of total assets. The former alt-A lender trimmed its losses from $509 million in Q4’07 to $184M in Q1’08 after switching most originations to loans eligible for purchase/guarantee by Fannie Mae and Freddie Mac… IndyMac plans to concentrate on its reverse mortgage unit… and loan servicing.”   (Inman News, July 7^th) 

Fannie and Freddie Freefall Off News.  “Semi-government backed lenders Fannie Mae (FNM) and Freddie Mac (FRE)--who together shoulder trillions of dollars in U.S. mortgages--fell in market value by more than a fifth on Monday. Fannie Mae plunged 20.0% to a 16-year low and Freddie Mac dived 26.0%. The weakness was being partially attributed to investor concerns sparked by a Lehman Bros. [report] of new accounting rules that would require the two government-sponsored entities to bring off-balance sheet items onto their books again. Lehman said the rules would also require Fannie to raise an additional $40.0 billion and Freddie to come up with an extra $29.0B.”  (Forbes, July 7^th) 

Long a Reliable Profit Source, Dividends Start to Crumble. “Many companies are chopping dividend payments to their shareholders. Financial institutions, reeling from the rise in foreclosures and ensuing credit crunch, are making the most drastic reductions. Citigroup (C), which has recorded billions of dollars in losses on mortgage securities, earlier this year lopped its dividend by 41%. So did Wachovia (WB). National City (NCC), a major regional bank, reduced its payout by nearly half, and Washington Mutual (WM) slashed its quarterly dividend to a mere penny.”  (Washington Post, July 6^th) 

How Lehman Brothers Veered Off Course. “Until the Glass-Steagall act [adopted during the Great Depression to separate investment banking from commercial banking], disappeared a decade ago, one of the attractions of owning a piece of an investment bank was that it’s… financial assets were generally liquid… Morgan Stanley or Bear Stearns balance sheets [from] 20 years ago consisted mostly of securities. Because they weren't burdened with multibillion-dollar investments in real estate or corporations, investment banks… could wait for bad markets to recover… At the end of 2003, Lehman had $11 billion of tangible capital and $312B of assets on its balance sheet. The ratio: 28-to-1. As of Q1’08, it showed $786B of assets and less than $18B of capital. Ratio: about 45-to-1, leaving relatively little cushion to absorb losses.”  (Washington Post, July 3^rd)

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Comments

[Ames Tiedeman]

Does WM go to zero?