Wachovia Downgrades AIG, Oppenheimer Downgrades Wachovia [Housing Tracker]

by: Judy Weil

Subprime Fallout 

Wachovia Sees Big Quarterly Subprime Loss For AIG“Wachovia cut its investment rating and earnings outlook for American International Group (NYSE:AIG) on Tuesday, saying it believed the world's largest insurer could post up to $7 billion in second-quarter losses on assets linked to subprime mortgages. Wachovia downgraded AIG to "market perform" from "outperform," saying the investment losses could offset operating earnings and "put a dent into the company's recent capital raise."  (Reuters, July 15th)

Meredith Whitney Cuts Wachovia on `Bleak' Prospects.  “Oppenheimer & Co.'s Meredith Whitney, the analyst who correctly predicted Citigroup Inc. would reduce its dividend this year, said the earnings outlook for Wachovia Corp. (NASDAQ:WB) has “dramatically diminished” and bank stocks will keep falling until asset prices “get real.''  Whitney said prospects for shareholders of the Charlotte, North Carolina-based bank are “bleak.” Mortgage assets are still priced too high on U.S. banks' balance sheets, she said. Whitney said Wachovia last week released charge-off figures that didn't correspond with portfolio values, meaning the bank might be shrinking its balance sheet.”  (Bloomberg, July 15th)

Encore Discovery Solutions Forms Subprime Services Unit. “Encore Discovery Solutions, a knowledge-based provider of electronic discovery and related services, announced today that it has formed a business unit featuring industry experts in matters related to subprime litigation. The group of professionals selected for this effort reflects the… expertise of Encore's staff and the broad range of legal and technical knowledge the company has developed. Subprime Unit members include attorneys, paralegals, experts in operations and workflows, forensic experts, project managers and technical experts.”  (MarketWatch, July 15th)

Regional Bank Collapse: No Moral Hazard Here. “An eye-opening statistic reported in today's WSJ indicates that, at the nation's banks, "the percentage of uninsured deposits has doubled since 1992, climbing to about 37% of the nation's $7.07 trillion in deposits at the end of the first quarter...". In the wake of continued bank weakness and the realization that funds thought secure may not fall within FDIC insurance limits after all, we may see depositors as well as shareholders flee from the financial hazards that accrue in the absence of moral ones.”  (Brett Steenbarger in Seeking Alpha, July 14th)

The 2% Solution.  “There is little question that bank deposits and agency debt are safely backed by the U.S. government... However, the holders of stock in banks or mortgage companies like Fannie Mae (FNM) and Freddie Mac (FRE) may not be so secure. It's just excruciatingly difficult to perfectly match risky assets and liabilities at extremely high levels of leverage. Ask Long Term Capital. Indeed, were it not for accounting rules that allow Fannie to keep balance sheet losses out of earnings, it would be clearer to investors that last summer's 5-month “duration mismatch” cost Fannie nearly a year of earnings. Similar derivatives-related issues are at the core of Freddie Mac's recent difficulties.”  (Hussman Funds Newsletter, July 14th)


Banker; IndyMac Scenario Not Applicable To Wisconsin. “Reuters report: As of March 31 the FDIC had put 90 banking institutions with $26.3 billion of assets on its "problem list." IndyMac (IMB) was among that group. More than 300 banks could fail in the next three years, RBC Capital Markets analyst Gerard Cassidy: Banks most at risk are those with high-risk assets such as construction loans and exotic mortgages.”  (Leader Telegram, July 14th)

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