- Another one bites the dust. Washington Mutual (WM), once the largest U.S. savings and loan, is now the largest U.S. bank failure in history. With $6.3B in losses over the last three quarters, $16.7B in withdrawals from customer accounts since Sept. 16, and unable to sell itself, the Office of Thrift Supervision called WaMu "unsafe and unsound" before initiating an accelerated shut-down yesterday. JPMorgan Chase (JPM) then stepped in to buy WaMu's branch network for $1.9B, making it the nation's second-largest bank, but will not acquire WaMu's liabilities, including claims by shareholders and debt holders. JPMorgan's purchase saved the FDIC from having to draw down on its insurance fund which stood at roughly $45B at the end of June.
- Bailout bill still on hold. Lawmakers seemed to come closer to a deal yesterday, putting together an outline for a compromise plan that involved doling out the rescue money in stages. However, talks broke off late Thursday as a White House meeting with Congressional leaders bore no progress, and Republicans unexpectedly unveiled an alternative rescue plan allowing banks to buy insurance for troubled assets. With negotiations scheduled to resume this morning, sans House Republicans, Democrats could theoretically move the plan forward without broad bipartisan support, but would risk causing political harm to their party weeks before an election. Some senators predict a bill could be pushed through this weekend using a complicated congressional procedure, while others insist any bill will be rejected unless both Democrats and Republicans are on board.
- Market confusion on stalled bailout. As the bailout bill remains mired in Congress, markets have shown their unease. The dollar continued to fall against the euro, Swiss franc and yen, while Treasurys rose. The Dow Jones, S&P 500 and Nasdaq indices closed higher on Thursday on hopes the Treasury's rescue plan would be approved before the weekend, but U.S. stock market futures declined overnight. Libor jumped the most in nine years, a sign that banks are increasingly reluctant to lend to one another.
- Interbank loans all but frozen. One month dollar loans (Libor) traded at 4.4% Friday morning, up from 3.7% yesterday, as counterparty risk - the possibility money lent won't be returned - continues to dominate credit markets. Three-month loans were at 4.6%, vs. 3.77% yesterday. "It's just a complete breakdown of the interbank lending market," fixed-income strategist Sean Maloney says. "We are now in a very fear-driven environment." The TED spread - the difference between what banks and the Treasury pay to borrow - widened to 308 BPs, the most on record. One month ago it stood at 111 BPs.
- Paper losses. The U.S. commercial paper market shrank by another $61B this week, following last week's $52.1B contraction, reducing the overall market to $1.7T. The squeeze is forcing companies to curb their reliance on short-term paper and use long-term debt at nearly double the cost - a worrisome development that will be closely watched come the Sept. 30 payday. Mistrust is so rampant that banks refuse to give customers credit even intra-day, creating an end-of-day logjam that is forcing the Fed to keep its money-transmission system open late. Financial institution interest is up to 3.3% from 2.47% last week, while three-month Libor rose to 3.8% Thursday from 3.5% the night before. "The world is clearly saying this is a huge problem," one expert said.
- Central banks push for liquidity. U.S. banks and money managers borrowed from the Federal Reserve at record high levels this week, with an average of nearly $188B a day. The borrowing was nearly four times as high as the record set the week before of $47.97B/day. "This looks like the balance sheet of a central bank that is keeping the financial system on life support," said a JPMorgan economist. Meanwhile, the European Central Bank, Bank of England and Swiss National Bank intensified efforts to ease quarter-end funding pressures, promising to add to markets $35B, $30B and $9B, respectively. Overnight, the Fed boosted its currency-swap line - which helps foreign central banks lend dollars to domestic banks - by $13B to $290B: $10B to the ECB and $3B to the SNB. And the Bank of England committed to inject another £40B into U.K. money markets Monday, boosting a program in which it lends financial institutions against a wide range of collateral, including mortgage securities.
- Me too. Raymond James Financial (RJF) wants approval to convert itself into a bank holding company, a path CFO Jeff Julien says the firm has been pursuing for years: "It's unfortunate that the timing coincides with what's going on at other firms." RJF's thrift, Raymond James Bank, would become a commercial bank, which could give it more flexibility to make different types of loans. Originally slated for next year, the plans are apparently being fast-tracked as financial markets collapse, and after the Fed approved the charter of peer I-banks Goldman Sachs (GS) and Morgan Stanley (MS).
- HSBC slashes market jobs. HSBC (HBC) is cutting 1,100 investment banking jobs - 4% of the unit's total. "We're doing it because of market conditions and the economic environment, and our cautious outlook for 2009," spokesman Gareth Hewett said. "Markets continue to be challenging and difficult but our strategy leaves us well positioned for the next wave of global growth, when it comes." Shares closed +2.2% Thursday.
- One step closer to "NorthDelta." Shareholders of Delta (DAL) and Northwest (NWA), meeting separately on Thursday, approved merger plans that would create the world's largest airline, with Delta shareholders voting their approval in a ratio of 99:1 and Northwest shareholders at 98:2. The next, and last, step to making the merger official is for the Department of Justice to sign off on the deal. The new airline would retain Delta's name.
- Durable goods. Durable Goods Orders fell 4.5% in August, much more than the -1.9% consensus. In July, they grew 0.8%. Ex-transportation, orders fell 3%, vs. -0.5% consensus (prior +0.1%). Durable goods inventories, up 13 of the last 14 months, increased $2.4B (0.7%) to $338.5B - the highest level since at least 1992.
- Jobless claims. Initial jobless claims came in at 493,000 vs. 450,000 consensus - up 32K from last week (revised to 461K from 455K). With weekly jobless claims now on the verge of topping 500K, the case for recession only gets stronger. Labor market conditions are clearly soft: expect a ninth consecutive decline in nonfarm payrolls.
- Bottomless hole for housing. August New Home Sales fell to a 17-year low of 460,000/year vs. 505,000 consensus. The data shows few signs of a housing bottom.
Earnings: Friday Before Open
Earnings: Thursday After Close
- Accenture (ACN): FQ4 EPS of $0.67 beats by $0.01. Revenue of $6B (+17.4%) in-line. [PR]
- Research In Motion (RIMM): Q2 EPS of $0.86 misses by $0.01. Revenue of $2.58B (+88%) in-line. Sees Q3 EPS of $0.89-0.97 vs. $0.98. Shares -20%. [PR]
- The Finish Line (FINL): Q2 EPS of $0.24 beats by $0.07. Revenue of $353M (+3.9%) in-line. [PR]
- TIBCO Software (TIBX): FQ3 EPS of $0.11 beats by $0.03. Revenue of $162M (+20.1%) vs. $155M. [PR]
- Asia markets closed in the red. Nikkei -0.94% to 11,893. Hang Seng -1.33% to 18,682. Shanghai -0.16% to 2,294. BSE -3.4% to 13,086.
- In Europe at midday: London -2%. Paris -2%. Frankfurt -2.1%.
- U.S. futures: Dow -1.5%. S&P -1.71%%. Nasdaq -1.28%. Crude -2.42% to $105.39. Gold -0.28% to $879.
- 'Flight to safety' Treasurys are up overnight. 30-year +0.58%. 10-year +0.46%. 5-year +0.45%. 2-year +0.25%.
Friday's Economic Calendar
- 8:30 Corporate Profits
8:30 GDP (final)
10:00 University of Michigan Consumer Sentiment
- Notable earnings before Friday's open: JBL, KBH
Seeking Alpha editor Eli Hoffmann contributed to this post.
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