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GE (Aaa/AAA) (10/10): General Electric reported third quarter earnings of $4.3 billion, in line with preannouncement at the end of September. GE’s financial services unit posted net income of $2 billion that included marks of $533 million. The company views its mortgage portfolio as strong and manageable as delinquencies in the consumer book rose 62 bps from last quarter to 6.54%. UK mortgages contributed the most to delinquencies as it rose 71 bps from last quarter. Management gave guidance on expected credit losses of 1.4%-1.7% in 2009, slightly below its peak credit losses seen during the early ‘90’s recession. The company is working to reduce its reliance on commercial paper and expects the outstanding balance to drop to $80 billion by year end. They reassured investors that demand for GE commercial paper remains strong, and its back-up lines of credit and cash positions are greater than their commercial paper outstanding.
WFC (Aa1/AA+), C (Aa3/AA-), WB (A1/A+) (10/10): Citigroup has backed away from competing with Wells Fargo over the acquisition of Wachovia. Wells Fargo will purchase all of Wachovia for approximately $15 billion and will not require any Federal assistance to complete the merger. It intends to issue $20 billion of additional capital and record integration charges of approximately $10 billion. Citigroup will continue to pursue its litigation of the two firms for $60 billion of punitive damage for breach of contract.
BNP (Aa1/AA+), Fortis (Baa2/A) (10/6): BNP Paribas will acquire the Belgium and Luxembourg assets of Fortis NV in a cash and stock deal worth €15 billion. BNP will issue €9 billion of new shares to help fund the transaction and upon the completion of the acquisition the Belgian and Luxembourg government will own 11.6% and 1.1% of BNP Paribas, respectively. Strategically, BNP will become one of Europe’s largest retail lenders and hold the regions biggest deposit base.
BAC (Aa2/AA-) (10/6): Bank of America released 3rd quarter earnings of $1.18 billion and announced two initiatives to raise capital. It will raise $10 billion in capital through common stock and retain approximately $1.4 billion per quarter by reducing its dividend to $0.32 from $0.64. These initiatives will keep its Tier 1 Capital ratio on target at 8%. In the third quarter, total net charge-offs were 1.84% as non-performing assets grew $3.5 billion to $13.4 billion. Credit card charge-offs reached 6.4%, while write-downs at its investment banking unit totaled $1.8 billion. BofA also boosted reserves to cover 2.17% of loans.
Separately, BofA has reached an agreement with State Attorneys General to settle claims regarding risky loans originated by Countrywide Financial. The deal, worth approximately $8.4 billion, will cover nearly 400,000 borrowers who took out subprime loans. The bank has agreed to modify the terms of loans from borrowers who are seriously delinquent and will also set aside $220 million to provide relief to borrowers in foreclosure or who have lost their homes. It has also reached an agreement with state Attorney Generals to buy-back $4.5 billion of auction rate securities and pay fines of $50 million.
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WFC (Aa1/AA+), C (Aa3/AA-), WB (A1/BBB-) (10/3): Wells Fargo offered to purchase Wachovia in a stock for stock transaction that valued the bank around $15 billion. The deal comes after Wachovia agreed to be sold to Citigroup. The Wells transaction would not require any Federal assistance and would purchase Wachovia in whole. The firm sees approximately $74 billion in losses on the $500 billion portfolio of Wachovia’s commercial and residential mortgage portfolio. Citigroup has vowed to oppose this transaction and claims that it has a binding agreement with Wachovia.
(9/29): Earlier in the week, Citigroup proposed to purchase a majority of Wachovia’s assets and liability for $2.1 billion in an all stock transaction. It would acquire a $312 billion mortgage portfolio where losses were to be capped at $42 billion and the FDIC would take losses on amounts above that. Citi would also be responsible for the senior and subordinate debt of Wachovia’s holding company and bank debt.
UBS (Aa2/AA-) (10/2): UBS reassured markets that it will have a small profit for the third quarter and will release earnings in early November. UBS affirmed it has substantially reduced positions in commercial and residential mortgage backed securities.
GE (Aaa/AAA) (10/1): General Electric received $3 billion from Berkshire Hathaway in exchange for perpetual preferred shares and will issue another $12 billion in common stock. The capital injection will help calm investor worries of mortgage exposure at its subsidiary GE Capital Corp. CEO Jeffrey Immelt reassure investors that the company continues to “successfully meet its commercial paper needs.” At the end of June, GE had $98 billion of CP outstanding and $15.2 billion of maturities in 2008.
DEXB (Aa3/AA-) (9/30): Dexia Group received €6.4 billion from Belgium, France, Luxembourg, and existing shareholder to prop up its capital as share prices have plummeted. The group expected its Tier 1 Capital ratio before the capital injection to be above 10%. Also, as a measure of risk management, it has altered its liquidity facility to Financial Security Assurance from a $5 billion unsecured facility to a $5 billion repo facility and will further cap its capital injections to the subsidiary to $500 million. In a separate release, Dexia’s Chairman of the Board of Directors, Pierre Richard, and Chief Executive Officer, Axel Miller, will resign.
MS (A1/A+), MUFG (NR/A) (9/29): Mitsubishi UFJ Financial Group completed a deal to acquire a 21% in Morgan Stanley for $9 billion. The capital infusion will help one of the remaining investment bank stay independent, while aligning itself with the world’s second-largest bank holding company. The deal is expected to close within a few weeks, and MUFJ will retain a seat on Morgan Stanley’s board.
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SEC (9/26): The Securities and Exchange Commission has ended the Consolidated Supervised Entities program that allowed global investment banks to voluntarily allow regulatory supervision. The program failed to help identify problems that may have prevented the failures of Bear Stearns and Lehman Brothers. For the time being, the broker-dealer subsidiaries will be monitored by the SEC through an information sharing agreement with the Federal Reserve.
WaMu (Caa2/D), JPM (Aa2/AA-) (9/26): Washington Mutual was seized by the Federal Deposit Insurance Corporation and will have a majority of its businesses sold to JP Morgan. JP Morgan will acquire all of WaMu’s mortgages, credit card loans, deposits, all branches, and certain liabilities for $1.9 billion. It will also issue $8 billion in new capital as it expects to write-down as much as $31 billion of bad loans. Because bank debt and holding company debt will not be assumed, holders of these papers will likely see little to no recovery. The acquisition will give JP Morgan instant presence in California and Florida where it can pitch its other financial services.
GE (Aaa/AAA) (9/25): General Electric issued a profit warning for the remainder of the year and will attempt to strengthen its capital and liquidity at GE Capital. GE will reduce the dividend that it receives from GE Capital to 10% from 40%, cut its dependence on commercial paper to 10% from 15%, and suspend its $15 billion stock-buyback program. These actions will likely reduce the risks stemming from its finance arm, while GE will work to increase earnings contributions from its industrial divisions.
BNY (Aa2/AA-) (9/24): Bank of New York will take an after-tax charge of $425 million to support several money market funds that had Lehman exposure. The funds that were involved include several commingled cash funds used primarily for overnight custody cash sweeps, a fund used for reinvestment of cash in its securities lending business, and several Dreyfus money market funds that included Dreyfus Cash Management Plus.
AIG (A2/A-) (9/23): American International Group said late on Tuesday it signed a “definitive” agreement for up to $85 billion in borrowings from the U.S. Federal Reserve, the main part of a rescue by the central bank that will see it take a 79.9% stake in the giant insurer. The firm’s Chief Executive Edward Liddy said the facility was “the company’s best alternative” in the current market environment. Not only will it pay 8.50 percentage points over 3-month LIBOR, putting the current rate at well over 11%, but it will also pay commitment fees. There will be an initial gross commitment of 2% of the total loan facility, and subsequently a fee on undrawn amounts of 8.5% a year. The interest and the fees will be added to the balance outstanding, the company said.
It still wasn’t clear whether the signing of the agreement will derail efforts by a large investor group that is working to thwart a government takeover of the company. A lawyer for the investors—which represent more than a third of all AIG stockholders and have the backing of former CEO Maurice “Hank” Greenberg—said representatives of the group were to be briefed by the company on its financial position.
MS (A1/A+) (9/22): Japan’s Mitsubishi UFJ Financial agreed to buy a stake of between 10% and 20% in Morgan Stanley, spending up to $8.4 billion. In a press release, the Japanese bank said that the size of its stake in the U.S. investment bank will depend on due diligence and an assessment of Morgan Stanley’s book value. The company is also seeking to establish a strategic partnership with Morgan Stanley and will have one director sitting on the U.S. firm’s board. China’s sovereign wealth fund China Investment Corp, which already holds a 9.9% in the Wall Street bank signaled over the weekend that it wouldn’t buy another stake in Morgan Stanley.
GS (Aa3/AA-) MS (A1/A+) (9/21): In a surprise and swift move, the Federal Reserve approved the transformation of Goldman Sachs and Morgan Stanley from investment banks to traditional bank holding companies, subjecting the two remaining independent Wall Street firms to the supervision of the Federal Reserve, the Office of the Comptroller of the Currency and the FDIC. The change also will result in new capital requirements for the two firms. In exchange, the firms will be eligible for additional lending from the Federal Reserve. The steps effectively marked the end of Wall Street as it has been known for decades and are expected to result in major changes of the firms’ profitability and their business models.
Separately, Berkshire Hathaway will invest $5 billion in Goldman Sachs through perpetual preferred stock that will yield a 10% dividend. It will also receive warrants for the right to purchase $5 billion in common stock.
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FRE (Aaa/AAA), WFC (Aa1/AA+) (9/19): Freddie disclosed that it has not received $1.2 billion in principal and interest from Lehman. They estimated their potential exposure to Lehman for servicing obligations to be $400 million. Also, Wells Fargo will take an impairment charge of approximately $225 million on exposures to Lehman. $90 million of notes are being marked at $0.25, $109 million in preferreds are trading at less than 1% of par, and $50 million in unsecured counter-party exposure.
Money Market Funds (9/18): The Treasury Department released a plan to shore up money market funds after the Reserve Primary Fund “broke the buck,” the Putnam Prime Money Market Fund began liquidation, and investors withdrew nearly $130 billion. The Treasury will establish an insurance program for all eligible money market funds and will be financed with up to $50 billion from the Treasury’s Exchange Stabilization Fund. The insurance will apply to balances prior to 9/19/08 and must be regulated under Rule 2a-7 of the Investment Company Act of 1940.
Lloyds (Aaa), HBOS (Aa2) (9/18): Lloyd’s agreed to acquire HBOS Plc as the UK government pushed the acquisition to avoid a bank run. The merger will create the largest retail bank in the UK and one of the main providers of UK mortgages. HBOS has been troubled by the mortgage market and relied heavily on wholesale funding, but the sharp drop in the share price of HBOS prompt the UK government to step in and provide a quick solution.
LEH (B3/D), BARC (Aa1/AA) (9/18): Lehman Brothers filed for chapter 11 bankruptcy after the firm failed to find a buyer. In anticipation of the pending market disruptions, a consortium of banks have committed $70 billion to a loan program that participating banks can borrow from to take care of borrowing needs. The bankruptcy filing affects only the holding company, while its subsidiaries will continuing operating.
Separately, Barclays will step in and purchase some of Lehman’s US broker-dealer operations for approximately $1.75 billion. The acquisition is subject to approval by US bankruptcy courts, and in conjunction Barclays raised approximately £700 million to fund the transaction.
AIG (A2/A-) (9/17): AIG will receive an $85 billion loan from the Federal Reserve that will allow it to liquidate its assets over time. The two-year loan will carry an interest rate of LIBOR plus 8.5% and the government will take an 80% stake in the company. The loan is backed by all assets of the firm and the loan must be paid back before all outstanding obligations are met. The decision for the bail out was prompt by AIG’s credit downgrade that required the company to post an additional $14.5 billion in collateral that it did not have.
MS (A1/A+) (9/16): Morgan Stanley reported earnings of $1.4 billion with writedowns of approximately $800 million as the firm saw gains in commercial real estate and subprime residential mortgages. The firm is seeking a longer funding profile and has brought down its commercial paper balance to $7.8 billion from $12 billion. Its liquidity stood at $81 billion and reduced its net leverage ratio to 23.5x from 25.1x.
GS (Aa3/AA-) (9/16): Goldman Sachs reported positive quarterly earnings of $845 million and additional writedowns of $1.1 billion that were in-line with expectations. GS took writedowns of $275 million on leverage lending, $500 million on residential mortgages, $325 million on commercial mortgages. Level 3 assets declined by about $10 billion from the sale of leveraged finance assets and they were able to increase their liquidity pool over the quarter to $102 billion.
BAC (Aa2/AA-), MER (A2/A) (9/15): Bank of America agreed to purchase Merrill Lynch for approximately $50 billion in an all stock transaction that will close in the first quarter of 2009. The deal is expected to generate $7 billion in cost savings and will enhance BofA’s franchise in investment banking, asset management, and high-net worth advisory.
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DB (Aa1/AA-) (9/12): Deutsche Bank AG has purchased a minority stake in Deutsche Post’s banking unit, Postbank. DB will purchase a stake of 29.75% in the company and has the option to acquire more shares at a later date. Strategically, this will allow DB to focus more on the retail-banking sector and double its customer base to about 24 million.
BAC (Aa2/AA-) (9/12): Bank of America warned of growing problems in its loans to commercial borrowers. At an industry conference, BofA noted that more than half of its $13.4 billion in loans to builders are considered troubled and nearly 20% are not paying interest. The firm had $335 billion in commercial loans as of June 30.
LEH (B3/D) (9/10): Lehman Brothers’ announced a major restructuring that will attempt to give it more flexibility to return the company to profitability. The firm pre-announced third quarter results of an estimated net loss of $3.9 billion with gross mark to market adjustments of $7.8 billion. It will sell a majority stake in its investment management unit, spin off a large portion of its commercial real estate holdings to its shareholders, sell a portion of its residential mortgage portfolio, and reduce its dividend to $0.05 cents. Residential mortgage exposure will stand at $13.2 billion after the completion of the sale of its UK mortgage portfolio to BlackRock. Lehman improved its net leverage ratio to 10.6x from 12.1x in the second quarter and had an estimated Tier 1 Ratio of 11%. Both ratings firms expects at least a two notch downgrade if these plans were to be executed.
GSE Holdings at Banks (9/9): Wells Fargo disclosed that it had a combined $480 million in GSE preferred securities and will likely mark down the trading value of these securities to 5% – 10% of par. As of the second quarter 2008, JP Morgan had $1.2 billion in GSE preferreds, Citigroup had $1 billion, AIG had $580 million, US Bancorp had $97 million, and Fifth Third Bancorp had $55 million. In July, Wachovia had liquidated their $509 million of preferred and will take a $170 million pretax charge in the third quarter. Citigroup will take a $450 million charge in the third quarter.
FNM (Aaa/AAA), FRE (Aaa/AAA) (9/8): Fannie Mae and Freddie Mac were taken over by the Federal Housing Finance Agency and placed under “conservatorship.” The FHFA will replace senior management and board of directors at both firms and will purchase $1 billion in senior preferred stock with the right to buy up to $100 billion in each entity. The Treasury will also receive warrants up to an 80% ownership stake. Dividends on common and preferred stock will be suspended to preserve capital, while interest and principal payments on senior and subordinate debt will continue.
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FDIC (9/4): In a speech to the Florida Bankers’ Association, FDIC director Sheila Bair confirmed the agency’s confidence that its $45 billion Deposit Insurance Fund would be sufficient to cover losses from bank failures. She did not believe that the bank regulator will need to tap other government liquidity sources to cover loses from growing bank failures. The FDIC has a $30 billion line of credit with the Treasury Department and additional funding capacity via the Federal Financing Bank for short-term liquidity needs. Nevertheless, banks are expecting higher DIF premiums in 2009 as the insurance fund seeks to return to its legally mandated minimum of 1.15% of insured deposits. Its current coverage is 1.01% of insured deposits.
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FNM (Aaa/AAA) (8/27): Fannie Mae announced the departures of Robert Levin, its chief business officer, and two executives who joined within the past two years: Stephen Swad, who was chief financial officer; and Enrico Dallavecchia, who was chief risk officer. The firm promoted Peter Niculescu, a former Goldman Sachs bond analyst, to chief business officer with broad responsibilities. It named David Hisey, formerly its controller, as chief financial officer. Michael Shaw, 61, formerly a senior vice president, becomes chief risk officer. David Benson, another senior vice president, was named executive vice president for capital markets and treasury. Daniel H. Mudd will continue his role as CEO. "This team will be responsible for meeting the dual objectives of conserving capital and controlling credit losses," Mudd said.
FDIC Report on Troubled Banks (8/26): The Federal Deposit Insurance Corporation reports that 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter. The FDIC does no disclose names of troubled banks. "Loss provisions totaled $50.2 billion, more than four times the $11.4 billion quarterly total of a year ago. Second-quarter provisions absorbed almost one-third (31.9%) of the industry's net operating revenue, the highest proportion since the third quarter of 1989". "At institutions with assets greater than $1 billion, the average ROA in the second quarter was 0.10%, down from 1.23% a year ago. The annualized net charge-off rate in the second quarter was 1.32 percent, compared to 0.49 percent a year earlier." In 1988, 1,394 institutions were in trouble, accounting for 10.6% of all financial institutions. In the more recent 'crisis' in 2002, 136 institutions were facing difficulties or 1.4% of reporting banks.
FNM (Aaa/AAA), FRE (Aaa/AAA) (8/26): Moody’s and S&P affirmed the GSEs’ AAA credit ratings with a stable outlook. Their financial strength, subordinated debt and preferred stock ratings, however, were lowered. The affirmation of the 'AAA' and short-term 'A-1+' senior unsecured debt ratings reflect the rating agencies’ expectation of continued government support for the entities, as represented in the Treasury's Economic Stimulus Plan. Rating actions on the subordinated classes of debt reflect increasing uncertainty about whether government support will extend to these securities in the context of further deterioration in the asset quality of the GSEs’ mortgage portfolios. The subordinated notes pose incremental risk to investors because of an interest deferral feature given certain trigger events tied to their regulatory capital levels.
C (Aa3/AA-) (8/25): Citigroup announced that Robert Rubin will relinquish his role as chairman of the company’s executive committee but will remain on its board of directors as a senior counselor. Simultaneously, the board announced the dissolution of the executive committee due to the receive decision to give the committee’s responsibilities to the nominating and governance committee, chaired by Time Warner chairman Richard Parson. Parson is also the lead director on Citi’s board.
JPM (Aa2/AA-) (8/25): JPMorgan Chase said its $1.2 billion in face value of GSE preferred stock had fallen about 50% in the third quarter of 2003, acknowledging the possibility that values remained “volatile.” It was quick to note that the actual impact on reported 3Q08 earnings would depend on market conditions in September.
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FRE (Aaa/AAA) (8/21): Freddie Mac executives said the firm’s officials are in talks with private-equity firms and other investors about acquiring its shares, the Wall Street Journal reported. "Senior management has been talking with a wide array of possible investors this week," the Journal quoted Freddie Mac spokesman David Palombi as saying. The report said the search for investors is challenged by fears that any investment in Freddie or Fannie Mae, may be lost if the U.S. Treasury bails out the companies through a purchase of equity in them.
GS (Aa3/AA-), DB (Aa1/AA-), MER (A2/A) (8/21): Merrill Lynch, Deutsche Bank and Goldman Sachs agreed to buy back auction-rate securities they sold to retail clients as part of agreements with state regulators probing how the firm marketed the complex securities.
TMC (Aaa/AAA) (8/20): Toyota Motor Corp. revised sales guidance for the full year of fiscal 2009. The company plans to reduce its sales guidance to 9.8 million vehicles from the 10.4 million it projected earlier, reflecting a weakening demand for automobiles in world's major economies. The new target includes sales by group companies such as Daihatsu Motor Co. and Hino Motors.
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WB (A1/A+) (8/15): Wachovia reached a preliminary settlement with securities regulators over its sale of auction-rate securities to investors. It will buy back about $9 billion of auction-rate securities it sold to its clients, $5.7 billion of which are held by individual investors, charities and small business. In addition, Wachovia will pay a $50 million fine to be split among several states. The agreement will return $5.7 billion-plus to more than 40,000 investors by the end of the year, according to the office of Missouri Secretary of State Robin Carnahan, whose office led the negotiations. Other businesses with larger holdings can redeem their securities by June 30, 2009.
Fannie Mae (Aaa, AAA), Freddie Mac (Aaa/AAA) (8/14): In the latest Wall Street Journal forecasting survey, 59% of the 53 economists polled said that the Treasury Department will have to step in to bail out the Government Sponsored Enterprises. When asked how the government should handle the situation with Fannie and Freddie, 68% said the lenders should be pushed to raise capital privately. Nearly one in three of them said that the companies should be nationalized.
JPM (Aa2/AA-) (8/14): JPMorgan Chase agreed to settle investigations by a number of securities regulators and offered to purchase at par auction rate securities held by its retail customers who purchased them through the firm prior to February 12, 2008. The offer will cover an estimated $3 billion in ARS. JPMorgan Chase will offer to purchase at par all ARS held by its individual customers as well as by those charities and small-to-medium-sized businesses with account values and household values of no more than $10 million through J.P. Morgan Securities or Bear Stearns. In additional to a $25 million penalty, the firm will record a $400 million pre-tax loss in connection with the settlement.
WMT (Aa2/AA (8/14): Wal-Mart Stores posted a 17% rise in quarterly net income, topping raised expectations and prompting the company to boost its fiscal-year target. The company gave cautious initial guidance for the current quarter largely below analysts' estimates. The world's largest retailer expressed some concern about how U.S. shoppers will fare in coming months.
UBS (Aa2/AA-) (8/12): UBS reported a second-quarter net loss of $330 million on write-downs of $5.1 billion. The firm reported net new money outflows of CHF44 billion, including CHF19 billion from its Global Wealth Management & Business Banking division. The Tier-1 ratio ended the quarter at 11.6%.
Separately, UBS asked its chief financial officer Marco Suter to step down from his job, to be replaced by Clive Standish on Sept. 1, 2008. Along with Markus Diethelm, who will join the firm as group general counsel, the firm added four new directors to its board. The bank will also divide the group into three autonomous divisions: Global Wealth Management, the largest; the Investment Bank; and Global Asset Management.
Senior Loan Officer Survey (8/12): The Federal Reserve’s latest survey of senior loan officers found banks growing more cautious in their lending to consumers. Two-thirds of domestic banks tightened lending terms between April and July for credit cards and other consumer loans. That was up from roughly a third of banks tightening credit-card loans in the prior three-month period. Banks also are increasingly raising minimum credit scores for consumer loans and lowering credit limits on credit-card accounts. The survey also found 60% of domestic banks expected to tighten standards on credit-card loans in the second half of the year.
UBS (Aa2/AA-) (8/12): UBS AG announced a settlement with securities regulators to repurchase a total of $8.3 billion of ARS, at par, from most private clients during a two-year time period beginning January 1, 2009. From mid-September, UBS will provide loans at no cost to the client for the par value of their ARS holdings. In addition, UBS also committed to provide liquidity solutions to institutional investors and will agree from June 2010 to purchase all or any of the remaining $10.3 billion, at par, from its institutional clients. The firm has also agreed to pay a fine of $150 million.
WB (A1/A+) (8/12): Wachovia Corporation will cut 600 full-time positions in addition to the 6,350 layoffs it announced last month. The 600 affected positions are mortgage-related. Additionally, it will close mortgage offices in 19 states where it has few or no retail branches. The move will result in the elimination of 125 jobs. The additional staff reductions are part of the company's efforts to reduce its expenses.
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RBS (Aa1/AA) (8/9): Royal Bank of Scotland Group posted a first-half net loss of £802 million and taking £5.9 billion in write-downs. The firm offset this amount earlier in the year with a £12 billion right offering. It is targeting a core tier 1 ratio of 6%, but ended the quarter short at 5.7%.
FNM (Aaa/AAA) (8/8): Fannie Mae reported a net loss of $2.3 billion in second quarter as credit related expenses rose to $5.3 billion. The figure included a reserve build of $3.7 billion to offset the expected rise in credit losses and will retain capital by reducing its dividend to just 5 cents. The firm expects credit losses on its portfolio to rise to 23-26 bps from its first quarter projection of 13-17 bps. Fannie expects credit losses to peak in 2008, but remain elevated in 2009. Its core capital was a reported $47 billion, $9.4 billion above its 15% OFHEO cap.
AIG (Aa3/AA-) (8/7): AIG reported an operating loss of $5.4 billion for the second quarter, but reiterated that it is comfortable with its capital position. The firm recorded an after-tax write-down of $3.6 billion on its mortgage-exposed credit default swaps and an after-tax write-down of $4 billion on residential mortgage backed securities. The firm will continue is strategic review of non-core assets, but stated that International Lease will not be sold.
FRE (Aaa/AAA) (8/6): Freddie Mac recorded a second-quarter loss of $821 million and booked credit losses totaling $2.5 billion. The firm is committed to raising $5.5 billion and will likely reduce dividends to 5 cents or less from 25 cents. It recorded $37.1 billion in core capital, which is approximately $2.7 billion above mandatory 20% target and $8.4 billion above minimum statutory requirements. Lifetime losses in its single family portfolio are modeled to lose up to $42 billion, while home price depreciation will decline another 8-10%.
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DB (Aa1/AA-) (8/1): Deutsche Bank reported second quarter earnings of EUR650 million as write-down and impairments cost $3.6 billion. The firm was able to reduce its leverage finance holdings by EUR6 billion to EUR24.5 billion and its commercial real estate portfolio by EUR4 billion to EUR10.7 billion. The firm is not opposed to acquiring weaker banks at the right price and rumored to have an interest in Deutsche Post. Its Tier-1 ratio ended the quarter at 9.3%, above their target of 8 to 9%.
Federal Reserve (7/31): The Fed extended the termination date for the Primary Dealer Credit Facility and the Term Securities Lending Facility to January that were originally supposed to end in September. It also introduced a new program to auction options under the TSLF to facilitate more volatile periods such as quarter-end.
MER (A2/A) (7/29): Merrill purged its balance sheet by selling its $30.6 billion super senior ABS CDO portfolio for $6.7 billion. It will also record a $4.4 billion write-down on portfolio and raise an additional $8.5 billion in common equity. The firm’s remaining exposure to US super senior ABS CDOs will be $8.8 billion, of which $7.2 billion is hedged.
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ALL (A1/A+) (7/24): Allstate reported second quarter net income of only $25 million as investment losses totaled $1.2 billion. More than 1,100 tornados hit the
WB (A1/A+) (7/24): Wachovia reported a net loss of $8.9 billion including a $6.1 billion charge to goodwill. The firm outlined plans to retain capital by cutting the dividend to $0.05, reducing expenses, and exploring non-core asset sales. The firm updated its loss assumptions on its $122 billion option-ARM portfolio and now expects lifetime losses to reach 11% from 7%. The firm recorded loan-loss provisions of $5.6 billion, which $4.2 billion were marked as reserve build. Total reserves of $11 billion covers approximately 90% of non-performing assets compared with a range of 140% to 200% at other large banks. The Tier 1 ratio ended the quarter at 8%. In a separate announcement, CFO Thomas Wurtz will leave after a replacement is found.
AXP (A1/A+) (7/21): Amex reported earnings of $650 million including $1.9 billion in loss provisions, of which $600 million were increases in its loss reserves for US cards.
BAC (Aa2/AA) (7/21): Bank of America reported earnings of $3.4 billion, but credit quality continued to decline. Net-charge offs for the quarter was 1.67%, offset by reserve build of $2.2 billion. The firm expects a rebound in consumer products by the end of 2008, and its Countrywide acquisition to add to earnings by next quarter. Credit card charge-offs are expected to reach 6.5%, while home price depreciation will range 25-30% with CA and FL reaching 40%. The Tier 1 ratio is expected to be 8.25%, and will fall below 8% after Countrywide is added to the balance sheet.
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C (Aa3/AA-) (7/18): Citigroup reported a net loss of $2.5 billion on higher credit costs and $7.2 billion in write-downs. The firm reduced total assets by $99 billion and expects to gain $4 billion from a sale of its German retail banking operation. 90-days past due delinquencies on 1st mortgages reached a cycle high of 3.7% and are expected to continue. Including the sale of its German retail unit, the tier 1 capital ratio will be 9.3%.
MER (A2/A) (7/17): Merrill Lynch reported a net loss of $4.7 billion and will sell its 20% stake in Bloomberg for $4.4 billion to shore up its capital. It also announced plans to sell a controlling interest in Financial Data Services, a subsidiary that provides administrative functions within the Global Wealth Management group, for about $3.5 billion. The losses can be attributed to $3.5 billion in losses related to US super senior ABS CDO positions and credit valuation adjustments of negative $2.9 billion on hedges with monolines.
JPM (Aa2/AA-) (7/17): JP Morgan reported earnings of $2 billion including a charge of $540 million from Bear Stearns related merger items. The firm wrote down an additional $1.1 billion in leveraged lending and mortgage-related positions, while increasing credit reserves by $1.3 billion to total $13.9 billion. It reduced its mortgage-related exposures in its Investment Banking unit by $12.8 billion to end the quarter with $33 billion. Net charge-offs in its prime mortgage portfolio of approximately $100 million, or 0.91%, may triple in 2009. Tier-1 ended the quarter at 9.1%.
WFC (Aa1/AA+) (7/16): Wells Fargo reported second quarter earnings of $1.8 billion impacted by $3 billion in provisions for loan losses. This included net charge-offs of $1.5 billion and an additional $1.5 billion in reserve build. Net charge-offs would be $265 million higher if Wells Fargo did not change their accounting policy for home-equity loans. The home-equity charge-off policy changed from 120 days to 180 days. Its home-equity liquidating portfolio stood at $11 billion, which took losses of $97 million, compared to its $73 billion core home-equity portfolio, which took losses of $245 million. The firm’s Tier-1 capital ratio ended at 8.24%.
Federal Reserve (7/14): The Federal Reserve and the Treasury outlined a plan to ensure adequate capital and liquidity at Fannie Mae and Freddie Mac. The Federal Reserve Bank of
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GE (Aaa/AAA) (7/11): General Electric released second quarter earnings of $5 billion. The company agreed to sell its Japanese consumer finance business for $5.4 billion and announced plans to spin off its commercial and industrial unit. It continues to seek buyers for its credit card business.
IMB (7/11): The Office of Thrift Supervision shutdown IndyMac Bancorp, representing the largest closure of a depository institution since 1984. The FDIC has moved in to operate the failing bank and estimated the cost of the takeover to by $4-$8 billion. Previously, the firm was barred from making new mortgages after FDIC removed the bank from the list of “well-capitalized” banks. IndyMac was the 9th largest thrift in the
WB (Aa3/AA-) (7/10): Wachovia announced it expects a second quarter loss of $2.6 – $2.8 billion driven by higher provision expenses, the previously announced non-cash SILO charge, and market disruptions. Charge-offs for the quarter will be approximately $1.3 billion or 1.1% of loans. In conjunction with the announcement, Wachovia will appoint Robert Steel as the new CEO, who was previously a Treasury Undersecretary.
Federal Reserve (7/8): The Federal Reserve and the SEC reached a formal agreement to share information to avoid another Bear Stearns collapse. The Fed will receive from the SEC information regarding an investment bank’s trading positions, leverage and capital requirements, among others. The SEC will receive information on short-term financing from banks that clear trades and hold collateral for securities firms.
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UBS (Aa2/AA-) (7/4): UBS released a statement that second-quarter earnings will “likely be at or slightly below break-even.” The firm notes that positive contributions from its Wealth Management and Asset Management businesses will offset losses from further market deterioration. The firm expects its Tier 1 capital ratio to be approximately 11.5% and will not raise new capital.
DB (Aa1/AA) (7/3): Deutsche Bank announced that it expects a profitable second quarter and will not need to raise new capital. The firm expects its Tier 1 ratio will remain approximately 9% at the end of the quarter.
FRE (Aaa/AAA) (7/3): Freddie Mac has been slow to complete its announced $5.5 billion capital raise due to continued accounting problems at the firm. Freddie has yet to register with the SEC and has seen its share price fall recently. A lower price may hamper its ability to raise capital, which may dilute its shareholder base.
JPM (Aa2/AA-), BSC (Aa2/AA-) (6/30): JP Morgan has announced that it will assume Bear Stearns’ debt and preferred stock. Rating companies aligned the debt ratings of the two firms, now rated Aa2 by Moody’s and AA- by S&P.
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Federal Reserve (6/27): The Federal Reserve released data on the value of Bear Stearns’ mortgage portfolio. It is now worth $28.8 billion compared to the initial $30 billion, where JP Morgan is responsible for the first $1 billion of losses. Separately, the Fed is considering relaxing regulation to allow private-equity firms to invest in banks. Although ownership of more than 9.9% of a bank would require some scrutiny, rules could be relaxed to limit voting power and board seats.
CFC (Baa3/BB+), BAC (Aa2/AA) (6/25): Countrywide shareholders approved the sale of the company to Bank of America and the deal is expected to close on July 1. Bank of America expects to cut 7,500 jobs over two years to realize cost saves and integrate the mortgage operations. Separately,
BCS (Aa1/AA) (6/25): Barclays announced that it will raise new capital by issuing shares to a group of Asian and
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MBI (A2/AA), ABK (Aa3/AA) (6/20): Moody’s downgraded the insurance financial strength ratings of MBIA and AMBAC to A2 and Aa3, respectively. Besides the firms underlying mortgage-related exposures, Moody’s noted that both firms have written little new business and their financial flexibility has dramatically decreased. Both firms have a negative outlook.
C (Aa3/AA-) (6/19): Citigroup CFO Gary Crittenden warned of further write-downs on failing mortgage investments. In a conference call with analysts, he said the firm would see losses on its exposure to leveraged loans and bond insurers, and expects increase in its reserves for bad loans.
MS (Aa3/A+) (6/18): Morgan Stanley released second quarter earnings of $1 billion, along with over $1.9 billion in total mark downs before hedges. The impairments included wrong way bets on hedges of leveraged finance positions, losses on real estate exposures, and a $120 million loss by a trader for incorrectly marking his books. The company managed an ROE of 12% and gave a range of its Tier 1 ratio to be between 11.5% - 12%. The company still has remaining exposures of $38 billion, reduced from $46 billion in the first quarter.
GS (Aa3/AA-) (6/17): Goldman Sachs reported second quarter earnings of $2.1 billion, while its ROE climbed to 20.4%. Goldman reported a credit loss of $775 million, of which $500 million were due to ineffective hedging of leverage loans. The firm was able to reduce its exposure in different areas. Leverage financed positions fell to $14 billion, down from $52 billion in the third quarter of 2007. Residential mortgages have fallen to $15 billion from $19 billion in the first quarter of 2008, while commercial loans stood at $17 billion from $19 billion in the first quarter. Value-at-Risk, the amount of money Goldman may lose in one trading day, rose to $184 million from $157 million reflecting the firm’s increased risk taking, but the Tier-1 ratio was 10.8% for the quarter.
LEH (A1/A) (6/17): Lehman released earnings in line with its preannouncement on June 9 of a $2.8 billion second quarter loss. Asset mark downs and credit related charges totaled $4.9 billion, while exposure to higher-risk assets declined about 23% to $89 billion. The majority of securities sold to reduce assets were AAA rated Alt-A whole loans and securities, while few were of lower rated mortgage securities. The firm end the quarter with a Tier-1 ratio of 10% and under BASEL II capital calculations of 15%. These ratios would be 12.5% and 17.5% after the capital raise.
(6/12): Lehman Brothers replaces CFO Erin Callan and COO Joseph Gregory before its official announcement of second quarter earnings. Ian Lowitt will take over for Callan, and Herbert McDade will replace Gregory.
(6/9): Lehman Brothers pre-announced a second quarter loss of $2.8 billion, while issuing a capital raise of $6 billion through common and convertible preferreds. The firm reduced its exposure to leverage finance by 35% and residential mortgages, commercial mortgages and real estate investments by 15-20% in each asset class. The reduction in net assets by $60 billion helped reduce net leverage to less than 12.5x from 15.4x. After the capital raise, net leverage is expected to fall to 10x. The firm maintains that it has superb liquidity, increasing its liquidity pool to $45 billion from $34 billion.
AIG (Aa3/AA-) (6/17): CEO Martin Sullivan will be replaced by Robert Willumstad, but will remain chairman of the board. The new CEO highlighted concerns in certain areas of AIG and said that it will review its non-insurance operations. Robert Willumstad, who has been known for divesting non-core assets at Citigroup, will look towards International Lease Finance and American General Finance as the likely candidates to be divested.
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BNP (Aa1/AA+), BAC (Aa2/AA) (6/10): BNP Paribas purchases Bank of America’s equity prime brokerage unit. The acquisition will increase BNP’s footprint in
Moody’s on Credit Cards (6/10): Moody’s credit card charge off rate index climbed to 6.27% in April and expects charge-offs to rise above the 7% peak during the past two economic contractions. Delinquencies 90-days past due continue to rise and is often a leading indicator of future charge-offs.
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NCC (A3/A) (6/6):
AIG (Aa3/AA-) (6/6): The SEC, Justice Department, and the
MBI (Aaa/AA), ABK (Aaa/AA) (6/5): Moody’s placed MBIA and AMBAC on review for possible downgrade, and will likely downgrade the two companies’ insurance financial strength ratings into the Aa range. Moody’s review will focus on the effect that mortgage-related stress will have on the firms’ capital positions. Separately, S&P cut the rating agencies’ insurance financial strength rating to AA from AAA and placed the ratings on CreditWatch negative. S&P is concerned with the firms diminished new business flows and declining financial flexibility.
S&P Capital Markets Review (6/2): S&P reviewed banks and brokers that have exposure to the capital markets and took action on
WB (Aa3/AA-) (6/2): CEO Ken Thompson was forced into retirement by its board as mortgage related losses mounted. The many missteps include the purchase of mortgage lender Golden West, aggressively pushing into commercial real estate, and the struggling integration of AG Edwards. S&P placed the company on CreditWatch negative citing “the abrupt departure of the CEO” and concerns about changes in its core businesses.
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BSC (Baa1/AA-), JPM (Aa2/AA-) (5/29): Bear Stearns shareholders approved the merger with JP Morgan and will be officially completed on May 30th. There continues to be no announcement on the status of the debt of Bear Stearns, and as a result, Moody’s maintains their Baa1 debt ratings with a review for possible upgrade.
S&P Rating on Alt-A (5/28): S&P cut or may lower the ratings of $34 billion of securities backed by Alt-A mortgages created in the first half of 2007. Among Alt-A loans issued last year, defaults and late payments of at least 90 days rose to 6.64% in April, up 65% since January. S&P expects these latest ratings action to be the last ones in the Alt-A category unless there are significant changes in the macroeconomic environment.
BAC (Aa2/AA) (5/28): Bank of America will raise its stake in China Construction Bank by about $1.86 billion, bringing its ownership stake to 10.75%. BofA has the option to increase its stake to 19.9% and currently, the value of the investment is worth about $30 billion. Many had expected the firm to sell a portion of its initial investment when the lockup period ended in the forth-quarter, but management is determined to retain a relationship in
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Home Equity Loan Losses (5/23): John Dugan, the head of the Office of the Comptroller of the Currency, said that banks’ home-equity loan losses will reduce bank earnings, but should not impair capital. The acceleration of home-equity loan losses would require banks to set aside higher levels of loan loss provisions and tighten lending standards. Home-equity credit lines have reached $1.1 trillion, more than double the 2002 levels. Loss rates have historically averaged just 20 bps, but have risen to 1.73% in the first quarter 2008.
UBS (Aa1/AA-) (5/22): UBS completed a $15 billion asset sale to a distressed-asset fund run by BlackRock, discounting the value of the portfolio by about 32 cents on the dollar. The value of the mostly subprime and Alt-A portfolio was worth $22 billion. After the sale, UBS’s Tier-1 capital ratio would improve by 20 bps to 12%.
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BCS (Aa1/AA) (5/15): Barclays reported £1.7 billion of impairment charges in the first quarter and had £32.5 billion of exposure to risky assets. The firm’s Tier 1 Ratio was 7.6% and contributed to the outlook by Moody’s of pressure on earning and capitalization levels. Moody’s placed the bank on negative outlook.
FRE (Aaa/AAA) (5/14): Freddie Mac recorded a narrower than expected loss of $151 million and will raise $5.5 billion in additional capital. OFHEO will reduce the capital requirement to 15% from 20% upon the completion of the capital raise, and will reduce it to 10% in the third quarter if certain requirements are fulfilled. At the end of the first quarter, it had excess capital above the OFHEO required minimum of $6 billion and will reach $14.2 billion when all changes are taken into account. Freddie’s credit losses of $528 million for the first quarter are expected to rise to $3.1 billion or 16bps for the full year of 2008.
Bank/Broker Update (5/13): Bank of America forecasted that home-equity loan losses will reach 2.5% in its $118 billion portfolio, mostly stemming from states such as
HSBC (Aa2/AA-) (5/12): HSBC disclosed $3.2 billion in write-downs in its US consumer finance business and saw 60-day delinquencies rise to 5% compared with 4.2% in the last quarter. According to disclosures, HSBC Finance posted a profit of $255 million primarily reflecting the increase in its own credit spreads of $2.7 billion, while overall, US based operations were profitable in the first quarter. The firm does not expect to raise capital and feels adequately capitalized to pursue opportunities in the market.
MBIA (Aaa/AAA) (5/12): MBIA reported a first quarter loss of $2.4 billion generated by a pre-tax write-down of $3.6 billion. During the first quarter, it conducted an analysis of its housing-related exposures and as a result, recognized $800 million in impairments and $540 million in loss reserves. The $2.6 billion capital raise in the first quarter provided a cushion to Moody’s minimum Triple-A capitalization level, but is below their target level by approximately $1.3 billion. Conversely, MBIA is above S&P requirement level by $900 million. It expects to be above Moody’s target levels over the next two quarters.
Separately, Moody’s will review the capital adequacy of MBIA and AMBAC after losses exceeded their expectations. It is primarily concerned with the rating agencies’ exposures to second lien mortgage securities.
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C (Aa3/AA-) (5/9): Citigroup outlined their strategy to return the company to profitability, but urged investors to be patient for 2-3 years. The company plans to reduce assets by $500 billion over the next 2-3 years with two-thirds coming from the consumer banking unit and one-third coming from the securities and banking segment. By 2010, the company is targeting $20 billion in annual profit with an ROE of 16-18%, by reducing its operating costs and managing credit costs.
AIG (Aa2/AA-) (5/9): AIG posted a first quarter loss of $7.8 billion and will raise $12.5 billion in capital. The company took a $9.1 billion write-down on their super-senior credit default swap portfolio and a $6.1 billion impairment charge in their investment portfolio. Cumulative unrealized valuation losses to date total $19 billion, but AIG’s modeled expected losses may total only $1.2 billion to $2.4 billion.
STT (Aa3/AA-) (5/8):
JPM (Aa2/AA-) TGT (A2/A+) (5/6): JP Morgan will acquire a 47% stake in Target’s $8.2 billion credit card portfolio for $3.6 billion, but would require Target the repurchase the stake at the end of six years. Control of the portfolio is kept with Target, but if credit quality declines, JP Morgan has the right to implement alternative underwriting and risk management practices. JPM would be on the hook for its share of any losses, which Target expects charge-offs to reach 7-8%.
FNM (Aaa/AAA) (5/6): Fannie Mae reported a loss of $2.2 billion for the first quarter and will raise $6 billion in additional capital. It will also cut the dividend in the third quarter to 25 cents. Currently, it has excess capital of $5.1 billion above the 20% regulatory minimum, which will be reduced to 15% upon the completion of the capital raise. Losses on mortgages held by Fannie rose to 0.126% from 0.034% and will be in the range of 0.13%-0.17% for the remainder of the year.
UBS (Aa1/AA-) (5/6): UBS reported a first quarter loss of CHF11.5 billion and had write-downs of $19 billion on US mortgage-related assets. These figures were in line with their pre-announcement on April 1st. Restructuring efforts will continue with a substantial reduction in headcount by 5,500 by June 2009 and announced that it will exit the institutional municipal finance business. The bank’s tier 1 ratio ended the quarter at 6.9%, but would improve to 11.8% when the previously announced capital raises are successful.
WB (Aa3/AA-) (4/30): Wachovia announced that it will take an after-tax non-cash charge of between $800 million - $1 billion in the second quarter. The charge relates to the tax treatment of leasing transactions taken between 1999 and 2003. Wachovia was influenced by a federal appeals court ruling on a separate company that tax benefits associated with certain lease transaction could not be taken.
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Moody’s Comments on Banks (4/30): Moody’s ratings model on banks were primarily focused on the commercial real estate exposure of banks, and noted that expected cumulative pre-tax loss on the CRE portfolio will total $75 billion. Heightened provisions will be taken by banks in the next four to six quarters, but ratings will remain stable if provisions are within range of their expectations. These views are based a mild
CFC (Baa3/BB+) (4/29): Countrywide Financial reported a $900 million loss as credit-related charges reached $3 billion. 36% of subprime loans were 30-days delinquent, while the delinquency rate of prime loans stood at 9.3% of loans. Provisions for credit losses on the home loan portfolio were $1.5 billion and charged $500 million on provisions for liabilities on claims made by investors. Separately, Bank of America did not specify its treatment of CFC’s outstanding debt obligations, but expects the acquisition to be completed by the end of the third quarter.
HBOS (Aa2/AA-) (4/29): HBOS PLC will raise £4 billion in a rights issue to bolster its capital and will reduce its dividend payout to 40%. This plan would raise enough capital to boost its Tier 1 ratio to between 6%-7%. The bank has reported £2.8 billion of write-downs so far for 2008.
DB (Aa1/AA) (4/29): Deutsche Bank reported a net loss of €131 million for the first quarter caused by a net €2.7 billion write-down. This was slightly higher than the €2.5 billion write-down announced by the bank of April 1st. It reported a tier-1 ratio of 9.2%, above the target range of 8-9%.
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CS (Aa1/AA-) (4/25): Credit Suisse was hit by CHF5.3 billion in write-downs that led to a net loss of CHF2.1 billion in the first quarter. The write-downs were primarily driven by CDO trading and leverage finance that accounted for about 80% of the total. Its leverage loan exposures shrank to CHF21 billion from CHF35 billion and its tier-1 ratio fell to 9.8% from 11.1%.
AXP (A1/A+) (4/25): American Express reported net income of $991 million and increased provisions to $1.27 billion. Credit card net charge-offs were 5.3% compared with 4.4% in the fourth quarter and 30+ day delinquencies rose to 3.6% from 3.2% sequentially. The managed card portfolio grew 19% from the prior year to $77.2 billion outpacing the mid-single digit portfolio growth expected by most other lenders. AXP is working to reduce credit-lines and approvals for credit-line increases.
RBS (Aaa/AA) (4/22): Royal Bank of
BAC (Aa2/AA) (4/21): Bank of America reported net income of $1.2 billion as provision rose to $6 billion driven by the weakness in housing. Net write-downs totaled $2.1 billion, of which a majority was taken on its $9.3 billion super-senior CDO exposure. Loan-loss reserve coverage of non-performing assets remained steady at 190%. Net charge-offs on its $118 billion home equity portfolio, of which 39% is located in
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C (Aa3/AA-) (4/18): Citigroup reported a first quarter net loss of $5.1 billion that included total write-downs of approximately $12 billion. About $6 billion was related to direct sub-prime exposures, $3 billion on its leverage lending commitments, $1.5 on monoline insurance, $1.5 on auction rate securities, and $3 billion increase in credit cost related to Global Consumer. Citigroup continues to be focused on capital building by selling assets and announced a plan to reduce its mortgage holdings by $45 billion.
MER (A1/A+) (4/17): Merrill Lynch posted a loss of $2 billion with write-downs of $6.6 billion related to mortgages, CDOs, and leverage loans. It wrote down another $3.1 billion in mortgages-related securities from moving securities to its hold-to-maturity portfolio. Management is working to reduce its exposure in risky assets, but many positions are hedged through monolines. The liquidity position continues to be strong with $82 billion in excess holding company liquidity. Moody’s put the A1 rating on review for downgrade, while S&P affirmed the A+ credit rating.
WFC (Aa1/AA+) (4/16): Wells Fargo reported net income of $2 billion tempered by a $326 million write-down of mortgage related assets. Losses in the home-equity and business-direct portfolio caused credit loss provisions to nearly triple to $2 billion. Nonperforming assets grew to 1.16% of total loans while net charge offs rose to 1.6% of total loans. The liquidating portfolio that contains the riskiest home equity loans stood at $11.9 billion with average net charge offs of 5.58% up from 4.8%.
JPM (Aa2/AA-) (4/16): JP Morgan reported earnings of $2.4 billion dragged down by a $2.6 billion write-down of mortgage and leverage loans and a $2.5 billion increase in loan loss reserves. The increase in loss provisions was primarily focused on the home-equity, mortgage, and credit card portfolios, and able to cover 232% of its non-performing assets. Home equity loans totaled $95 billion with losses of 1.89% up from 0.32% last year. JPM expects home price declines of an additional 7-9%, with peak to trough decline of 20%. Losses in the credit card portfolio were 4.37%, within range of the 5% net charge-offs expectations set by the firm. The Bear Stearns acquisition is expected to close by June 30th and intends to generate $1 billion in annual synergies over time.
WB (Aa3/AA-) (4/14): Wachovia announced a loss of $393 million for the first quarter and will raise $7 billion of new capital through a stock sale. It will also slash it dividend by 41%, which will save the company about $2 billion per year. Market valuation write-downs in the Corporate & Investment Banking unit totaled $2 billion, while loan-loss reserves were increased by $2.1 billion. Wachovia’s large pick-a-pay mortgage portfolio acquired from the Golden West acquisition is the primary driver of non-performers as nonperforming assets rose to 3.82%, which compares to its own mortgage retail business of 1.15%. The mortgage portfolio totaled $170 billion, of which $121 billion was part of the Pick-A-Pay product, and
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GE (Aaa/AAA) (4/11): General Electric posted lower than expected earnings of $4.3 billion as loss provisions soared 42% to $1.33 billion. GE has been restructuring its financial services operations by shrinking its consumer unit and focusing on the commercial-finance division. Global revenue outside the
Citigroup (Aa3/AA-) (4/9): Citigroup is planning a sale of a portion of its leverage loan portfolio to a group of investors for $12 billion. Reports indicate the loans will be sold at 90 cents on the dollar, and if successful may help stabilize the leverage loan market. Citi continues to raise capital by divesting “peripheral” businesses, but a major restructuring plan has yet to be outlined.
FHLB (Aaa/AAA) (4/8): The Federal Home Loan Banks of Chicago and Dallas called off merger talks that began last August on concerns the Chicago bank held large positions in hard to value mortgage securities. The
NOVN VX (Aaa/AA-), NESN VX (Aa1/AA) (4/7): Novartis said it will buy, in a two-part transaction, the 77% stake in eye-care company Alcon Inc owned by Nestle. The initial stake of 25% will be purchased in the second half of 2008 for about $11 billion, and the remaining 52%, about $28 billion, will be purchased between 2010 and 2011. Novartis is seeking diversification from its pharmaceutical unit, while Nestle will use the proceeds to reduce debt and pursue other acquisition opportunities. Novartis was downgraded by S&P on concerns that the transaction will be primarily debt financed, while Nestle’s outlook was revised to stable from negative.
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UBS (Aaa/AA-) (4/4): A former President of UBS, Luqman Arnold, is pushing for a break-up of the Swiss bank by separating the investment bank from the private-client bank and divesting its asset-management business. Shareholders have been putting pressure on the firm to sell its investment banking arm as writedowns accumulated to $37 billion.
(4/1): UBS announced that it will take a quarterly loss of CHF12 billion and a $19 billion write-down on mortgage related assets. The bank had reduced its subprime exposure to $15 billion from about $27 billion and its Alt-A exposure to $16 billion from about $26 billion. It will create a separate unit to manage these illiquid securities. UBS will raise new capital of CHF15 billion through a rights offering and had previous capital injections of over CHF19 billion from foreign investors and other measures. Also, the Chairman Marcel Ospel will not seek reelection and will be replaced by UBS’s general counsel Peter Kurer.
NCC (A3/A) (4/4): Speculation that both Ohio-based KeyCorp and Fifth Third Bancorp are interested in acquiring National City Corp highlights the pressure on regional banks during this market crisis.
DB (Aa1/AA) (4/1): Deutsche Bank announced that it will take a €2.5 billion write-down related to leverage finance, commercial real estate, and residential mortgage backed securities. Last week, it had warned that it may miss 2008 profit targets as credit market turmoil hit the German bank. In February, the bank published preliminary 2007 earnings that included an estimated €2.2 billion in write-downs. In 2007, it had an estimated exposure to risky assets of €58 billion.
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FMT (3/28): Fremont General Corp, a subprime lender before the housing market crisis began, was issued a directive by the FDIC to seek new capital within 2 months or sell its banking subsidiary. In addition, a number of restrictions were issued to prevent the company to raise capital through new deposits. Originally a top 10 issuer of subprime loans, it stopped making these loans in March 2007.
FHLB (Aaa/AAA) (3/24): The Federal Housing Finance Board, which regulates the Federal Home Loan Bank System, approved a proposal to allow the banks to purchase an additional $150 billion in mortgage backed securities. The banks currently can hold up to three times their capital, and will be increased to six times. The MBS purchases will be limited to securities issued by Fannie and Freddie.
JPM (Aa2/AA-), BSC (Baa1/AA-) (3/24): J.P. Morgan increased its offer to purchase Bear Stearns to an estimated $10 per share. The new deal will give JPM a 39.5% ownership of Bear Stearns in a new equity offering. In addition, JPM revised the terms with the Fed to shoulder the first $1 billion loss of the $30 billion in financing.
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CIT (A3/A-) (3/20): CIT Group announced that it will draw down its unsecured credit facility of $7.3 billion to repay short-term debt as the commercial paper market was closed to them. The company will seek new sources of funding and explore sales of non-core assets to increase capital.
CS (Aa1/AA-) (3/20): Credit Suisse announced that it will restate earnings for fourth-quarter 2007, and likely take a loss for first-quarter 2008. The total loss of CHF2.9 billion was a combination of incorrect valuation of CDOs, fraudulent valuation by traders, and market price declines.
MS (Aa3/AA-) (3/19): Morgan Stanley released earnings of $1.6 billion compared to a loss of $3.6 billion in Q407, topping analyst expectations. The company had net writedowns of $2.9 billion and exposures to risky assets of $56 billion. Liquidity remains strong ending the quarter with $124 billion compared to $123 billion in Q407.
FNM (Aaa/AAA), FRE (Aaa/AAA) (3/18): The Office of Federal Housing Enterprise Oversight has reduced the surplus capital requirement for Fannie Mae and Freddie Mac to 20% from 30%. The move would reduce the capital requirement at Freddic Mac by about $2.6 billion and Fannie Mae by $3.2 billion. This would provide up to $200 billion in liquidity to the mortgage market. Also, the GSEs plan to raise additional capital in the form of preferred securities.
JPM (Aa2/AA-), BSC (Baa1/AA-) (3/17): J.P. Morgan scooped up Bear Stearns in a stock offer of $2 a share, or about $278 million, as Bear Stearns saw its liquidity taken away. The Federal Reserve helped broker the transaction, stepping in to provide $30 billion in financing for Bear’s less-liquid assets. Bear’s turmoil accelerated as their counterparties stopped lending with the firm and demanded their cash returned, essentially causing a “run on the bank” scenario for the broker.
Federal Reserve (3/17): The Federal Reserve announced two new initiatives intended to improve liquidity in the market. The Fed created a new lending facility, the Primary Dealer Credit Facility, to allow primary dealers to post collateral in exchange for funding at the Discount Rate for up to 120 days. At the same time, the Fed reduced the Discount Rate to 3.25% from 3.50%, and increased the maximum maturity for loans to depository institutions to 90 days from 30 days.
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BSC (Baa1/BBB) (3/14): The Federal Reserve Bank of
CCC (3/13): Carlyle Capital Corp. had its collateral seized by lenders as the hedge fund failed to meet margin calls. It defaulted on $16.6 billion of debt after its lenders failed to reach refinancing agreements. CCC had an IPO in July 2007 through which it raised over $300 million to exploit the difference between interest earned on its investments in mortgage securities and the cost of financing. The fund borrowed $32 for every dollar of equity and set up repo agreements with 12 banks including BofA, BNP, DB, JPM, LEH, MER, UBS, among others. The banks had lent the fund about $21 billion, and recently sold $5.7 billion of the funds’ collateral.
S&P (3/13): S&P revised its forecast for bank write-downs of subprime mortgage securities to $285 billion from $265 billion. Financial institutions have already disclosed over $150 billion, and thus, more than halfway through the write-downs, according to S&P. However, ABX indexes have dropped substantially, margin calls are beginning to force liquidations, and disclosures are uneven, all of which contribute to more write-downs in the coming months.
President’s Working Group (3/13): The Working Group on Financial Markets released its recommendations on improving credit rules to avoid a recurrence of the mortgage crisis in the future. The group was formed during the Reagan administration in response to the market crash of 1987 and is headed by Treasury Secretary Henry Paulson. The group proposed strengthening state and federal oversight of mortgage lenders and brokers, implement licensing standard for mortgage brokers, and rating firms to disclose conflict of interests and differentiate ratings between structured and conventional bonds.
ABK (Aaa/AAA) (3/12): Rating agencies concluded their reviews of Ambac after it completed the $1.5 billion capital initiative. Moody’s and S&P affirmed the Aaa/AAA ratings, while Fitch affirmed its AA rating. The outlook at all rating agencies was changed to negative. Moody’s noted that the ratings outlook could turn stable within the next six to twelve months if capital could be strengthened to above the target AAA level.
Federal Reserve (3/11): The Federal Reserve said that it will create a new securities lending program named the Term Securities Lending Facility that will accept Federal agency debt, agency RMBS, and non-agency AAA-rate private label RMBS. Primary dealers will be able to borrow up to $200 billion worth of Treasury bills for 28 days. Unlike the TAF auction where only banks were able to access the liquidity, the new program is an open market operation allowing dealers to participate. Also, the Fed tripled the size of its “swap” agreements with the European Central Bank, to $30 billion from $10 billion, and the Swiss National Bank, to $6 billion from $2 billion, allowing more flexibility to borrow dollars.
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FDIC (3/7): FDIC Chairman Sheila Bair hopes to issue a new proposal that will ease the way banks issue covered-bonds. Covered-bonds are bank-issued obligations that are backed by mortgages held on the bank’s balance sheet. Under the proposal, if the bank fails, investors could be assured that the FDIC would be quick to pay off the bonds. Currently, if a bank fails, FDIC has 90 days to decide whether to pay off a covered bond; but according to Bair, paying off the bonds would be cheaper than letting the bondholders seize the collateral. She says, this “creates another mechanism for funding mortgages,” and some regulators think that covered bonds are more conservative since banks hold the mortgages on their balance sheet.
Federal Reserve (3/7): In an attempt to ease liquidity pressures in short-term funding markets, the Fed has raised the outstanding amounts in the Term Auction Facility to $100 billion. The TAF auctions on March 10 and 14 will be increased to $50 billion from $30 billion.
LEH (A1/A+) (3/7): Lehman has suspended two traders in its
FNMA (Aaa/AAA), FHLMC (Aaa/AAA) (3/6): The limits on mortgage loans will be raised to a maximum of $729,750 and will mostly affect counties in
ABK (3/5): Ambac Financial Group plans to sell $1.5 billion in common stock and equity units to bolster its capital. Moody’s and S&P released statements indicating that they may affirm the AAA rating if the sale is successful, and place a negative outlook on the company. Also, Ambac will discontinue certain structured finance operations and suspend all structured finance business for six months in order to accumulate capital.
ACA FP (3/5): Credit Agricole released 4Q results of €857 million ($1.3 billion) loss including write-downs of €3.3 billion at its investment bank Calyon. Also, the bank had write-downs of €700 million to cover its exposure to bond insurers.
C (Aa3/AA-) (3/6): Citigroup announced its plan to reduce mortgage assets by $45 billion over the next 12 months, which represents a roughly 20% drop from their YE 2007 levels, and expects to reduce expenses by $200 million. Furthermore, it plans a 50% reduction in the amount of new loans held on balance sheet, increase GSE eligible production to 90% from 65%, combine all
(3/5): Citigroup is looking to divest “peripheral” businesses in the hopes of replenishing its capital base. In a memo sent to employees, CEO Vikram Pandit identified “core” businesses that included wealth management, US retail banking, credit cards, transaction processing and investment banking. In a separate report, Citigroup has decided to pare back its
(3/3): Citigroup is reorganizing its
BAC (Aa1/AA) (3/3): Financial firms will likely see their losses reach at least $600 billion as the crisis triggered by the collapse of subprime mortgages batters banks, brokers and insurers, UBS AG analysts said.
HSBC (Aa3/AA-) (3/3): HSBC annual profits increased 10% to $24.2 billion despite a higher-than-expected $17.2 billion loss on investments tied to the credit squeeze. Faced with pressure from activist investors, the
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AIG (Aa2/AA) (2/29): American International Group posted a $5.3 billion fourth-quarter net loss as the result of an $11.1 billion pretax valuation loss in its portfolio of credit default swaps (CDS) guaranteeing collateralized debt obligations. In addition to the CDS write-down, the firm recorded a $2.63 billion capital loss related to its general investment portfolio, as well as a $643 million charge related to investments held by its financial products unit. The results came on the heels of the company’s announcement earlier in the month that its auditor had found “material weakness” in its accounting systems, and that it would have to write down the value of the CDS portfolio by $4.88 billion for October and November alone. That indicates that the value of the portfolio declined by an additional $6.24 billion in December. AIG said the losses “will not be material” to the company’s financial condition. Joe Cassano, chief executive of the Financial Product (AIGFP) unit, would retire in March. Separately, AIG disclosed $42.2 billion exposure to monoline insurers, 84% of which has underlying rating of A or better and 96% to MBIA, FSA, Ambac, and FGIC.
AXP (A1/A+) (2/29): American Express Company completed the sale of its international banking subsidiary, American Express Bank Ltd. (AEB), to Standard Chartered PLC. Standard Chartered will pay American Express a purchase price of approximately $823 million.
WFC (Aa1/AA+) (2/29): Wells Fargo & Co. said it took a $39 million loss in 2007 on debt in structured investment vehicles. The loss came as part of a $130 million capital support agreement Wells entered as a way to safeguard triple-A credit rating for many of its investment funds. The nation's fifth-largest bank added it held three separate SIVs worth more than $1 billion as of Feb. 1.
Write-downs by Financial Firms (2/29): In a research note, the global banking unit of UBS said banks and brokers stand to lose $350 billion and total losses sustained by all financial firms may reach $600 billion. Financial institutions have so far disclosed more than $181 billion of write-downs and credit losses. ``Leveraged risk positions are a cancer in this market and the sooner it is treated the better,'' the research report said. A report presented to a conference attended by Federal Reserve officials had a different estimate of total losses by banks. Morgan Stanley economist David Greenlaw and Goldman Sachs Group Inc. chief
FHLMC (Aaa/AAA) (2/28): Freddie Mac reported a loss of $2.45 billion for the fourth quarter amid a continuing surge in home-mortgage defaults. The full-year net loss was $3.1 billion. The fourth-quarter loss was the result of marked-to-market losses of $0.8 billion on the company’s credit guarantee assets and approximately $2.3 billion in its derivatives portfolio, both due to the impact of declining long-term interest rates. Credit-related expenses totaled $912 million for the fourth quarter, down from $1.4 billion in the third quarter. Realized credit losses were an annualized 5.4 basis points. As a result of the continuing deterioration in the
RBS (Aaa/AA) (2/28): Royal Bank of Scotland Group Plc, the
FNMA (Aaa/AAA), FHLMC (Aaa/AAA) (2/27): The Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae and Freddie Mac, announced it plans to remove the portfolio growth caps for both companies on March 1. The announcement came just hours after Fannie Mae was able to successfully file its 2007 financial statements on time. The ability of Fannie and Freddie to expand their mortgage portfolios is still constrained by a capital surcharge imposed by OFHEO. OFHEO Director James Lockhart said in the statement that any easing will depend on Fannie Mae and Freddie Mac's financial condition and the current market environment.
Separately, Fannie Mae swung to a fourth-quarter loss of $3.56 billion, compared with year-earlier net income of $604 million. Analysts surveyed by Thomson Financial were expecting a loss of $1.33 billion. Much of the loss was driven by $3.22 billion in losses on interest-rate swaps, a hedging strategy that suffered losses as interest rates fell. The firm thinks
MBI (Aaa/AAA) (2/26): Moody’s followed S&P in removing MBIA’s Aaa insurance strength ratings from review for downgrade. The outlook remains negative at both rating agencies. The affirmation of MBIA’s Aaa/AAA came after the largest monoline bond guarantor raised $2.6 billion to shore up its capital against CDO write-downs. Moody's estimated that MBIA's stress-case losses, based on its assumptions about defaults, would be about $13.7 billion versus $16.1 billion available capital, a figure enough to satisfy Moody's minimum capital requirements for its triple-A rating, but falls short of its "target" level, Moody's said. The firm will reassess the rating in the next six to 12 months. MBIA Chief Executive Jay Brown said the company completed its "significant dilutive capital" raising, eliminated its quarterly dividend, has temporarily halted the writing of new structured finance business, and will no longer insure new derivative credit contracts.
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NTRS (A1/AA-) (2/22): Northern Trust Corp said it would offer up to $229 million of support for eight separate money funds that previously purchased securities issued by structured investment vehicle Whistlejacket Capital LLC and its subsidiary, White Pine Finance LLC. The support would be used when the net asset value of any of the funds falls below previously specified levels due to the sale of investments issued by Whistlejacket and/or its subsidiary to maintain the NAV of the fund. In announcing the support agreements, NTRS said “although it was not obligated to do so, the Corporation entered the Capital Support Agreements in order to provide stability to the Funds and investors in the Funds.”
Credit Card ABS (2/22): Moody’s said that the charge-off and delinquency rates on
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C (Aa3/AA-) (2/19): Citigroup is selling or closing some of its retail branches and consumer finance operations in Europe, Asia, and Latin America to divert more resources to higher growth areas. The move includes selling its Japanese Consumer Finance business, where management had previously cut the number of branches to 51 from 324 in 2006. Other considerations include shutting part of its Mexican consumer finance and selling 50 UK-based consumer finance branches.
CS (Aa1/AA-) (2/19): Credit Suisse Group, Switzerland’s second-biggest bank, said first-quarter earnings will be reduced by $1 billion from pricing errors which led to the reduction in the value of some asset backed securities by $2.85 billion. The news came just a week after the firm reported fourth-quarter results largely free of any impact from subprime-credit exposure. A bank spokesman said a small number of traders were investigated for overvaluing these securities on its balance sheet. S&P placed its AA- rating on watch for downgrade, while Moody’s affirmed its stable ratings outlook.
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MS (Aa3/AA-) (2/13): Morgan Stanley will cut its
BRK (Aaa/AAA) (2/12): Warren Buffett said he offered to reinsure $800 billion of municipal liabilities of MBIA, Ambac Financial, and FGIC Corp. In return, he is asking for 1.5 times the premium the insurers are receiving. His firm, Berkshire Hathaway, would put up $5 billion in capital as part of the plan, he said. One company turned down the offer and the other two did not respond to his offer.
BAC (Aa1/AA) (2/12): Bank of America and four other
C (Aa3/AA-) (2/12): Citigroup Inc. plans to provide a $3.3 billion facility to support six of the seven structured investment vehicles it took onto its balance sheet last year to shore up their debt ratings and protect creditors. The facility, if tapped, would provide additional capital should the market value of junior notes in the SIVs approach zero, a Citigroup spokesman said in a statement. The firm brought $49 billion of SIVs onto its balance sheet, after a lack of investor demand derailed an attempt to create a “super-SIV” to help sell those securities.
UBS (Aaa/AA) (2/12): UBS named Jerker M. Johansson, a seasoned Morgan Stanley banker, to head its investment banking unit as chairman and chief executive. The unit is responsible for an estimated $18 billion in write-downs on mortgage securities and other investments. In accepting the job, Johansson took on the challenges of restoring clients' confidence and stemming defections of talented employees. He must also sort out a crippled debt-securities business and find a way to revive a unit that is currently subtracting from UBS's market value.
AIG (Aa2/AA) (2/11): American International Group said that the value of some of its debt portfolio had plunged by $5.96 billion, not $1.6 billion as AIG reported earlier. The firm said it will change how it determines fair value of the super-senior credit default swaps portfolio it underwrote for the collateralized debt obligations (CDOs) of its subsidiaries. The change in its valuation methodology, announced in a regulatory filing, was prompted by AIG’s independent auditor, PricewaterhouseCoopers. That firm found AIG to have “material weakness in its internal control over financial reporting and oversight related to the fair valuation of the AIGFP super senior credit default swap portfolio,” according to the filing. The company calculated it had a valuation loss of $352 million in September. That loss increased to $899 million in October and up to $1.6 billion in December.
“As a result of current difficult market conditions, AIG isn’t able to reliably quantify the differential between spreads implied from cash CDO prices and credit spreads implied from the pricing of credit default swaps on the CDOs, and therefore AIG will not include any adjustment to reflect the spread differential (negative basis adjustment) in determining the fair value of AIGFP’s super-senior credit default swap portfolio at December 31, 2007,” the company said in the filing. Both Moody’s and S&P placed AIG’s senior debt ratings on negative outlook.
SocGen (Aa2/AA-) (2/11): Societe Generale launched a heavily discounted €5.5 billion rights issue to shore up its finances in the wake of a large trading loss and said it expects to post a net profit of €947 million for 2007. The Paris-based bank also announced a €325 million write-down related to its residential mortgage-backed securities trading portfolio.
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DB (Aa1/AA) (2/7): After having written down close to €2.2 billion ($3.2 billion) in the third quarter on structured credit products and leveraged loans, Deutsche Bank took a €44 million charge on its leveraged-loan book in the fourth quarter, and saw no losses on structured credit products. The bank’s early decision to reduce its exposure to the U.S. mortgage market last year and to hedge other risky assets paid off, making it one of the few European banks to survive the fourth-quarter without significant subprime-related write-downs. Its fourth-quarter net profit fell 48% to €953 million, hurt by lower investment-bank earnings. Net interest income rose 67% to €2.69 billion. CEO Josef said the bank wouldn't be interested in buying Société Générale SA.
STI (Aa3/A+) (2/1): Moody’s changed SunTrust Banks’ rating outlook to negative from stable. According to Moody's, STI incurred considerable charges during the fourth quarter 2007, such that the company was barely profitable. The risks addressed in the quarter included marks on securities in support of its funds management business and asset backed commercial paper conduit, as well as a hefty increase in loan loss provisions. "SunTrust's ratings could be downgraded should the company fail to raise sufficient capital to absorb potential losses or should STI's profitability remain sub par," Moody’s said.
MER (A1/A+) (1/30): Merrill Lynch plans to exit the business of underwriting collateralized debt obligations and other structured credit products as the securities led to a record loss, CEO John Thain said at an investor conference. Later in the day, Merrill issued a statement which said “opportunities in many areas will be minimal for the foreseeable future and our activities will be reduced accordingly.” The firm will continue packaging corporate loans and derivatives into securities.
MRK (Aa3/AA-) (1/30): Merck & Co. posted a $1.63 billion fourth-quarter loss, or 75 cents a share, compared with net income of $473.9 million, or 22 cents a share, a year earlier. The loss largely reflected the $4.85 billion, or $1.55 a share, pretax settlement charge for Vioxx liability cases. CEO Richard Clark sought to reassure shareholders about the cholesterol treatments, Vytorin and Zetia, in light of study results that cast doubt on whether Vytorin is better than a cheaper generic medicine at slowing cardiovascular disease. While impact of the findings is not clear, their release caused concerns because the trial was completed in April 2006, but results were not disclosed until January of this year. During that time, combined annual sales of Vytorin and Zetia grew to more than $5 billion. Clark said that the company remained confident to meet the 2010 financial targets it set in late 2005. Compared with the same quarter a year earlier, revenue climbed 3% to $6.24 billion.
UBS (Aaa/AA) (1/30): UBS AG posted the biggest loss ever by a bank after raising fourth-quarter subprime write-downs to $14 billion. Europe’s largest bank by assets said it had a net loss of 12.5 billion Swiss francs ($11.4 billion) for the quarter, almost double the median analyst estimates. The annual shortfall was about 4.4 billion francs, the first since the firm was created through a merger a decade ago. The losses already cost the jobs of CEO Peter Wuffli, his finance chief Clive Standish, investment-banking head Huw Jenkins and other managers at the securities unit. New CEO Marcel Rohner said the record losses were a result of positions created “by a small group of people in one team.” Both Moody’s and S&P lowered the ratings outlook for UBS to negative from stable, saying it may be harder to generate revenue as the bank reorganizes the investment bank.
S&P Comments on Impact of RMBS/CDO Downgrades on Banks (1/30): After taking rating actions on 6,389 U.S. subprime RMBS ratings and 1,953 CDO ratings, S&P said that total losses for financial institutions will eventually reach more than $265 billion. The downgrades would not likely add significantly to the more than $90 billion of losses already reported by “many of the largest global financial institutions,” it said. The rating agency, however, expected “losses moving to regional banks, credit unions, and FHLBs.” The downgrades covered 45.9% of the par amount of U.S. RMBS backed by first-lien subprime mortgages loans rated by S&P during 2006 and first half of 2007.
Unnamed financial Firms (1/29): Federal investigators opened criminal inquiries into 14 companies as part of a wide-ranging investigation of the subprime mortgage crisis, focusing on accounting fraud, securitization of loans and insider trading. The FBI wouldn't identify the companies under investigation but said that generally the bureau is looking into allegations of fraud in various stages of mortgage securitization, from those who bundled the loans, to the banks that ended up holding them. Neil Power, chief of the FBI's economic crimes unit in Washington, said the bureau was also going over the books of financial firms that have been forced into bankruptcy as a result of the mortgage crisis, to look for instances of insider trading or other wrongdoing.
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SocGen (Aa2/AA) (1/24): Soceite Generale, France’s second-largest bank, revealed a €4.9 billion ($7.2 billion) fraud tied to a single employee who had concealed huge losses through a scheme of “elaborate fictitious transactions.” The bank was also taking a roughly $3 billion write-down in assets related to subprime exposure, $1.2 billion of which were related to bond insurers. The bank said it discovered the “massive fraudulent directional positions” on January 19, but waited until it could unwind those trades before going public with the problem. Jerome Kerviel, an employee working on the futures desk at the bank’s headquarters near Paris was in charge of hedging on “plan vanilla” futures on European equity market indexes, and was able to use his knowledge in bank’s security setup to hide the fraudulent positions, the bank said. SocGen plans to raise €5.5 billion ($8.1 billion) in a rights offering. Moody’s downgraded SocGen’s senior rating to Aa2 from Aa1 on the write-down news. S&P placed its AA rating on CreditWatch negative.
AIG (Aa2/AA) (1/23): AIG decided to bail out Nightingale, a structured investment vehicle, by assuming all of its outstanding debt. The entity was established in May 2007 under Banque AIG, an overseas unit of AIG with approximately $2.2 billion debt. In Aug 2007, Nightingale told investors that they had no direct exposure to subprime in the U.S. but had a "very small" super senior exposure through three multi sector CDOs. Both Moody’s and S&P affirmed AIG’s credit ratings.
STI (Aa3/A+) (1/23): SunTrust Banks reported a pre-tax loss of $69 million for the fourth quarter. Net income fell 23% from the year-ago quarter to $11.1 million, or a cent a share, below Street estimates of $0.31. The firm purchased $718 million in ABS from an ABCP program called Three Pillars. The assets were written down by $145 million. It also purchased $1.4 billion of SIV assets from two money market funds, and took a $250 million write-down. Other write-downs include a $555 million charge for securities and loans, and $116mm to close a private placement fund. Within the bank’s $15 billion home equity portfolio, net charge-offs in third-party originated lines (12% of total portfolio) were 3.85% compared to 1.23% for the entire home equity segment. The bank’s Tier One capital ratio fell to 7% compared to its target of 7.5%, and management is in the process of reviewing 'certain transactions' with its Coca-Cola stake to boost capital.
BAC (Aa1/AA) (1/22): Bank of America’s fourth-quarter net income fell 95% as the company recoded a higher-than expected $5.28 billion in CDO write-downs. Its write-down estimate in November for the quarter was $3 billion. In addition, the company recorded $400 million losses to support certain cash funds and recorded subsequent write-downs of $400 million on securities purchased from the funds at fair value. The net income of $268 million, or 5 cents a share, compared with $5.26 billion, or $1.16 a share a year earlier. Net revenue dropped 31% to $12.67 billion. Its provision for credit losses doubled to $3.31 billion. The percentage of net charge-offs rose to 0.91% of loans from 0.82%. Non-performing assets rose to 0.68% from 0.26%. Its investment-banking arm recorded a loss of $2.76 billion on negative revenue of $781 million. On the earnings call, CEO Ken Lewis said the current environment is “the toughest” he had seen since becoming head of the biggest U.S. bank, but did not expect the economy to slip into a recession. Moody’s said the issuer’s Aa1 rating remains under review for downgrade, a designation assigned after BofA’s Countrywide Financial acquisition. The rating agency will now consider the ongoing earnings performance as a key element in addition to the impact of the acquisition. The lead bank's Aaa deposit rating and all Prime-1 short-term ratings are not under review.
1/25: As part of a plan to shore up its capital ratios after recording $5.28 billion CDO write-downs, Bank of America priced $12 billion of preferred securities. The two-part deal, a $6 billion convertible preferred stock and $6 billion of straight preferred stock, was increased from $6 billion after being heavily oversubscribed in public offerings. The offerings will raise the bank’s pro forma Tier One capital ratio to 8%, according to the bank.
C (Aa3/AA-) (1/22): Citigroup managed to raise its capital ratios to levels comparable to those of the stronger US banks. Its depleted capital base even before it wrote down large sums of CDO-related charges was the sharp focus of investor criticism. In a press release, the firm said that, after recent capital raising activities totaling almost $30 billion, its pro forma Tier One capital ratio for the fourth quarter 2007 was now 8.8%. The more relevant and important tangible common equity to risk-weighted managed assets (TCE/RWMA) capital ratio was raised to 6.9%. “These levels meaningfully exceed our capital ratio targets,” said CEO Vikram Pandit. Among the $30 billion capital infusion were: a). $12.5 billion private placement of Convertible Preferred securities with a 7% non-cumulative dividend, b). $2.9 billion public offering of Convertible Preferred securities with 6.5% non-cumulative dividend, c). $3.25 billion public offering of Straight Preferred securities with non-cumulative dividend of 8.125%, d). $7.5 billion of Upper DECS Equity units, in a private placement to the Abu Dhabi Investment Authority, and e). $3.5 billion public offering of enhanced E TRUPS bearing an 8.30% coupon.
NCC (A2/A) (1/22): National City Corp swung to a fourth-quarter net loss of $333 million, or 53 cents a share, compared to year-earlier net income of $842 million, or $1.36 a share. The latest results included $181 million in mortgage-related charges and a loan-loss provision of $691 million, resulting from higher credit losses on liquidating portfolios of nonconforming mortgage and out-of-footprint home equity loans, as well as other mortgage loans. Revenue dropped 40% to $1.7 billion, and mortgage businesses lost $445 million. In addition to the announced 49% dividend cut, the firm will issue new capital securities in the first quarter 2008.
WB (Aa3/AA-) (1/22): Wachovia’s fourth-quarter net income dropped 98% to $51 million, or three cents a share, from $2.3 billion a year earlier, as the company’s deteriorating lending portfolio forced it to dramatically increase its loan-loss provision to $1.5 billion from $206 million. Revenue at the fourth-largest U.S. bank by assets fell 17% to $7.2 billion amid $1.7 billion in mortgage-related losses. Net charge-offs were 0.41% of average loans, compared to 0.14%. Commercial loans 90 days past due grew to 0.89% of loans from 0.23%, while consumer loans 90 days past due rose 1.39% from 0.59%. Non-performing assets grew to 1.08% of loans from 0.32%. Moody's affirmed Wachovia's Aa3 ratings while changed its outlook to negative. The rating agency attributed the rating affirmation to Wachovia's strong financial flexibility. Moody's further noted the challenges faced by Wachovia: 1) The deterioration in the California real estate market that may require further provision needs its option-ARM portfolio, 2) Wachovia's I-banking concentration in structured products, and 3) Wachovia's high dividend policy.
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ABK (Aaa/AAA) MBI (Aaa/AAA) (1/18): Ambac became the first AAA-rated monoline bond insurer to lose the AAA insurance rating today. The downgrade came from Fitch Ratings. Moody’s placed Ambac’s and MBIA’s AAA insurance strength ratings on review for downgrade yesterday. S&P followed with a similar move today in assigning CreditWatch Negative to their AAA financial strength ratings. We think the actual downgrades will likely occur within a month, possibly sooner. ACA, which is already rated CCC by S&P, will likely be declared insolvent by the Maryland Insurance department. It has a midnight deadline tonight to post $1.6 billion in collateral on $60 billion of credit default swaps (CDS). Most of the CDS are believed to be hedges against CDO losses by major Wall Street firms, which will need to again write the amounts down. The firms that were mentioned to have ACA exposure are: UBS, Citigroup, Merrill Lynch ($1 billion each). CIBC took a $2 billion yesterday in charges related to $3.5 billion (ouch!) of securities hedged by ACA.
Both MBIA and Ambac, the numbers one and two largest monoline bond insurers, have been scrambling to come up with new capital to make up for shortfalls after massive CDO-related write-downs. These latest rating actions came after mortgage credit weakened further to surpass rating agencies’ previous estimates of capital needed for the insurers to maintain their AAA ratings. Together, the two firms guarantee over $100 billion in CDOs and $2.4 trillion in municipal and asset-backed securities. The loss of AAA ratings may seriously weaken the monoline bond guaranty model, shake public confidence in debt securities, and raise new doubt in the credit, counterparty, and liquidity exposure of major financial institutions.
BK (Aa2/A+) (1/17): Bank of New York Mellon reported net income of $520 million, or 45 cents, down from $1.63 billion, or $2.27 a share a year earlier. The latest quarter's results included a $180 million charge from restructuring Three Rivers Funding Corp, a Mellon-sponsored ABCP program. Year-ago results included $1.68 a share as the result of an asset swap with JPMorgan Chase. The bank said the consolidation of the ABCP conduit "was based on the ongoing disruption in the capital markets impacting the funding costs of conduits." It also took a $118 million loss to write down the value of CDOs.
MER (A1/A+) (1/17): Merrill Lynch matched Citigroup’s massive fourth-quarter net loss of $9.83 billion, or $12.01 a share, after taking $14.6 billion of write-downs related to subprime mortgages and CDOs. The firm recorded $7.9 billion in mortgage-related write-downs in the third quarter. The firm’s fourth-quarter net revenue was negative $8.19 billion. New CEO John Thain noted that its fixed income, currencies and commodities business became more challenging, particularly in November and December that resulted in substantially lower client flows and decreased trading opportunities. Net U.S. CDO exposure was $4.8 billion at year-end, compared with $15.8 billion three months earlier. For the same period, exposure to subprime-residential mortgages fell to $2.71 billion from $5.66 billion.
Two days earlier, Merrill announced to issue mandatory convertible preferred stock worth $6.6 billion to a group that includes Korea Investment Corp, Kuwait Investment Authority, both government-controlled investment funds, and Japanese bank Mizuho Financial Group. The stock will pay a 9% dividend. The new round of capital infusion came less than a month after the firm issued $6.2 billion in common equity, bringing the total to $12.8 billion.
JPM (Aa2/AA-) (1/16): JPMorgan Chase reported net income of $2.97 billion, or 86 cents a share, in the fourth quarter compared to $3.37 billion in the previous quarter. The result fell short of Street analyst consensus of 92 cents a share thanks largely to a sharp increase in loan loss provisions. Net structured finance write-downs totaled $1.3 billion, or 7% of revenue. Remaining exposures include $26.4 billion in leverage lending pipeline, $2.7 billion in subprime mortgages and $5.5 billion of CDOs ($4.8 billion ABS). Results in many segments were strong, but consumer credit losses increased in credit cards, auto, subprime mortgages and home equity portfolios. Compared to its bank peers, JPM’s capital ratios remain strong, with the Tier One ratio at 8.4% and the tangible equity to risk weighted assets ratio at 6.8%. Management was “extremely cautious” about its 2008 outlook, especially in credit card losses (4.5%), home equity charge-offs (1.55% to 1.60%), and subprime losses ($75 million per quarter).
WFC (Aa1/AA+) (1/16): Wells Fargo’s fourth-quarter net income dropped 38% to $1.36 billion, or 41 cents a share, on a $1.4 billion reserve for credit losses. Revenue rose 8% to $10.21 billion, but return on equity fell to 11.25% from 19.02% due to the credit reserve. The $1.4 billion provision, which the company pre-announced in November, will cover expected losses on an $11.9 billion portfolio of home-equity loans the company plans to liquidate. CFO Howard Atkins said 2008 will be “as challenging” as 2007 due to housing weakness and the faltering U.S. economy. In affirming Wells Fargo’s credit ratings, Moody’s acknowledged that “default frequency in this portfolio is likely to rise and severity of loss will be high." "Wells Fargo has the financial flexibility to absorb the relatively high level of charge-offs in its home equity portfolio that Moody's expects to occur over the next six to eight quarters," said the rating agency.
BAC (Aa1/AA) (1/15): Bank of America outlined a streamlined corporate and investment banking unit that would focus on functions most closely aligned with serving large businesses, while scaling back more exotic trading functions. CEO Ken Lewis said the firm is selling its prime brokerage unit, gutting parts of its trading unit and shutting down the unit responsible for CDO products. It plans to keep investment bank