Thursday, January 31, 2008

Financial Turmoil Likely to Continue

Voltron says: I'm trying to short more MBI here, but my broker can't borrow shares. :-(

Thursday January 31, 7:49 pm ET
By Stephen Bernard and Dan Seymour, AP Business Writers

After Subprime Woes, Uncertainty Around Bond Insurers Could Be Next Storm
NEW YORK (AP) -- As bad news about the financial system piles up, trust -- the pillar of investing -- is being buried.

The most recent fears are tied to the potential failure of bond insurers, the companies that back the funding for hospitals, schools and other public works. A meltdown there could deliver another devastating blow to battered banks and force higher taxes on homeowners.

That has made it difficult for the Federal Reserve -- even with its aggressive rate cuts recently -- to restore confidence and quash the volatility and uncertainty.

"The biggest issue is people just don't really know how big this is," Davin Gibbins, chief investment officer at Aris Corp., said of the losses banks could face. "People don't know the size of the problem, and markets hate uncertainty."

"People are afraid to make business decisions," said Donald Light, a senior analyst at Celent.

The risk that bond insurers could lose their top-notch credit ratings comes after world stock and credit markets have already been shaken by billions of dollars in losses tied to subprime mortgages, or loans given to customers with poor credit history.

The Fed has made two rate cuts totaling 1.25 percentage points in the past two weeks in an effort to spur new investments through lower interest rates. But some investors are hesitant to make any investments, regardless of price.

That uncertainty has created wild swings in the market as every bit of information is analyzed.

"One of the greatest crises our economy faces is a lack of confidence in credit evaluation," said Sen. Charles Schumer, D-N.Y. "The fact that this has spread beyond mortgages and infected the bond insurance industry is a huge concern."

Stocks fell sharply in early trading Thursday as investors fretted over a $2.3 billion loss at bond insurer MBIA Inc. and the prospect of new downgrades in the industry. By the end of the day they were higher, taking heart from a pledge from MBIA's chief executive that the company could retain its credit rating and raise fresh capital.

Over the past few months, ratings agencies have downgraded or threatened to cut bond insurers' financial strength ratings, saying the companies -- which make payments on bonds when the issuer is unable to do so -- do not have enough extra cash to cover a potential spike in claims.

A downgrade from the crucial "AAA" rating would likely end the insurer's ability to book new business.

Standard & Poor's placed MBIA on a negative credit watch late Thursday and downgraded Financial Guaranty Insurance Co. Fitch Ratings had previously downgraded other bond insurers -- Ambac Financial Group Inc. and Security Capital Assurance Ltd. -- as well as FGIC.

The downgrades have led to a series of problems for municipalities who rely on the insurance.

If an insurer's rating falls, bonds backed by the insurer fall as well. The lower the rating, the higher the cost.

"Clearly the cost for insurance is going up," said Richard Tortora, president of Capital Markets Advisors, which provides bond advisory services for municipalities in the Northeast.

There was about $2.6 trillion in municipal bonds outstanding as of Sept. 30, the latest figures reported by the Securities Industry and Financial Markets Association. More than half of municipal bonds carry insurance, Tortora said.

Any increased price on that insurance is "passed on to the taxpayer," Tortora said.

Exactly how much larger of a burden taxpayers will shoulder depends on the underlying credit rating of the municipality.

"The prices for lesser-grade borrowers has widened rather significantly," said Tim Long, a managing director and investment banker focused on public finance with Robert W. Baird & Co.

While cheaper bond insurance helps municipalities, rising insurance costs are unlikely to stop them from issuing a bond, Long said. The municipalities also have been helped by the rate cuts, Tortora said.

The Fed moves have helped to offset the higher insurance prices, so municipalities have been able to avoid higher costs from the insurance uncertainties. But if the Fed is unable to keep up, the cost to governments will rise.

The distress gripping bond insurers has caught the attention of lawmakers in Washington, who have been consumed for months in politically charged debate over possible remedies for the mortgage market crisis. A key House Democrat, Rep. Paul Kanjorski of Pennsylvania, is seeking information from regulators and has raised the issue of whether tighter regulation of the bond insurance industry may be needed.

Robert Steel, the Treasury Department's undersecretary for domestic finance, said the potential financial and economic impact of the bond insurance distress "is on our mind."

"The good news is that the state regulators are engaged and seem to be working with ... the different companies," Steel told a Senate hearing Thursday. He said Treasury was monitoring the situation.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said he is monitoring developments and is seeking guidance from Treasury and other regulators as to what actions, if any, Congress should take.

New York Gov. Eliot Spitzer said Thursday that a plan by the state's insurance regulator to bail out struggling bond insurers was making good progress -- though no specifics about the plan have been disclosed.

Financial institutions, which already wrote down about $150 billion of subprime-related exposure last year, could be seeing billions more in losses from bond insurers.

Citigroup Inc., Merrill Lynch & Co., UBS AG and other banks may post another $70 billion in write-downs should bond insurers lose their top credit ratings, according to Oppenheimer & Co. analyst Meredith Whitney.

The three banks -- among those hit hardest from the subprime meltdown -- are the most exposed to troubled U.S. bond insurers. Merrill Lynch has already charged off $2 billion associated with ACA Capital, which S&P lowered to junk status in December.

On top of any new losses tied to bond insurers, further losses from the subprime mortgage fallout are still likely. S&P said Wednesday that it is considering cutting the rating on more than $500 billion in mortgage-backed bonds, which could lead to further losses.

S&P estimates total mortgage-related losses at financial services firms could reach $265 billion.

AP Business Writers Joe Bel Bruno and Jeremy Herron in New York and Marcy Gordon in Washington contributed to this report.

Wednesday, January 23, 2008

Agencies Review Subprime Rating Practices

By Charles Gasparino, On-Air Editor

As the subprime crisis spreads to the bond insurers, the big bond rating agencies are conducting internal reviews of their practices to determine what caused them to miss one of the biggest financial debacles in years, sources tell CNBC.

The findings of the assessment are not complete. But here is a snapshot of why the agencies maintained the AAA rating on collatoral debt obligations (CDOs). In doing so, they failed to recognize the bond insurer's exposure of these risky securities.

It's hard to come up with a percentage, but a picture is emerging of the average subprime borrower as being someone with absolutely no clue about the type of loan they were taking out, when interest payments might kick in, and at what levels. FICO scores, a measure of credit risk, were not predictive. This means that many mortgage lenders must have lied about the ability of borrowers to pay.

Of all subprime loans that go into foreclosure, banks can only recover 30% of the loan. This shows that the appraised values of home purchased with subprime loans was unrealistic.

The rating agencies relied on the inaccurate statistics without questioning the underlying data. In the past the raters would say they were at fault for missing a debacle like Enron because of the alleged fraud of Skilling, Fastow etc. However, agencies now recognize that they should have scrutinized the underlying data of the subprime market more closely, particularly the historical anomaly of a housing boom that lasted so long.

By misreading the CDO market, rating agencies basically ignored the growing exposure to CDOs on behalf of the bond insurers. By their calculations the CDOs were triple-A securities. Raters didn't force MBIA and Ambac to hold increased capital against their CDO holdings even when the housing market started to implode. Missing the CDO meltdown as well as missing the bond insurers exposure to the warped securities was a double whammy for raters

Moody's and S&P are now afraid to downgrade insurers. A downgrade will force Ambac and MBIA -- the two most troubled insurers -- to increase capital requirements to keep their triple A rating. If they are unable to do so, they will lose the rating and will likely go out of business. According to sources, rating agencies would rather wait for a bailout of bond insurers to occur first, and then assess the damage.

Why the market is up

Bush convenes Plunge Protection Team

By Ambrose Evans-Pritchard, International Business Editor, London Telegraph
Last Updated: 1:18am GMT 11/01/2008

Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency.

On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.

It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

The team is led by Treasury chief Hank Paulson, ex-Goldman Sachs, a man with a nose for market psychology, and includes Fed chairman Ben Bernanke and the key exchange regulators.

Judging by a well-briefed report in the Washington Post, a mood of deep alarm has taken hold in the upper echelons of the administration. "What everyone's looking at is what is the fastest way to get money out there," said a Bush aide.

Emergency measures are now clearly on the agenda, apparently consisting of a mix of tax cuts for businesses and bungs for consumers. Fiscal action all too appropriate, regrettably.

We face a version of Keynes's "extreme liquidity preference" in the 1930s - banks are hoarding money, and the main credit arteries of the financial system remain blocked after five months.


"In terms of any stimulus package, we're considering all options," said Mr Bush. This should be interesting to watch. The president is not one for half measures. He has already shown in Iraq and on biofuels that he will pursue policies a l'outrance once he gets the bit between his teeth.

The only question is what the president can manage to push through a Democrat Congress.

The Plunge Protection Team - long kept secret - was last mobilised to calm the markets after 9/11. It then went into hibernation during the long boom.

Mr Paulson reactivated it last year, asking the staff to examine "systemic risk posed by hedge funds and derivatives, and the government's ability to respond to a financial crisis", he said.

It seems he failed to spot the immediate threat from mortgage securities and the implosion of the commercial paper market. But never mind.

Markets Gone Wild

Voltron says: Market down 300 then up 300. Crazy. Good chance to short MBIA. I have not mentioned it much on this blog. They insure mortgage backed securities against losses. If they lose their triple-A credit rating, they will go out of business. They've been told by Moody's and others that they need to raise two billion dollars to keep their credit rating. They had to pay 14% interest in order to raise new capital! Triple-A rated companies usually pay around 5-6%

Tuesday, January 22, 2008

Feds cut interst rates 3/4%

Voltron says: it smacks of desperation.

Monday, January 21, 2008

Global Stock Markets Down around 5%

US stock markets closed for MLK.

Sadly, it's starting . . .

Mortgage Company Exec Jumps to Death

MARLTON, N.J. (AP) — An executive of a collapsed subprime mortgage lender jumped to his death from a bridge Friday, shortly after his wife's body was found inside their New Jersey home, authorities said.

The deaths of Walter Buczynski, 59, and his wife, Marci, 37 — the parents of two boys — were being investigated as a murder-suicide, according to the Burlington County Prosecutor's Office.

Prosecutor Robert Bernardi said Evesham Township police went to the couple's home in the Marlton section of the township around noon after a male caller asked them to check on Marci Buczynski. Her body was found in a bedroom.

Authorities would not provide further details on her death, saying only that she was pronounced dead at the scene and that the county medical examiner's office would perform an autopsy Saturday.

About 20 minutes after her body was found, officers from the Delaware River and Bay Authority Police Department received reports that a man — later identified as Walter Buczynski — had parked his car on Delaware Memorial Bridge and jumped from the span.

Crews were searching for his body Friday night.

Bernardi said a motive for the apparent murder-suicide was not immediately clear. The couple's children were being cared for by family members, Bernardi said.

Walter Buczynski was a vice president of Columbia, Md.-based Fieldstone Mortgage Co., a high-flying subprime mortgage lender that made $5.5 billion in mortgage loans and employed about 1,000 people as late as 2006.

However, it has since filed for bankruptcy and now has fewer than 20 employees. The company had recently filed court papers seeking approval to pay about $1.1 million in bonuses that would be divided among Buczynski and other staffers so the company could wind down its lending operations and go out of business.

Friday, January 11, 2008

Sold my CFC options

Voltron says: It's below $7 which was my target. The option prices now do not provide a good risk/reward for the Bank of America merger falling apart. If that changes, I'll get back in.

Thursday, January 10, 2008

NY Times: CFC buyout price about $7

Stock price will probably settle around $7 if this rumor is true.

January Options

January options expire on the 18th, so be sure you sell the options or give exercise instructions to your broker.

CFC buyout drama begins

We saw the same drama with Accredited Home Lenders. Once the stock hits the low single digits, desperate institutional investors create buyout rumors to pump and dump the stock. I covered half of my position at $7 / share. I'll look to cover the rest if the buyout rumor falls apart. Be prepared to sell shorter dated options and buy longer dated options. This type of drama can take months to play out.


Unusual trades in Countrywide calls raise eyebrows

Thu Jan 10, 2008 9:11pm EST

By Doris Frankel

CHICAGO (Reuters) - Unusual call trading in Countrywide Financial Corp (CFC.N: Quote, Profile, Research) on Thursday before news that Bank of America Corp (BAC.N: Quote, Profile, Research) was in talks to buy it has some option players asking if word of a pending deal had leaked to the market.

About 304,000 calls compared with 248,000 puts traded in Countrywide, a combined volume five times its normal level, according to market research firm Trade Alert.

"It looks like somebody was informed because the call volume in Countrywide was so heavy earlier in the day ahead of news that Bank of America may be close to a deal for the mortgage giant," said Jon Najarian, co-founder of Web information site in Chicago.

That included about 19,000 January contracts, allowing holders to buy Countrywide stock at $5, which traded before the stock leaped above $8 after the Wall Street Journal reported the possible takeover of the top U.S. mortgage lender.

Later, sources familiar with the matter told Reuters that Bank of America, the second-largest U.S. bank, was in advanced talks to take over Countrywide, whose shares ended the day more than 50 percent higher at $7.75.

The January $5 calls closed at $3.20 a contract, up from a range of 65 cents to $1 earlier in the day. The 19,000 $5 calls apparently bought before the news represented a paper profit of a potential $4 million at the end of the day, Najarian said.

It is hard to pin down whether unusual option trading stems from insider information because it can also be speculation of a merger or just plain luck. Either way, these call buyers made a well-timed bet.

"It's possible that the news was leaked in the hours prior to the takeover buzz," said Frederic Ruffy, analyst at California-based options education firm Optionetics.

He noted that trading in Countrywide options was brisk before and after the takeover speculation triggered the surge in the stock price.

"While some of the trading remained defensive early in the day amid ongoing worries about the lender's financial woes, there was also a noticeable increase in call volume," Ruffy said. "More than 60,000 calls had traded before the stock surged on the news in afternoon trade."

On Wednesday, despite a negative tone surrounding Countrywide and very active Countrywide puts, the calls were also unusually active, said William Lefkowitz, options strategist at brokerage firm vFinance Investments in New York.

This continued on Thursday before and after the Bank of America news. "People were expecting some kind of announcement that would jolt the stock as many option traders bet on volatility plays," Lefkowitz said.

Rumor: Bank of America to buy Countrywide

Voltron says: probably bull. CFC is back to where it was a week ago.

The Wall Street Journal

January 11, 2008


Countrywide Seeks Rescue Deal

Bank of America Eyes
Stricken Home Lender
As Crisis Grinds On
January 11, 2008

Bank of America Corp. is near agreement to take over tottering mortgage giant Countrywide Financial Corp., in a move that could build a bulwark against the mortgage-default crisis by protecting one of its biggest casualties from collapse.

Bank of America had insisted for months no takeover was in the works, but people familiar with the talks said a deal could come very soon. It isn't clear how much Bank of America, the largest U.S. bank in stock-market value, has offered for Countrywide, the bigest mortgage lender, whose stock has dropped 88% from its recent high. It is still possible that an agreement could be delayed or fall apart. For federal approval, the deal could depend on exploiting a little-known regulatory loophole to allow the merged bank to hold more than 10% of the nation's deposits.

But Countrywide's fall and expected rescue mark a milestone in the unfolding international financial crisis. The turmoil was triggered a year ago by the bust of the American housing market and the resulting wave of mortgage defaults, but it is spreading -- and authorities are struggling to contain it.

A weakening economy and rising mortgage delinquencies have begun to feed off each other in a dangerous spiral, as falling home values and tightening credit begin to sap consumers' spending. Chain stores yesterday reported weak December sales, and American Express Co. reported reduced spending and increased delinquencies among customer base, known for being upscale. Unemployment last month jumped and economists have dramatically raised the odds of a recession to 42%, according to the latest survey.

To combat those trends, Federal Reserve Chairman Ben Bernanke yesterday indicated a new willingness to cut interest rates more deeply. That came after the Bush Administration began floating the idea of direct economic stimulus such as tax rebates. Bank of America's move provided an immediate shot in the arm, as the battered stocks of Countrywide and some other mortgage lenders rose on optimism that the possible takeover by Bank of America could signal an end to the relentless bad news from lenders.

More broadly, a failure of Countrywide would have posed a major risk to the U.S. economy, since the lender services about one of every six loans in the country. Bankruptcy likely would have shifted huge financial risk to Fannie Mae and Freddie Mac. A Treasury spokesman said agency officials played no role in any talks about a rescue by Bank of America.

Bank of America declined to comment on any deal, citing a longstanding policy on not commenting on rumors and speculation. Countrywide representatives didn't immediately respond to a request for comment.

Countrywide's acquisition would mark the end of a mortgage lender long known as an innovator, survivor of slumps and fierce competitor that rocketed to No. 1 in U.S. mortgage lending by the early 1990s. It has remained the biggest by hiring thousands of loan officers from rivals that merged, and lowering its lending standards along with others -- leading to rising defaults recently.

During the housing boom, Countrywide was a big promoter of option adjustable-rate mortgages, which give borrowers choices of how much to pay each month and can increase a loan's balance. A smaller chunk of Countrywide's business came from subprime loans, but the lender was exposed to many past subprime loans and other risky loans it sold.

"From the Countrywide stockholder perspective, this is manna from heaven," said analyst Richard X. Bove of Punk Ziegel & Co. "They've got this lousy stock and if Bank of America paper replaces Countrywide paper, they own one of the best banks in the country and they're bailed out."

For Bank of America, the deal would instantly allow it to realize its ambition of becoming a mortgage giant. But it also would bring some ticking time bombs, whose powers to destroy value won't be clear at least until the housing market bottoms out, which may not be for a year or more.

Bank of America has more than $100 billion in its own home-equity loans, second mortgages that have shown signs of strain as the housing crisis spreads. Bank of America would be taking on another $32.47 billion in Countrywide home-equity loans. Though Countrywide has virtually stopped making subprime loans, it has exposure to its past originations. As of Sept. 30, Countrywide's savings bank held $26.84 billion of option adjustable-rate mortgages, which allow borrowers to start with minimal payments and face far higher ones later.

These two categories of high-risk loans accounted for three-quarters of Countrywide's loan holdings at the end of the third quarter. Countrywide says some of that risk is covered by mortgage insurance, but some investors are nervous about mortgage insurers ability to pay off all the claims they face in the next few years.

Bank of America has also already strained its capital levels by paying $21 billion for Chicago's LaSalle Bank over the summer, and could risk more capital if Countrywide faced big write-downs.

Another worry is that investors in mortgage securities are looking for chances to force Countrywide to repurchase many of the loans it sold in recent years. Provisions of those sales require repurchases in some cases, such as when loans default early or otherwise don't live up to the "representations and warranties" provided by Countrywide at the time of the sale. "It is our intention to defend our positions vigorously," the company said in a recent securities filing.

A purchase of Countrywide, however, could be coming at a big discount, and could ease the losses Bank of America has suffered on investment in the company in August., Then, it bought preferred shares convertible to a 16% stake for $2 billion. Just since then, Countrywide's stock has fallen by about half. Its overall market value has sunk to just $3 billion -- equivalent to about two months of profit for Bank of America.

Countrywide's stock has plunged in recent days amid intensifying anxiety among investors, and Countrywide was forced to deny earlier this week that it planned to file for bankruptcy.

Bank of America has been seen as a potential buyer of the troubled lender since buying the stake in August. The Charlotte, N.C., company has first right of refusal in any sale of Countrywide, and Bank of America has a long history of opportunistic takeovers of banks facing distress.

There appeared to be a big obstacle after the Federal Reserve approved Bank of America's acquisition of LaSalle in September. The combined bank grew to hold 9.88% of the country's deposits. Federal law prohibits a bank holding company from controlling more than 10% of U.S. deposits after acquiring another bank.

But the law includes a caveat: The 10% limit doesn't apply to federally chartered thrifts, meaning a bank-holding company may control more than 10% of deposits in the U.S. following a thrift acquisition. Since a Countrywide subsidiary called Countrywide Bank is a federally insured thrift, that may give Bank of America room to maneuver around the deposit cap.

Bank of America is the only bank that has ever neared the 10% deposit cap. Many seasoned banking attorneys were not familiar with the caveat, as no bank has ever tried to acquire a thrift to vault above the 10% limit.

"This could be the biggest loophole in the world," said Gilbert Schwartz a partner at Schwartz & Ballen LLP and former Fed attorney. It was unclear when or how loophole first became known to the banks.

It also isn't known if Bank of America is trying to structure the deal in a way that would help shield the bank from some of the biggest financial uncertainties facing Countrywide.

One possibility is that Bank of America would seek some sort of tangible regulatory "reward" for rescuing Countrywide, said analyst Nancy Bush of NAB Research in Aiken, S.C., such as having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America's ability to do deals. "We're in an environment in which you could really say, anything can happen," she said.

Bank of America Chairman and CEO Kenneth D. Lewis has often said he likes "the product, not the business," when it comes to mortgages. He has particular disdain for servicing, which includes sending monthly statements, collecting payments and routing them to loan holders. Mr. Lewis prefers that mortgages be offered to bank customers through bank branches, as part of a suite of products including checking, savings and investments.

Many on Wall Street snickered as the value of Bank of America's $2 billion investment in Countrywide tumbled. But some analysts and investors have wondered if the driving reason for making the August investment was to plant a flag at Countrywide and keep any competitor from swooping in.

Just last month, Mr. Lewis told analysts at the Goldman Sachs conference that at some point "arithmetic overcomes all your issues." "But if I ever did anything in the mortgage business, I would have to eat about seven years of my words, so it would have to be pretty compelling."

The financial institutions involved in the deal are overseen by a myriad of federal regulators in Washington. The Fed oversees Bank of America's parent company, while the Office of the Comptroller regulates the Charlotte company's national bank. The Office of Thrift Supervision oversees Countrywide's federal thrift charter, and the Federal Deposit Insurance Corp. insures deposits at both Bank of America and Countrywide Bank.

Former Bank of America Chief Financial Officer Marc D. Oken compared the deal to the buyout of troubled MNC Financial Inc. The former CEO of Maryland National, Frank Bramble, sits on the Bank of America board.

Mr. Oken argues that for all its problems, Countrywide still has the "finest mortgage distribution network in the country," and that Bank of America is likely buying it for a fraction of what it would have cost a year ago.

"I'm proud of these guys," he said. "It's a bold move and it's indicative of the confidence that the board has in the company and the management."

One likely scenario is that Bank of America could arrange an "earn-out," a deal common in private equity where the buyer agrees to a price today but an additional payment should the company meet goals in a year or more.

[Angelo Mozilo]

The takeover would call into question the future role of Angelo Mozilo, a New York-born executive known for his deep tan and frank speaking style, who co-founded Countrywide in 1969 and now serves as chairman and chief executive. Mr. Mozilo, who turned 69 last month , was long praised as an innovator, reliable survivor of periodic slumps and fierce competitor in the U.S. mortgage industry.

But he has run into a barrage of criticism over the past year as Countrywide has stumbled. Critics say the company lowered its lending standards too far in pursuit of market share and squandered capital through heavy repurchases of its own stock. Meanwhile, Mr. Mozilo undermined confidence in the company through his heavy sales of Countrywide shares he has acquired over the years through stock option awards. A takeover could result in another big payday for Mr. Mozilo. David Wise, a New York-based consultant for Hay Group, a compensation-advisory concern, estimated that Mr. Mozilo would receive cash severance payments totaling $36 million.

From 2004 through 2007, Mr. Mozilo sold about $414 million of Countrywide shares. The Securities and Exchange Commission last year opened an informal investigation into the stock sales, which were made through prearranged plans known as 10b5-1 programs. These plans are designed to allow senior executives to sell shares at regular intervals automatically. If executives pledge they don't have insider information at the time the plans are established, they can be used as a defense against insider-trading charges.

Mr. Mozilo modified his longstanding 10b5-1 plans late last year to increase sales of stock that he obtains through the exercise of stock options. Mr. Mozilo has said he increased the pace of selling to diversify his personal investments in an orderly way ahead of his retirement, scheduled for December 2009. He has denied any wrongdoing in connection with the share sales and argued that the options were a tax-efficient way for Countrywide to pay him.

Mr. Mozilo remains a sizable shareholder in Countrywide, the company has said. As of last April, Countrywide said he held about one million shares in the company plus options to acquire another 8.2 million, for a combined stake of 1.5% of the shares then outstanding.

Countrywide said Wednesday that its deposits totaled $61 billion at the end of December and that it had increased "retail deposits," those obtained directly from individual savers, by $2.3 billion in December alone. Last August, customers flocked to Countrywide branches to remove their savings amid fears about the company's health, but the initial investment by Bank of America helped quell those fears and allowed Countrywide to rebuild its deposit base.

Aside from deposits, Countrywide in recent months has relied very heavily on borrowings from the Federal Home Loan Bank System. Those borrowings totaled $51.1 billion as of Sept. 30, up 77% from three months earlier.

--Ann Carrns in Atlanta and Gregory Ip in Washington contributed to this article.

Wednesday, January 9, 2008

MBIA in trouble


MBIA slashes dividend by more than half

Bond insurer says move will save the company $80 million annually, warns of bigger-than-expected quarterly loss.

NEW YORK ( -- MBIA Inc. slashed its dividend by more than half Wednesday as part of a larger plan by the troubled bond insurer to raise capital and maintain its lofty credit rating.

The Armonk, NY-based company said it would cut its quarterly dividend by 62 percent, lowering it to 13 cents a share from 34 cents a share.

MBIA said the move would save the company approximately $80 million annually and it expected it to help the company maintain its Triple-A credit rating.

"We are committed to the successful implementation of this comprehensive plan to significantly strengthen our capital position and secure our Triple-A ratings without qualification," MBIA Chairman and CEO Gary Dunton said in a statement.

The company also warned that it expects to post a $737 million loss for the fourth quarter when it reports its results Jan 31. Analysts polled by Thomson Financial were anticipating the company would post a net loss of $182 million.

But Wall Street was encouraged by the news. MBIA (MBI) shares gained more than 11 percent in pre-market trading after the announcement. To top of page

Countrywide faslified documents

Voltron says: another scathing (but long winded) article by Gretchen Morgenson of the New York Times. Summary: Countrywide admitted it "recreated" documents in an effort to forclose on a mortgage that was discharged through bankruptcy.

Here's the link:

Voltron says: trying to collect debts discharged in bankruptcy is a growth industry according to this recent businessweek article:

Tuesday, January 8, 2008

Barron's Online
Tuesday, January 8, 2008

Hope Fades in the Market as it Rises at the Polls

WHILE THE ELECTORATE SEEMS EAGER for change, it's more of the same for the financial markets.

The stock market plunged anew Tuesday, but the carnage in the financial sector was nothing new. The new, new bad thing is that the housing foreclosure crisis has claimed a new victim, the phone company.

AT&T shares plunged 4.6% after its chief executive admitted to "softness" in its home-telephone and broadband Internet business resulting from consumers' failing to pay their bills. AT&T shares, one of 2007's bright spots, rising to around 42 from 34 last year, shed 1.87 to 39.16 on 72 million shares traded, three times the average daily volume.

With this component of the Dow Jones Industrial Average leading the retreat, the Dow plunged 238 points, to 12,589, or 1.9%. The Nasdaq Composite fell another 2.4% while the Standard & Poor's 500 broke through 1400, shedding 1.8%.

Having your phone shut off is about the last thing that will happen to a tapped-out consumer. The repo man will take away your car and the credit-card companies will cut you off first. But, if the bank forecloses on your house, then the phone bill goes unpaid.

But the bad news is by now old news for the biggest mortgage originator, Countrywide Financial, and ground-zero of the housing-finance disaster.

Countrywide was moved to deny market rumors that it was not about to file for bankruptcy protection, as its shares collapsed from just under $8 to around $6 by early afternoon. That denial got the stock back up to nearly $7 but shares plummeted to just about $5 near the close before ending at 5.47, down 2.17 or 28.4% for the session.

Bond insurers MBIA and Ambac Financial Group also plunged 20.7% and 16.7%, respectively, while E*Trade Financial shed 20.5%. As if it needs to be mentioned, all these financials set fresh 52-week lows.

But there was no specific news to account for this sort of carnage among the financials. Just the chatter about a Countrywide bankruptcy, vehemently denied, was enough to torpedo the stock price. After all, some of its debt obligations coming due in 2008 sell at significant discounts, indications of the market's skepticism that they will be paid in full and on time.

And there also was talk about a list of collateralized debt obligations being offered among dealers, an indication of yet another institution scrambling to liquidate derivatives under duress.

That very lack of hard news is the scary part of sudden, precipitous decline, such as the stock market experienced Tuesday afternoon.

From a technical standpoint, the market's action was particularly ominous.

Joan McCullough of East Shore Partners observes Tuesday was an outside day on the downside, a technical pattern wherein the S&P futures touched a higher high early in the session and then proceeded to collapse to a lower low. The March S&P contract sliced through the 1400 level with no resistance, to settle at 1397. That puts the nearby futures right on the edge of a breakdown on the charts, she says.

Obviously, the Federal Reserve is watching all this action, and hardly in a disinterested fashion. Could the renewed stress and strain in the financial system be anticipating more the confession of more grievous sins on the part of institutions?

If so, even more banks and brokerages whose solvency is not in question may have to go hat in hand to beseech the holders of vast wealth across the seas for capital infusions. At best, that would dilute current common holders, even as those investments bolster their balance sheets and help assure their future survival.

As for those institutions for whom the market believes the bell is about to toll, its skepticism about their future prospects seems well founded.

Countrywide, comments Egan-Jones Ratings, "is severely challenged and might falter if it does not receive an infusion of at least $4 billion in the next couple of weeks."

Among other things, Bank of America's vaunted $2 billion convertible preferred stake taken at the peak of last summer's crisis equals just 1% of Countrywide's assets, Egan-Jones observes. Countrywide will need more funding because of the 40% drop in its mortgage originations and a shift away from the profitable subprime business, it adds.

Countrywide has taken charges of only $1 billion against its assets of $209 billion, Egan-Jones continues. A 5% charge would total $11 billion, compared to equity of $15.2 billion, the firm notes. Delinquencies have risen to 5.94% in October from 3.97% a year earlier, it adds.

On the liability side, Countrywide's business model depends on availing itself of short-term interest rates below 3%. But Countrywide is now paying over 5% for money, either from federally insured deposits for its bank unit or from the Federal Home Loan Banks. So, the American taxpayer effectively is a co-signer on Countrywide's liabilities.

The stock market's scary decline, along with gold's sharp rally to nearly $880 an ounce, suggests investors are fleeing financial assets. Drug stocks and utilities, both paying generous dividends, are offering the equity market's last redoubts.

For investors, it seems audacious to hope now.

Housing Slump to Continue: Fannie CEO

Voltron Says: I still predict housing will not begin to recover until 2011.

Associated Press
Tuesday January 8, 4:49 pm ET
By Marcy Gordon, AP Business Writer
Housing Market Will Continue to Weaken and Sap Strength From Economy, Fannie Mae Chief Says

WASHINGTON (AP) -- The CEO of Fannie Mae, the largest financer and guarantor of U.S. home loans, predicted on Tuesday that the housing market downturn is likely to persist into 2010.

To blunt the broader economic impact, Fannie President and CEO Daniel Mudd, speaking at an event hosted by the U.S. Chamber of Commerce, urged lawmakers and lenders to pursue "the most generous means possible" to help out borrowers facing sharply higher mortgage payments in the next few years. But Mudd voiced only qualified support for a new plan orchestrated by the Bush administration that would help borrowers with weak credit whose mortgages are resetting to higher costs with a five-year freeze of interest rates.

Losses to investors from reworked loan contracts could reduce the available credit for mortgage securities and reverberate on Fannie and its smaller government-sponsored sibling, Freddie Mac, which buy up home loans made by banks and other lenders and then bundle them as securities for sale to investors worldwide.

Washington-based Fannie Mae, which lost $1.4 billion in last year's volatile third quarter, expects to lose money this year on eight to 10 of every 1,000 mortgages held on its $2.4 trillion book -- a steep increase from four to six in 2007.

Mudd's comments came the same day as Treasury Secretary Henry Paulson said the administration was exploring a possible expansion of the program to include stronger borrowers. Such an expanded plan to cover homeowners with conventional mortgages would more directly affect Fannie Mae and Freddie Mac, which have a relatively small exposure to high-priced subprime mortgages but stand behind hundreds of billions of dollars of conventional loans.

Shares of Fannie and Freddie slumped Tuesday as Countrywide Financial Corp., the nation's largest mortgage lender, released a statement denying rumors that it would soon file for bankruptcy.

Fannie Mae's stock fell $2.60, or 7.6 percent, to $31.63, while Freddie Mac shares declined by $2.40, or 8.2 percent, to $26.76. Both Fannie and Freddie are major buyers of loans made by Countrywide.

Smaller drops were seen among other lenders such as Wells Fargo & Co. and Bank of America Corp., while shares of Countrywide fell $2.17, or 28.4 percent, to $5.47.

Mudd said in his speech that the Bush mortgage rate-freeze plan was "an important step," but he also warned that "altering basic contracts would have a high price," in particular by breaching the legal rights of the investors holding mortgage-backed securities.

"Investors left with the losses would not easily return to the market," Mudd said. "That inevitably would shrink the pool of credit."

Meanwhile, Mudd told the business audience that the health of corporate America this year will depend on "how we get through the toughest housing correction in our lifetimes."

He reaffirmed the prediction made recently by Fannie Mae that American home prices will fall by 10 percent to 12 percent from their 2005 peak before the housing market can rebound, likely in 2010.

Fallout from the slump has forced Fannie Mae and Freddie Mac to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and foreclosures are spiking on high-risk mortgages made to borrowers with weak credit histories.

Last month, the two companies sliced their dividends and sold billions of dollars of special stock to raise capital and shore up their finances.

CFC approaching low single digits

Voltron says: I cashed in half of my position. I'll try to cash out the other half at $3.

Financial Services
Rumors Crush Countrywide
By Mark DeCambre Senior Writer

1/8/2008 4:38 PM EST

Updated from 1:49 p.m. EST Countrywide Financial's (CFC) shares plummeted to new lows Tuesday amid rumors -- later denied -- that the mortgage lender could be nearing a bankruptcy filing. The beleaguered company's stock closed down 28.3% to $5.43, a new 52-week low. Shares dipped as much as 34% to $5.05 in Tuesday trading -- even after a brief trading halt on the New York Stock Exchange and the company issued a statement denying the rumors Tuesday afternoon -- challenging the notion that the nation's largest mortgage lender is too big to fail. "The rumor was they would file for Chapter 11 this week," Michael Mainwald, head of equity trading at Lek Securities Corp., told Bloomberg during Tuesday afternoon trading. A call to a spokesman at Countrywide was not returned.

Shares of Countrywide, run by CEO Angelo Mozilo, have lost nearly 90% of their value since last year due to the collapse of the mortgage market. Other financial stocks also were swooning on a day that uncertainty about the U.S.'s economy continued and another high-profile CEO, Bear Stearns' (BSC) James Cayne, appeared on the way out after drawing fire in the fallout of the subprime mortgage mess. Bear shares were off more almost 7% and shares of JPMorgan Chase (JPM) , Merrill Lynch (MER) , Morgan Stanley (MS) , Lehman Brothers (LEH) and Citigroup (C) were all off more than 3.7%.

Countrywide last year scored $2 billion in funds from Bank of America (BAC) that was meant to prop up the troubled lender, but the funds have done little to stave of losses at the Calabasas, Calif-based company -- and so far has been a losing investment for BofA. Credit ratings firm Egan-Jones notes that Countrywide's funding avenues are becoming scarce, given that big loan purchasers Fannie Mae (FNM) and Freddie Mac (FRE) are expected to be scaling back mortgage acquisitions.

Egan-Jones speculates that Countrywide may need as much as $4 billion to operate its business, due to the expected retrenchment of the mortgage originations and the moving away from dicey higher-margin loans. Should Countrywide file for bankruptcy, it would further roil a U.S. market that has been deeply stung by a slumping housing market after a heady boom in mortgage origination and homeownership. "This would be the ultimate a test of whether the government will let this thing fail or whether it's going to rescue it," said Peter Cohan, president of Peter S. Cohan & Associates, speculating on the implications on a possible Chapter 11 for Countrywide. "This could be one of the most difficult situations for government in the role of business." The U.S. government, led by Treasury Secretary Hank Paulson, has been extremely proactive in attempting to stave off the widespread calamity that could ensue if defaults in mortgages soar.

Already in place is a plan to freeze low-interest teaser rates for homeowners for five years. Such efforts have been much maligned by Wall Streeters with free market mentalities, who view such moves as anti-capitalists bailouts. But a failure at Countrywide, if it ever happens, could have massive consequences.

Countrywide, which has struggled since the summer in the face of a significant pullback in the mortgage sector, accounts for around 20% of mortgage origination in the U.S. The company reported a net loss in the third-quarter of $1.2 billion, or a loss of $2.85 per diluted share -- its first loss in its 25-year history. By transferring much of its business to its bank during the crunch in the securitization, the company expected to be profitable in the fourth quarter. It increased bank deposits by $1.7 billion in September, it reported in the third quarter. The markets, however, dicey since August, have not cooperated and many financial firms faced a rough road during the last two months of 2007.

Monday, January 7, 2008

Moody's is in trouble

Moody's to cut 275 jobs, take 4th-qtr charge

Mon Jan 7, 2008 5:32pm EST

NEW YORK, Jan 7 (Reuters) - Moody's Corp (MCO.N: Quote, Profile, Research), the parent of Moody's Investors Service, on Monday said it will eliminate 275 jobs, or 7.5 percent of its staff, as the credit market slowdown brings a decline in demand for credit ratings.

The New York-based company expects to take a charge of $47 million to $52 million for the fourth quarter of 2007. It said the charge includes $43 million to $48 million for the job cuts, and $4 million to end some technology contracts.

Moody's said it employed 3,600 people at the end of the year. On Oct. 24, it had posted a 13 percent decline in third-quarter profit, slashed its full-year earnings outlook, and said it planned aggressive cost cuts to cope with tightening credit markets. (Reporting by Jonathan Stempel; Editing by Gunna Dickson)

Paulson: No Easy Answer to Mortgage Woes

Monday January 7, 5:45 pm ET
By Martin Crutsinger, AP Economics Writer

Paulson Says There Is No Simple Solution to Housing and Mortgage Crisis WASHINGTON (AP) -- The Bush administration is working to combat the country's severe housing crisis but there is no simple solution, Treasury Secretary Henry Paulson said Monday, adding that a correction in the housing market is "inevitable and necessary."

Paulson said the country was facing an unprecedented wave of 1.8 million subprime mortgages that are scheduled to reset to sharply higher rates over the next two years. He said this raised the threat of a market failure and was the reason the administration brokered a deal with the mortgage industry to freeze certain subprime mortgage rates for five years to allow the housing market to recover.

"By preventing avoidable foreclosures, we will safeguard neighborhoods and communities and fulfill our responsibility of protecting the broader U.S. economy," Paulson said in a speech in New York. "However, let me be clear: there is no single or simple solution that will undo the excesses of the last few years."

Paulson said that the deal the administration brokered with the industry to freeze certain subprime mortgage rates for five years did not involve the use of any taxpayer money. Conservative critics have complained that the administration's plan represented government intrusion in the operation of markets that would end up rewarding some people who had taken out risky mortgages.

In his speech, Paulson raised the possibility that some sort of "systematic approach" may need to be developed to help homeowners with other types of adjustable-rate mortgages that are resetting to higher rates. The current plan only involves subprime mortgages, loans offered to borrowers with weak credit histories.

The steep slump in housing has been a serious drag on the overall economy. There are rising fears that the country could topple into a recession. Those worries were heightened after a report Friday showing that the unemployment rate jumped to a two-year high of 5 percent in December with job growth slowing to a crawl.

Paulson called the current housing correction inevitable after what occurred during the five-year boom in which sales and prices climbed to record levels.

"After years of unsustainable price appreciation and lax lending practices, a housing correction is inevitable and necessary," Paulson said.

He said that the correction was taking a toll on the economy that would continue for a period of months.

"It will take additional time for markets to regain confidence," Paulson said. "The overhang of unsold homes will contribute to a prolonged adjustment and poses by far the biggest downside risk."

Paulson and President Bush both delivered speeches Monday declaring the economy is fundamentally sound. Bush received an update Friday from Paulson, Federal Reserve Chairman Ben Bernanke and other market regulators about how markets have been performing following a severe credit squeeze that began in August that roiled financial markets around the world.

The administration is considering an economic stimulus package that might include tax cuts to ward off a recession. Bush is expected to unveil the package, if he decides to go ahead with it, around the time of the Jan. 28 State of the Union address.

Asked about a stimulus package, Paulson said Monday that Bush has not made any decisions yet but that the administration was very much focused on the issue.

"This is a decision the president still has to make. When he makes it, we will report to all of you," Paulson said during a question-and-answer session after his speech.

The credit crisis was sparked by raising defaults on subprime mortgages. Those defaults have already resulted in multibillion-dollar losses at many financial institutions who bought securities backed by the subprime mortgages that have gone bad.

Paulson said that those large write-downs showed the system was working.

"As markets reassess, we should not be surprised or disappointed to see financial institutions writing down assets and strengthening balance sheets," he said.

Paulson said the administration is continuing to work with the mortgage industry to ensure the quick implementation of the agreement to freeze subprime mortgages that are due to reset if the homeowner is living in the house, is current with payments before they reset but cannot make the higher payments.

He said that last Friday more than 20 mortgage institutions that are part of the HOPE NOW alliance met to work through outstanding issues involved in the mortgage plan. "We expect most servicers to begin fast-tracking borrowers in the next few weeks," he said.

Associated Press business writer Vinnee Tong in New York contributed to this report.