Tuesday, November 20, 2007

Freddie's subprime mess

Freddie Mac posted its largest ever quarterly loss on Tuesday. Third quarter net loss more than doubled to $1.39 billion. The loss was caused by a $2.24 billion decline in the value of derivative contracts and $1.2 billion in credit losses among the $2.7 trillion of mortgage assets. A slump in the value of mortgages reduced core capital to $600 million more than its regulatory requirements, prompting Freddie Mac to seek more money. The company also said it may cut its dividend. The announcement caused futures to decline in premarket trading.

In Zurich speculation swirled that UBS might be forced to cut its dividend to protect its Tier 1 capital. This comes after the company confirmed last week that it expects growth to be profitable in the coming quarters. Rumor that Citigroup will have to cut its dividend forced the stock to move sharply lower last week. Jan Hatzius from Goldman Sachs estimated that lending might be constricted by 2 trillion dollar because banks have to shore up their capital ratios.

Another company that is in trouble because of its involvement in the US mortgage market is H&R Block.
The mortgage crises claimed a new high profiled CEO as Mark Ernst resigned after the companies sale of its money losing mortgage lending business collapsed.
Regional banks seem to come clean with their subprime exposure as well. Milwaukee-based bank Marshall & Ilsley said Monday it has a $282 million exposure to troubled residential mortgage lender Franklin Credit Management Corp. Although it did not expect any potential losses on the mortgages to be material to the $8B company's financial results.

Problems with mortgage lenders are mounting in the UK. The third-biggest lender, Paragon faces "unattractive'' credit costs following the collapse of the U.S. subprime mortgage market. Its 3Q profit fell and it may need to raise 280 million pounds ($547 million) in a share sale. Paragon said it has an agreement with Zurich-based UBS, supported by shareholders, to underwrite the sale of new shares. The company won't pay a final dividend this year. Bradford & Bingley, the U.K.'s biggest lender to landlords, sold 4.2 billion pounds ($8.7 billion) of home and commercial property loans to improve cash flow as credit costs increase. It also sold a portfolio of commercial loans at a discount to book value for 2 billion pounds to GE Real Estate. The bank reiterated earlier this month it continues to raise money on the capital markets and is ``well funded.''

In Germany reinsurers confirm their involvement in the US subprime crises after Swiss Re reported an unexpected loss yesterday. The big three did not change their earlier made maximal loss assumptions from their subprime exposure.

Just adding to the financial problems in Europe are a series of worker strikes in France and Germany. Civil servants, from teachers to postal workers, began a mass walkout across France on Tuesday, the seventh day of a transport strike, but the government said it wouldn't cede on planned reforms.

Asia has its own mortgage problems after Bank of China reported substantial losses on credit derivatives, although their exposure to the US subprime market seemed to be smaller for now. The bigger problem in Asia is overheating of their economies. Transactions in Shenzhen's primary property market slumped 40 percent in October from the previous month as banks refused to arrange new mortgages after using up their credit for the year, according to a mainland property consultant. Housing prices surged some 30 percent on average for the first three quarters of the year to 13,000 yuan (HK$13,634) per square meter.
Leaders of the Association of Southeast Asian Nations will today agree to eliminate trade barriers for goods and services in an attempt to create a European Union-modeled economic community by 2015.

The good news came from Hewlett-Packard. The world's largest computer maker issued a better than expected quarterly profit on Monday. The company also increased its outlook which is driven by strong sales of notebook computers. Shares of upscale retailer Nordstrom rose 11 percent to $33.90 in extended trade on Monday after the retailer reported results that beat estimates. The discounter Target reported an unexpected decline in quarterly profit. Higher housing and gasoline expenses forced the consumer to cut back on spending. If the consumer is hanging in the chances of a recession are very small. A survey conducted by the Consumer Federation of America and Credit Union National Association says says 35% of consumers expect to spend less than usual on holiday shopping this year, the highest figure in the survey's eight-year history and up from 32% last year. Bill Hampel, chief economist at CUNA, said: "The bottom will not fall out of retail but it will be softer."

The bottom will also not fall out of the troubled credit derivatives market as greed trumps fear on Wall Street. New York-based Kohlberg Kravis Roberts, Schwarzman's Blackstone Group and Black's Apollo Management are raising money for collateralized loan obligations that will buy the assets for as little as 95 cents on the dollar. Morgan Stanley, Citigroup and their Wall Street competitors financed at least seven private-equity CLOs in the past two months. Although the bottom is not falling out new CLOs tumbled to $68 billion since June, from about $127 billion in the first six months of the year. Fears of credit contraction are emerging on Wall Street. How this will impact mainstreet will determine the future direction of capital markets.

Tokyo shares reversed a morning slide to close higher on Tuesday. The Index ended up 1.1 per cent at 15,211.52 after dropping as much as 1.9 per cent. The broader Topix index was up 0.9 per cent at 1,469.27. TheNikkei was buoyed by news that JC Flowers, the US buyout firm, would buy a third of Shinsei Bank for $1.8bn. The investment will shore up Shinsei's capital after the first loss since Flowers and partner Timothy Collins acquired the then-bankrupt bank from Japan's government in 2000. In Hong Kong the Hang Seng index also recovered from early losses and closed up 1.13% on the day.

The dollar tumbled overnight with the euro reaching a new all time high against the dollar on news that currency rich Golf states might drop the peg. The dollar peg has "served the economy very well in the past," said Sultan Nasser al-Suweidi, the governor of the United Arab Emirates' central bank, last week. "However, we have reached a crossroads." Dollar bearish was also rumor about an imminent inter-rate cut by the Federal Reserve, which makes the minutes of the last meeting ever more important. Light, sweet crude for January delivery on the New York Mercantile Exchange rose 95 cents to $95.59 a barrel in electronic trading by mid-afternoon in Europe.

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