Tuesday, April 1, 2008

The Problems In the Financial Sector Aren't Over By A Long Shot

Every day when I wake up I always ask myself, "what am I going to write about today?" I have no idea why, but for some reason I think there just won't be something interesting to highlight. Today I clicked on Bloomberg and their opening web page was writing gold.

Sometime over the last few weeks, S&P issued a report that said we're almost at the end of all the bank writedowns. The market rallied on the report's release. My response was shall we say a bit jaded. S&P was one of the firms that got us in this mess by blessing poorly researched mortgage pools with AAA ratings. As if on cue, the news from the financial sector since S&P issued this report has been negative. Case in point are the following headlines from today's front page on Bloomberg:

UBS AG, battered by the biggest writedowns from the collapse of the U.S. subprime mortgage market, reported a 12 billion-franc ($11.9 billion) quarterly loss and said Chairman Marcel Ospel will step down.

The bank will seek 15 billion francs in a rights offer to replenish capital, on top of 13 billion francs raised from investors in Singapore and the Middle East. UBS will write down $19 billion on debt securities, bringing the total to almost $38 billion since the third quarter of 2007. Zurich-based UBS also said today it will cut jobs at the investment bank.

Ospel, 58, who led the creation of UBS in a merger a decade ago, will be replaced by 58-year-old general counsel Peter Kurer. Deutsche Bank AG said today that market conditions have become ``significantly more challenging'' in recent weeks, after rising U.S. mortgage defaults caused about $230 billion in credit losses and writedowns at financial companies. UBS rose as much as 10 percent in Swiss trading on optimism Switzerland's largest bank will recover from its subprime losses.

``Behind closed doors they have been cleaning up very swiftly and the capital increase will put them back onto a solid foundation,'' said Joerg de Vries-Hippen, who oversees about $26 billion, including UBS shares, as chief investment officer for European stocks at Allianz Global Investors in Frankfurt. Still, ``it will take years to repair the bank's reputation,'' he said.

Let's review. The bank has losses from credit writedowns of $38 billion. They have had to raise an additional $28 billion. Yet now they're getting back on a "solid foundation." That is one of the shakiest "firm foundations" I have ever seen for a large financial institution. I'm not the only one who thinks so either:

UBS, the world's biggest money manager for the wealthy with about 2.3 trillion francs in private-banking assets, said clients in Switzerland withdrew funds in the first quarter. Those redemptions were offset elsewhere and net investments were ``slightly positive,'' Chief Executive Officer Marcel Rohner said on a conference call today.

But UBS isn't the only firm that is having problems:

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm, is seeking to raise at least $3 billion from a share sale after speculation it's short of capital drove the stock down 42 percent this year.

Lehman is offering 3 million convertible preferred shares in a sale that will be ``an endorsement of our balance sheet by investors,'' Chief Financial Officer Erin Callan said in an interview yesterday. Demand for the stock was three times greater than the amount on sale as of 6:30 p.m. in New York, according to a person familiar with the offering who declined to be identified before the sale ends today.

Chief Executive Officer Richard Fuld is trying to restore confidence after Lehman shares plunged as much as 48 percent on March 17 on speculation the New York-based firm would face the same cash shortage that broke Bear Stearns Cos. Merrill Lynch & Co., Citigroup Inc. and Morgan Stanley have also raised cash from investors after more than $200 billion of writedowns and losses tied to the collapse of mortgage markets at the world's biggest financial companies.


``We still maintain that we don't need capital, but we've realized that perception is the dominant issue in today's markets,'' Callan said.

This is a "vote in our balance sheet." What I find amazing is the this is oversubscribed. Can you say lemmings over a cliff? I love the statement, "we don't need it, but we're doing it anyway." That makes no sense -- unless there is a really a problem and the CEO is looking to spin the problem away. And things are so healthy at Lehman that:

The firm's net income declined 57 percent in the quarter, less than analysts estimated, because of a $1.8 billion writedown on mortgage assets. Merger advisory fees jumped 34 percent, investment-management revenue surged 39 percent and equities rose 6 percent.

Fuld, 61, has announced plans to cut 5,300 jobs, or 19 percent of the workforce, and closed mortgage units during the past seven months. He also has expanded in Europe and Asia to gain market share in stock trading as part of his initiatives designed to help Lehman grow faster than its peers once markets recover.

Because we all know that declining revenue and job cuts are the sign of a healthy business model, don't we?

But wait -- there's even more good news today:

Deutsche Bank AG, Germany's biggest bank, will write down a record 2.5 billion euros ($3.9 billion) in loans and asset-backed securities as contagion from the subprime-market collapse spreads to Europe's largest financial companies.

``Conditions have become significantly more challenging during the last few weeks,'' the Frankfurt-based bank said today. Deutsche Bank will cut the value of leveraged-buyout and commercial real-estate loans and residential mortgage-backed securities.

Deutsche Bank, which increased profit last year as it skirted the worst of the subprime meltdown, said a week ago its 2008 pretax profit target is under threat. Swiss rival UBS AG announced today Chairman Marcel Ospel will step down after reporting an additional $19 billion of writedowns.

And the CEO is so thrilled by his banks overall position that:

Chief Executive Officer Josef Ackermann, attending a banking conference in London today, wouldn't answer questions.

That's a sign of confidence, isn't it'? It's from the Richard Nixon "I am not a crook" school of public relations. Not taking questions should raise a boat load of red flags.

But wait -- there's even more good news from Deutsche Bank:

Deutsche Bank spokesman Christian Streckert cited last week's annual report when asked today about the 2008 pretax profit forecast of 8.4 billion euros, which excludes one-time effects. The bank on March 26 said writedowns and a worsening economy would ``adversely affect our ability to achieve our pretax profitability objective.''

``The market was prepared,'' said Thomas Nagel, a Frankfurt-based trader at Equinet AG. ``Bank stocks could even being nearing a turnaround because the drops have been exaggerated.''

Deutsche Bank said today markdowns on assets backed by residential mortgages ``principally'' involve 7.91 billion euros of so-called ALT-A mortgages, which fall between subprime and prime.

I love when companies report earnings with the asterisk of "one time event" added to the number. It's their way -- along with the idiot analysts who cover the sector -- of spinning the hell out of poor numbers. Considering we're three quarters into the financial crisis, adding an asterisk to a number and saying "it's a one time event" just doesn't hold water. The bottom line is the entire sector is in the middle of a major problem that isn't showing any signs of slowing.

As if all the above headlines weren't enough:

Thornburg Mortgage Inc., a residential-finance company hit hard by the credit crunch, said Monday it had succeeded in raising new capital to stave off bankruptcy.

After a struggle of more than a week, the real-estate investment trust, specializing in making large mortgages to people with good credit, said it raised $1.35 billion through selling bonds, warrants to purchase its common shares and interests in certain mortgage assets. The company plans to use the proceeds from the offering to satisfy a capital-raising requirement set by its lenders, who gave the company an extension through Monday to raise $948 million or risk losing funding.

To sell the bonds, Thornburg is paying a high price. Buyers of the bonds will get 18% interest initially and warrants to buy Thornburg shares for a penny a share. Thornburg said last night it had received $1.15 billion of the proceeds from the offering. The remaining $200 million of the offering proceeds is being held in escrow and will be delivered to the company upon the completion of a tender offer for its preferred stock.

The funding problem for Thornburg, based in Santa Fe, N.M., underscores the challenges facing many financial firms at a time when the credit-market turmoil has severely curtailed access to capital. Unlike subprime lenders -- those catering to people with poor credit -- Thornburg has prided itself on a low default rate and a $35 billion portfolio of adjustable-rate mortgages and mostly highly rated mortgage securities.

18% is the cost of their funds. Why didn't they just go to Vinnie? He'll only take out your kneecaps.

This started last summer with Bear Stearns' announcement that they're writing down $6 billion in losses from tow hedge funds. Nothing has changed since then -- except the bottom calling by a bunch of happy pill taking morons -- to indicate we've reached the bottom. And every time someone says "we're done" we get a series of headlines like we got today. The bottom line is we're in a world of hurt and we're' nowhere near the end of it.