Friday, July 18, 2008

The Credit Crisis is Far From Over

Just this morning the following three items were on the front page of the WSJ

Citigroup Swings to Loss

Citigroup Inc. swung to a second-quarter loss as it reported around $7 billion more in write-downs as credit costs continues to rise, and the company said it cut 6,000 jobs during the period.

Merrill Reports Loss

The brokerage firm's second-quarter loss of $4.65 billion, or $4.95 a share, was one of the worst in Merrill's history and more than twice as steep as the loss for which analysts had been bracing. Already clobbered by subprime-related write-downs of more than $30 billion in the previous three quarters ended in March, Merrill took an additional $9.7 billion hit in the second quarter, which caused the bulk of the company's net loss.

The results underscore why Merrill is parting with valuable assets, such as its 20% stake in news and data provider Bloomberg LP, which is being sold back to the news and information provider's parent Bloomberg Inc. for $4.4 billion. Merrill also announced Thursday its plan to sell Financial Data Services Inc., valued at $3.5 billion.


The moves haven't yet led to a rebound in Merrill's overall performance. Merrill has had to raise $15.5 billion in new capital since Mr. Thain arrived and hasn't come close to turning a quarterly profit. In another sign of tough times at the firm, Merrill recently halted talks to occupy a new tower on the World Trade Center site in lower Manhattan, opting instead to negotiate with its current landlord.

Freddie Mulls Stock Sale

Mortgage giant Freddie Mac -- emboldened by emergency regulatory actions that have triggered a two-day rebound in its battered stock -- is considering raising capital by selling as much as $10 billion in new shares to investors, according to people familiar with the matter.

The high-stakes maneuver would have the potential to avoid a full-blown government rescue for Freddie Mac and Fannie Mae, twin keystones of the U.S. housing market. The publicly traded, government-sponsored companies own or guarantee about $5.2 trillion of home mortgages, or nearly half the total outstanding, and are at the center of government efforts to prop up the sagging housing market.

Countrywide has a bunch of crap in their portfolio:

An amended complaint filed Thursday by the California attorney general related to a suit against Countrywide Financial Corp. sheds new light on the poor quality of loans the company was planning to sell to investors.

The new data provide a close look at 158,000 mortgages that had been slated for sale by Countrywide Homes Loans before last summer's credit crunch -- which was triggered by rising mortgage defaults -- turned investors away from mortgage-backed securities. Nearly 48% of nonprime loans and 21% of pay-option adjustable-rate mortgage in that portfolio were in some stage of delinquency or foreclosure as of April 30, according to the amended complaint, filed by California Attorney General Jerry Brown in state court in Los Angeles. Overall, more than 21% of all loans in that portfolio were in some stage of delinquency or foreclosure, it says.

These loans account for roughly 17% of mortgages held by Countrywide, says Dan Frahm, a spokesman for Bank of America Corp., which completed its acquisition of Countrywide earlier this month. Mr. Frahm added that 9.53% of all loans owned by Countrywide were 30 days or more past due as of the end of April.

Let's review:

We have two of the largest and most important financial institutions writing off an additional 16.7 billion in writedowns. As of a few days ago and according to an on-screen graphic from Bloomberg total worldwide writedowns are now over $400 billion dollars. Most of those are from the US and Europe -- which leads me to wonder why Asia hasn't reported a lot of losses yet. Either they were smarter than the average bear or we have a wave of bad news from another continent on the way.

We have a government sponsored entity saying it is thinking about selling $10 billion in equity. This is on top of the Paulson plan which calls for an unlimited line of credit for these two companies in addition to letting the Treasury purchase Freddie and Fannie stock in the open market. Yet we are continually told the GSEs are in good shape. For a company that is in good shape, it sure looks like they are in desperate need of money.

And then there is Countrywide -- a company under federal investigation. We now know they were selling, well, crap. And that's a huge problem because a lot of the crap that Countrywide sold is backing up bonds in portfolios across the globe.

But over the last few days we've seen the financials rally because they're a great place to put money?