Nov 27, 2007

CitiGroup Puts Our Oil Money To Work

Yesterday CitiGroup announced the Abu Dhabi Investment Authority will invest $7.5 billion in our nation's largest bank. The investment was made through the purchase of convertible bonds that pay 11% and will convert to common shares, at a maximum price of $37.42, anytime during the fourth year of the note.

Citi must need that money fast because under the above terms an 11% convertible (2% over junk bonds) would have been grabbed up by US investors. Then again there is the possibility of doing significant business with the sovereign investment trust in the future. With Citi pointing the way, many more opportunities should open up for the group.

Still, if CitiGroup’s stock regains half of its value, then these convertibles are extremely valuable and I would rather see Americans rewarded for their years of investment into CitiGroup.
If the company announces layoffs of in the 40,000 neighborhood, then their stock should take a good jump on the strong cost cutting news. There is also a consensus that CitiGroup would release significant value to shareholders if the company were broken up.

Joseph Altman, AP Business Writer wrote an interesting article: Citi Sells Stake to Abu Dhabi Fund

Nov 26, 2007

Pimco Financial And Bill Gross

Part of a series The Great American Write-Down

Pimco Financial: Bill Gross is the chief investment officer for Pimco, the world’s largest bond fund. When interviewed on CNBC he said: "A Fed cannot afford to let homes go down by 10 to 15 percent like we saw in Japan," Mr. Gross saw the turmoil our markets are experiencing more than a year ago and steered his fund away from the troubled sectors. The result is that Morningstar has listed his fund in the top 2 percent of all bond funds.

From a Brett Arends
article on

“Last week, Gross grabbed the headlines by warning that the housing slump could lead to devastating economic consequences. He argued that a 10% fall in prices nationwide could set off price deflation of a kind not seen since the Great Depression, while waves of mortgage defaults could undermine confidence in the financial system here and abroad.”

Mr. Gross sees the problem as being much worse than reported and is calling for immediate federal action to directly aid troubled home owners.

Jim Jubak describes the environment the bond market is in these days in his article, The Bond Market's Shaky Foundation on

“The unstable foundation is built on overseas cash flows and currency manipulation by foreign central banks. Dry rot threatens the whole system of ratings. And some of the banks propping up the market for credit derivatives shake at the slightest touch.”

“The professionals in this market -- the traders, the underwriters and the more sophisticated investment banks -- know exactly how shaky the whole edifice has become. They're determined not to be the last out the door.”

Housing bubble bust helps Pimco's Gross rebound
UPDATE 2-PIMCO: Fed "can't afford" to let housing crack
FACTBOX-Writedowns and losses at major global banks

The Great American Write-Down

The business of mortgages.
The Mortgage Meltdown Part 1 I wrote “The widespread closures and layoffs in the mortgage industry is more than just a slow down or a shakeout, it directly points to a flawed business plan.” When you start doing No-Money-Down, Interest-Only, 100 Percent Financing, qualifying applicants on the lower “Teaser-Rates” and doing so on inflated home prices, leaves absolutely no room for error. The mortgage companies pile on significant fees and then sell those mortgages to various investment groups, many of which are listed below. Those banks sort and package those mortgages in order to either resell or issue bonds to recoup there expense. At each step the mortgage company or the bank takes their profit upfront adding to the cost of the mortgage. When the packages are funded they roll those funds into new mortgages and start all over.

It was too much money aggressively searching for deals, which ultimately drove the appreciation in housing.
There was so much pressure to produce mortgages that brokers were working every possible angle to get someone to take their money; bad credit was no problem, no money down and we’ll find a way, payment too large and we’ll up the price and get the seller to cover some of the interest, need some cash out of the deal our appraisers know the true value of the property and we love speculators because they’ll bring us lots of deals. Everyone was happy as long as they could take their profit and pass it on. There was so much stuffed on top of an already bad deal that any speed bump in the housing market could cause a crash.

Mortgages are available to qualified buyers with conservative appraisals.
Now that both the property and the financial speculator are washed out of the system, mortgages are still available to qualified buyers and at good terms. Fannie Mae and banks that didn’t handle subprime products are getting burned because of their investments into the bonds, CDO's and SIV's that were secured by these blotted mortgages.

What’s next?
Bob Janjuah, the head of credit research at RBS, Royal Bank of Scotland, has estimated that the total asset value lost by the subprime mess will end up between $250 billion and $500 billion. So far the total write-downs from the 23 American companies listed below is about $71 billion just in the past eight weeks.

Everyone but Mozilo of CountryWide agree that next year will be more of the same. These numbers are only from a handful of our largest financial corporations. As listed in my article, Mortgage Industry Producing Lots of Unemployed, hundreds of smaller companies have closed and approximately 40,000 have lost their jobs in the mortgage industry. Those costs have been enormous but don’t attract the headlines and aren’t included in the headline numbers. There are also losses like CapitalOne who had a negative $670 million turn around in the third quarter when compared to the third quarter last year. These losses are also missed in the tallies.

These huge losses also ignore some very large companies like New Century, First Magnus, American Home Finance and NovaStar. The mortgage insurance industry has been devastated; most of the companies in that sector are near death like Radian, MGIC, PMI, Balboa and First American. With losses mounting in these bond portfolios, bond insurers are facing losses beyond anyone’s imagination. The rating agency Fitch has said that bond insurers have a $2.5 TRILLION problem. Ambac, ACA Capital, Security Capital, Assured Guaranty and MBIA could be looking at hundreds of billions in losses.

If you have a pension account then you have probably lost money.
Accounts in most major pension and mutual funds have lost value. Even names you wouldn’t consider when talking about mortgages like Prudential, AIG, H & R Block and E-Trade are taking losses because of their involvement into mortgages backed securities. This spreads across all spectrum's of companies that held investments because the bonds were considered safe and paid a slightly higher dividend.

When you mention to someone that CitiBank will write-off another $10 bil this year, they look at you funny and say so what. It’s not CitiBank’s money that is being lost; it’s the money from investors and pension funds. At the low end of the above prediction the average American household will lose $2,244 in asset value (investment and pension) and that number doubles to $4,488 if we hit the higher estimate.

The problem doesn’t stop at our borders.
The following banks have all had major losses and write-downs because of their U.S. investments: Deutsche Bank –Germany $3.2 billion, Credit Suisse-Switzerland $1.9 billion, UBS-Switzerland $3.6 billion, Societe General SA-France $920 million, AMP-Australia $1.4 billion, RBS-Scotland $2.7 billion, Barclays-Great Britain $2,7 billion, HSBC Holdings-Great Britain $3.4 billion and in Canada the Bank of Montreal, National Bank of Canada, Royal Bank of Canada, Scotia Bank and CIBC all had losses due to their holdings of US mortgage securities.

Take a look at the following 23 profiles of the losses recently taken by our financial community. I’ve listed them separately so individual companies can be identified and additional resources are listed for each one.

There is one who called it right; Pimco Financial. Take a look, I’ve put him first. (Just above)

Bank of America

Part of a series The Great American Write-Down

Bank of America, (BAC) the nation’s second largest bank, said they will take a $3 billion write-down in the fourth quarter. When they announced that profits had dropped 32 percent for the third quarter they also had to include that they were going to let 3,000 staff go.
Every time a financial institution releases negative financials they feel that the next thing to say is that we are on top of things by letting people go. Of course 3,000 is a very safe number to throw out, with 198,000 employees, 3,000 can be done with little effort. What irks me is that Reuters out of London wrote that less than 100 of the cuts will come from Europe, Middle East or Africa, which leaves the good old US of A as the likely cutting field.

UPDATE 2-Analysts cautious on Citigroup; BofA downgrades stock
BofA to take $3B write-down
Fewer than 100 BofA cuts planned for EMEA -sourcesFTC Clears $21 Billion Purchase: BofA deal could cost Chicago jobs

Bear Stearns

Part of a series The Great American Write-Down

Bear Stearns (BSC) wrote $820 million off in the third quarter and will take another writedown of $1.2 billion in the fourth. Moody’s and Fitch have stated that Bear Sterns still has too much exposure to subprime and CDOs.

Ex Bear Stearns co-president Spector gets no severance
Bear Stearns sued over mortgage losses
UPDATE 2-Moody's warns on Bear Stearns, Fitch cuts


Part of a series The Great American Write-Down

CapitalOne (COF) In June CapitalOne had a reported that they were writing off $300 million for the second quarter and stating that they are laying off 2,000. Now that they are reporting their results for an abysmal third quarter, they included another 1,900 to the chopping block. Since I couldn’t find a Press Release on their website I’ll assume that it’s an additional 1,900 and not part of the original 2,000.
I did find one item of interest in their Press Released was one titled Capital One Makes Pigs Fly!
For the third quarter CapitalOne had an $81.6 million loss as compared to a $587 million profit in the third quarter of 2006. That loss was made more drastic by the fact that revenues had increased by a whopping 23 percent.


Part of a series The Great American Write-Down

CitiGroup (C) wrote $2.2 billion off in the third quarter and estimates for the next two quarters are in the range from a low of $8 billion to a high of $21 billion.

CitiGroup just made an announcement that there would be a new round of cuts. The company has said that they have no numbers as of yet but estimates are that as many as 45,000 may lose their jobs. CitiGroup has 330,000 employees.

Maybe it’s just a coincidence, but I view the correlation between the companies that have aggressively off-shored, in the past three years, are also the companies that are experiencing the largest losses. I just believe that it’s a win-at-any-cost mentality.

Citigroup Writedowns May Top $13.7 Billion
Citigroup debt protection costs hit new highs
Citigroup falls on "sell" after $15 bln writeoff seen
US STOCKS-Citigroup downgrade sinks Wall St
Citigroup Mixed Signals & None Good
Do You Work For Citigroup?


Part of a series The Great American Write-Down

CountryWide (CFC) In October CountryWide posted a $1.2 billion dollar loss, their first loss in 25 years. At the same time the company also put out a statement saying that the worst was behind them and predicted profits for the fourth quarter and 2008. The market bought into it and their stock jumped 32 percent.
From the beginning of the housing downturn Chairman and CEO Mozilo has viewed it as an economic correction; an opportunity to snatch up people and accounts from the hundreds of weaker mortgage firms closing up shop. They have been able to obtain much needed cash from Bank of America and George Soros.


Part of a series The Great American Write-Down

E-Loans is the mortgage division of E-Trade (ETFC) wrote $197 million off their books this month and made no forecasts for what is going to happen in the near future. The rumor mill has it that the problem may be significant enough to bring down the entire company. Only time will answer that one but their survival is not going to be painless.

UPDATE 1-E*Trade CEO rules out bankruptcy-CNBC
Shares of E-Trade Fall on Plans for Mortgage-Related Writedowns in the Fourth Quarter

Fannie Mae

Part of a series The Great American Write-Down

Fannie Mae (FNM) had a $1.4 billion loss in the third quarter and they are scrambling; issuing bonds and floating addition shares to shore up their ailing finances.

The Mess Won’t Stop At Fannie Mae
Freddie, Fannie to the housing rescue - not so fast
UPDATE 2-Fannie Mae, Freddie Mac debt protection costs rise
Big Ben's Dumb Idea for Fannie and FreddieFannie Mae Practices a Bit of Accounting Legerdemain

Nov 25, 2007

Freddie Mac

Part of a series The Great American Write-Down

Freddie Mac (FRE) reported a $2 billion loss in the third quarter, the TIMESONLINE.COM report that Freddie’s losses are $4.8 billion. From there Press Release Freddie lost $4.6 billion in the first three quarters of 2007. What isn’t getting press is that they lost $8.1 billion in net asset value in just the third quarter. Another quarter like that and they will be in non-compliance of the regulatory minimum capital requirement of $8.5 billion in excess capital. Just another $600 million and they will break the 30 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO. They are also in need of immediate funding putting their dividend at risk; both Freddie and Fannie are contemplating issuing convertibles or more stock, further diluting their shares value.

Freddie Mac Reports Third Quarter 2007 Net Loss of $2.0 Billion or $3.29 Per Diluted...
Fannie, Freddie rout seen hurting major investorsUPDATE 1-Freddie Mac sued over mortgage problems

GE Asset Management

Part of a series The Great American Write-Down

GE Asset Management is the arm of GE that takes care of the $60 billion GE U.S. pension fund for 530,000 active employees, vested former employees and retirees and their beneficiaries. One of their funds, a short-term cash fund recently had a run and redemptions trimmed $600 million from the funds value. The management of the pension seems unconcerned but the part of all these write-downs that bothers me is that as these assets are disappearing, where exactly are they disappearing from. Me thinks that the losses will ultimately end up draining our massive pension accounts.

GE: Investors took $600 million out of fund after subprime losses
Mortgage Woes Damage a GE Bond Fund


Part of a series The Great American Write-Down

GMAC Last year Cerberus Capital bought a 51 percent stake in GMAC. Their mortgage lending unit, ResCap, lost $2.2 billion (25 percent) in value last quarter. GM was required by the sale covenants to capitalize ResCap with up to $1 billion if needed. They have done that but the company will still require additional funds to maintain a net worth level of $5.4 billion, also required in those sale covenants. Besides issuing $750 million in new bonds GMAC is considering purchasing a non-US mortgage company that will dilute the losses into a larger pool of mortgages.

Now, What's Bad for GMAC Is Bad for the U.S.A.
GMAC Bids to Rescue ResCap
UPDATE 2-GMAC targets Northern Rock; sale of ResCap parts

Goldman Sacks

Part of a series The Great American Write-Down

Goldman Sacks (GS) wrote off $2.4 billion in the third quarter and no estimates have been made for the future.

The overall opinion is that Goldman is best positioned and have made the correct moves to weather this storm.

Huntington Bank

Part of a series The Great American Write-Down

Huntington Bank (HBAN) Huntington will have to cover about $300 million in the fourth quarter. Besides being hammered by the housing situation, Huntington let First Franklin Financial Corp borrow $1.5 billion that are secured by mortgages. Since Merrill Lynch now owns First Franklin I have to wonder how they plan to handle this.

Huntington Bancshares Taking $300M Charge
Huntington sees surprise loss from mortgage client

IndyMac Bancorp

Part of a series The Great American Write-Down

IndyMac Bancorp (IMB). The third quarter was a rough one for IndyMac, posting a loss of $202 million or five times company estimates. Their credit rating is now BBB-minus, one more cut and they will have obtained junk status.

IndyMac outlook now negative, was stable - S&P
IndyMac Bancorp posts 3rd-quarter loss
IndyMac loss dwarfs own forecast

JP Morgan

Part of a series The Great American Write-Down

JP Morgan (JPM) CreditSights Inc. has stated that JP Morgan might have to write-down as much as $4.1 billion. The company has been very silent about their own holdings while being quick to point to others.

Moody's cuts 23 JP Morgan Alt-A RMBS classes
UPDATE 1-US mortgage-related losses up to $300 bln-OECD

Lehman Bros.

Part of a series The Great American Write-Down

Lehman Bros. (LEH) Lehman wrote $700 million off in the third quarter and have stated that any further write-downs should be neutralized by their hedges. It appears that they were quickest of the big nameplates to start shorting their mortgage exposure.

Stock Market Update - Thu Nov 15 09:35:48 EST 2007

Merrill Lynch

Part of a series The Great American Write-Down

Merrill Lynch (MER) The $8.4 billion write-down Merrill took in the third quarter lead the company to a quarterly loss of $2.24 billion, the largest of their 93-year history. Estimates call for another $8 billion in the fourth quarter with a strong chance for more in 2008. To add insult-to-injury CEO Stan O’Neil, who led Merrill through four consecutive years of record profits as housing boomed, purchased subprime lender First Franklin Financial Corp from National City Corp for $1.4 billion. I guess O’Neil believed all the hype about the hype that subprime was contained and thought he would come out the other side as the somewhat of a genius.

Merrill's own subprime warnings unheeded
Merrill bank $1 bln infusion keeps capital rating
Citigroup Falls After Analyst Downgrade

Morgan Stanley

Part of a series The Great American Write-Down

Morgan Stanley (MWD) wrote $6.2 billion off November 7th after writing off $1.2 in September. So far I haven’t seen any information or estimates for the forth quarter.

S&P cuts 78 classes on 39 Morgan Stanley RMBS deals
New bank mark-to-model data is no measure of risk

National City Corp

Part of a series The Great American Write-Down

National City Corp (NCC) Third quarter profits fell 80 percent and their mortgage lending unit had a $152 million loss. Considering that they sold their subprime mortgage unit, First Franklin Financial Corp, to Merrill this past summer, the company kept a chuck of the subprime loans. In the second quarter alone, that portfolio lost $800 million in value. The ninth-largest U.S. bank also said it is eliminating 2,500 jobs or about 7 percent of their staff.

UPDATE 3-National City net sinks 80 pct, cuts 2,500 jobs

NovaStar Financial Inc.

Part of a series The Great American Write-Down

NovaStar Financial Inc. (NFI) From a Jonathan Stempel article in Reuters: “NEW YORK, Nov 15 (Reuters) - NovaStar Financial Inc. shares fell as much as 63 percent on Thursday after the troubled subprime mortgage lender posted a $598 million third-quarter loss and said bankruptcy is possible.”

Mr. Stempel pens an interesting article about NovaStar and if you’re looking for a more in-depth look at the company, click here.

Sovereign Bancorp Inc.

Part of a series The Great American Write-Down

Sovereign Bancorp Inc. (SOV) The Philadelphia-based bank said it would triple its provision for credit losses by adding over $100 million to the reserve fund. Sovereign had gotten out of the sub-prime business in early 2006 and sold $3.3 billion of that portfolio, but retained loans they could not sell, many of them non-prime, which are usually given to home buyers with poor credit records.

Sovereign Bancorp warns of writedowns

SunTrust Banks Inc.

Part of a series The Great American Write-Down

SunTrust Banks Inc. (STI) had $161 million of write-downs related to loans warehouse and trading assets.

SunTrust also included in their third quarter financials a $45 million severance charge related to plans to eliminate 2,400 jobs, or 7 percent of SunTrust's work force, by the end of 2008 to help the bank save $530 million a year by 2009.

UPDATE 1-SunTrust 3rd-qtr profit falls 23 pct
SunTrust – Could Offshoring Be Part Of Their “Organizational Design Component”


Part of a series The Great American Write-Down

Wachovia (WB) wrote $1.3 billion off in October on their structured portfolio and $1.1 billion off in November on their CDO portfolio.

UPDATE 1-Timing of Golden West deal 'not good'-Wachovia execWachovia Says Portfolio Lost $1.1 Billion in Value in October, Raises Loan Loss Provisions

Washington Mutual

Part of a series The Great American Write-Down

Washington Mutual (WM.N) will increase their loan loss provisions by at least $2.7 billion this year. The companies stock has also taken an additional hit from an investigation by NY AG Cuomo into the practice of pressuring their mortgage insurers to inflate the value of the properties being mortgaged. As a result of this practice, families were over mortgaging their homes causing a severe financial burden. As these loans were packaged and sold, there actual underlying value was also inflated; causing a misrepresentation and losses to the investment banks that bought them.

Note: Company just stated that further provisions, estimated at $1 billion or more, are going to be required to cover additional loan losses.

WaMu Sinks as Losses Mount
Washington Mutual shares sink on Cuomo probe, losses
WaMu sued over home appraisals - law firm
WaMu’s “Amazing Accomplishment”