by Calculated Risk on 1/11/2008 10:51:00 AM

Brian asks: "How many other AAA rated companies are raising money at 14%?"

From Reuters: MBIA $1 bln debt sale may yield 14 percent-investor

A planned $1 billion debt sale by a unit of MBIA Inc may yield about 14 percent, higher than levels discussed on Thursday ... Investors on Thursday said dealers were negotiating a coupon rate between 9 percent and 12 percent, nearly double what similarly rated bonds offer.

by Anonymous on 1/11/2008 10:16:00 AM

What happens when a reporter straps on a decent-sized pack of skepticism about a trade association's PRs and picks up the phone. It's like so totally cool.

Floyd "Maybe This Isn't Just Subprime" Norris in the New York Times:

And now the banks are begging the accounting rule makers to allow them to ignore a rule that has been on the books for almost 15 years. They explain that they never had any idea that they would have to restructure a lot of home mortgages, and thus had no reason to develop systems to deal with the accounting for such restructurings.

“No one anticipated a day when potentially hundreds of thousands of residential mortgage loans would be modified,” said Alison Utermohlen, an official of the Mortgage Bankers Association who has led the effort to get the accounting rules relaxed.

She said many members of the association did not have computer systems adequate to comply with the rule, but she did not identify any specific banks. . . .

The accounting rule in question, Financial Accounting Standard 114, was adopted in 1993. Lynn E. Turner, a former chief accountant of the Securities and Exchange Commission, recalls that it was enacted because of abuses by financial institutions during the savings and loan debacle. Under the old rule, banks could avoid reporting losses so long as they expected to get the principal back eventually, even if the borrower did not have to pay interest on the restructured loan. The rule put an end to that.

Or at least it put an end to it for most types of loans. These banks live with F.A.S. 114 for their commercial mortgages and corporate loans, but according to Ms. Utermohlen, they don’t have systems in place to do the calculations for large numbers of restructured residential mortgage loans.

The calculations, it turns out, are not that complicated. You could do them with a decent financial calculator, or an Excel spreadsheet. But the banks argue that would take too much effort, given the volume of loans likely to be restructured. “This would be extremely time-consuming and would likely involve additional staff dedicated to this purpose,” Ms. Utermohlen said in a letter to the Financial Accounting Standards Board this week.

Will the banks win this argument? It appears to be one that they want to win without having to actually admit that any specific bank has a problem at all. I called five members of the Mortgage Bankers Association that are represented on the committee that Ms. Utermohlen said she worked with: Citigroup, JPMorgan Chase, Bank of America, Countrywide Financial and Washington Mutual. Countrywide said that its computer systems were adequate to comply with F.A.S. 114, but that it felt it would be “less burdensome from an operational standpoint” if the rule could be ignored. None of the other four told me whether their systems were adequate.

Thanks, Floyd, for joining the team. Whenever they're going out of their way to look stupid ("we have no one on staff who can actually use Excel"), the pea is under the other shell. And yes, it is always worth asking why we give bank charters to people who can't discount a cash flow with both hands and a flashlight.

by Anonymous on 1/11/2008 09:55:00 AM

I'd have enjoyed "Disorderly Conduct," but maybe that's the suit that follows against the servicing operations. From the Cleveland Plain Dealer (thanks, W.H.!):

Cleveland Mayor Frank Jackson took aim at Wall Street on Thursday with a lawsuit against 21 major investment banks that he said have enabled the subprime lending and foreclosure crisis here.

The one-of-a-kind suit, filed in Cuyahoga County Common Pleas Court, accuses venerable institutions such as Deutsche Bank, Goldman Sachs, Merrill Lynch and Wells Fargo of creating a public nuisance.

Jackson contends the companies irresponsibly bought and sold high-interest home loans. The result: widespread defaults that depleted the city's tax base and left entire neighborhoods in ruins.

City officials hope to recover hundreds of millions of dollars in damages, including lost taxes from devalued property and money spent demolishing and boarding up thousands of abandoned houses.

"To me, this is no different than organized crime or drugs," Jackson said in an interview with Plain Dealer reporters and editors. "It has the same effect as drug activity in neighborhoods. It's a form of organized crime that happens to be legal in many respects."

by Anonymous on 1/11/2008 07:58:00 AM

LONDON (MarketWatch) -- Bank of America said on Friday it's buying Countrywide Financial for $4 billion, confirming rumors that first emerged Thursday, in a move that will make it the top mortgage lender and loan servicer in the U.S. . . .

Terms of the deal call for shareholders of Countrywide to receive 0.1822 of a share of Bank of America stock in exchange for each share they own.

At Thursday's close, that values Countrywide at $7.16 per share -- lower than the $7.75 closing price after news leaked of a possible deal.

Countrywide shares fell 15%, or $1.22 in pre-open trading Friday, to $6.53.

The purchase is expected to close in the third quarter. It's expected to be neutral to Bank of America earnings per share in 2008 and lift EPS in 2009, excluding merger and restructuring costs.

Bank of America expects $670 million in after-tax cost savings in the transaction, fully realized by 2011.

by Calculated Risk on 1/11/2008 12:52:00 AM

From the NY Times: Giant Write-Down Is Seen for Merrill

Merrill Lynch is expected to suffer $15 billion in losses stemming from soured mortgage investments, almost double its original estimate, prompting the firm to raise additional capital from an outside investor.

The whisper number just keeps getting bigger. Merrill reports next week.

by Calculated Risk on 1/10/2008 07:31:00 PM

Here is a graph of the Fed Funds rate, inflation (as measured by Cleveland Fed median CPI), and the unemployment rate since 1990.

Click on graph for larger image.

The inflation rate is the Cleveland Fed median CPI and is a year-over-year rate - so it is a lagged series.

It's not unusual for the YoY inflation rate to be rising as the Fed cuts rates. Usually, as the economy weakens, the inflation rate will fall. That is the current expectation of the Fed.

Note: The graphs shows the Fed Funds rate at 3.75% at the end of January; that is what the market expects following Chairman Bernanke's speech this morning.


Source: Cleveland Fed, Fed Funds Rate Predictions

The market expectations are now solidly for a 50 bps rate cut on January 30th.

by Calculated Risk on 1/10/2008 05:22:00 PM

Herb Greenberg writes: The Real Story on Countrywide...

We’ll know it soon enough, but ... several things would appear apparent ...:

1. The Fed is behind the deal.
2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.
3. As part of the deal, the Fed likely agrees to guarantee BofA against Countrywide-related losses.

Read his eight points. Interesting speculation.

by Calculated Risk on 1/10/2008 04:37:00 PM

From MarketWatch: American Express To Take 4th Quarter Charge Of $275M Charge

American Express said it will take a fourth-quarter charge of $275 million, due to slower spending and higher delinquencies and loan write-offs in December.

by Calculated Risk on 1/10/2008 02:24:00 PM

From the WSJ by Damian Paletta, Valerie Bauerlein and James R. Hagerty: Bofa In Talks to Buy Countrywide

Bank of America Corp. is in advanced talks to acquire struggling Countrywide Financial Corp., according to people familiar with the situation.

... two people familiar with the matter said it could occur very soon. It also is possible that an agreement could be delayed or fall apart altogether.

by Calculated Risk on 1/10/2008 12:26:00 PM

From Chairman Bernanke: Financial Markets, the Economic Outlook, and Monetary Policy

Although the TAF and other liquidity-related actions appear to have had some positive effects, such measures alone cannot fully address fundamental concerns about credit quality and valuation, nor do these actions relax the balance sheet constraints on financial institutions. Hence, they cannot eliminate the financial restraints affecting the broader economy. Monetary policy (that is, the management of the short-term interest rate) is the Fed’s best tool for pursuing our macroeconomic objectives, namely to promote maximum sustainable employment and price stability.

Although economic growth slowed in the fourth quarter of last year from the third quarter’s rapid clip, it seems nonetheless, as best we can tell, to have continued at a moderate pace. Recently, however, incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced. Notably, the demand for housing seems to have weakened further, in part reflecting the ongoing problems in mortgage markets. In addition, a number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending as we move into 2008.

Financial conditions continue to pose a downside risk to the outlook for growth.
emphasis added

Sounds like more rate cuts (no surprise, the market is pricing in a 50bp cut later this month).