Debt Rattle, June 26 2008: Seriously Souring Sentiments

Dorothea Lange A New Beginning October 1939
"Ex-Nebraska farmer now developing farm out of the stumps. Bonner County, Idaho."

Ilargi: Today, I’d think it’s enough for you to read through the quotes; the trends are excruciatingly clear, and you don’t need my comments. One point might be good to emphasize: Wachovia, the 4th biggest US bank, is in very dire straits, -until now- sort of under the radar.

I bet there are talks going on, as we speak, at the Treasury and the Fed and the inevitable JPMorgan, on how to save and divvy up Wachovia’s assets and transfer the dog doodoo to the public. Mind you, if Wachovia is the $800 billion gorilla in the room, Citi is the big wounded $8 trillion mastodont. Goldman now openly has a strong "sell" call on the stock.

Oh, and General Motors shares are at their lowest level in over 30 years; coincidentally, back then the US president was named Ford.

Joke of the day: US GDP growth beats expectations.


Credit fears resurface

Fears are mounting that conditions are set to deteriorate markedly in credit markets. Lehman Brothers warned this week that spreads on credit default swaps, which track the cost of insuring corporate debt against default, could soon spike beyond the levels seen at the time of the Bear Stearns rescue in March.

Spreads tightened a touch on Wednesday as the market hoped the £4.5bn ($8.9bn) secured by Barclays augured well for raising capital in the banking sector. However, the trend since mid-May has been disturbing. The Markit iTraxx Europe index of investment-grade debt has crept back up from the recent low of 66 basis points to 96bp today. Across the Atlantic, the CDX has moved over the same period from 91bp to 130bp.

Sentiment has soured as investors have become more worried that the fallout from the subprime debacle is increasingly infecting the real economy. A data-rich week has offered little solace. Private sector output in the eurozone has contracted for the first time in five years, while consumer confidence and housing metrics in the US continue to be dire.

Sharply rising input prices that can’t easily be passed on will further crimp business profit margins, increasing the risk of corporate failure. Adding to the woe are more ratings downgrades for the monoline bond insurers, crucial cogs in the financial system.

Moody’s says the prospect of a 25 basis point rate rise by the ECB next month “is likely to be unwelcome news for the debt markets”. Comments on Wednesday from Jean-Claude Trichet, ECB president, only cemented expectations of a rise in July.
True, Mr Trichet has disabused the market of expecting a succession of tightening measures. But with the US Federal Reserve also very wary of inflation, the credit markets can’t expect much help from the authorities soon.

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Wall Street Sold Auction-Rate to Investors While Warning Issuers of Danger

Yanping Cui, 57, says she invested in auction-rate bonds last December at the urging of a broker at UBS AG in Long Beach, California. The same month, UBS told one of the issuers of those securities, a New Hampshire student-loan agency, that the $330 billion market was in danger of failing.

That's exactly what happened in February, when mounting mortgage losses forced dealers who underwrote and managed the market for more than 20 years to stop acting as buyers of last resort. Cui was told she wouldn't get her money back until the market recovered. "He said it's very safe and as liquid as possible," Cui said of the advice she received from UBS broker Brian Meehan.

"I'm so angry. That's my bloody money." Meehan, now at Wells Fargo Investments in Newport Beach, declined to comment. Cui is one of dozens of investors who say they were sold auction-rate securities as a low-risk alternative to cash at the same time underwriters, including UBS and Citigroup Inc., were telling issuers that demand was softening, bond documents and interviews with investors show.

The chronology shows that dealers "knew they didn't have enough demand," said Christopher "Kit" Taylor, executive director of the Municipal Securities Rulemaking Board from 1978 to 2007, who now consults investor groups on financial markets and regulation. "They were not telling the other side of the story."

At least 24 proposed class-action lawsuits have been filed against brokerages since March, and a nine-state task force is examining how the firms marketed the securities. Those burned in the meltdown see it as a case of Wall Street hiding known risks from investors, much like the dot-com scandal over former Merrill Lynch & Co. analyst Henry Blodget, who once advised buying a stock while privately calling it "junk."

"They were selling me their junk student-loan bonds, knowing the market was going down," said Jimmy Walker, 53, who owns a doughnut business in Dallas and who bought $1 million of auction-rate securities on Jan. 23 from Bank of America Corp.

He says his banker brought in a broker who recommended the securities and never mentioned anything about auctions. "It took a lot of doughnuts to get $1 million in the bank," Walker said. "That's my life savings. I'll be dead by the time I collect."

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Ilargi: This one is getting complicated. My first reaction is that regulators may have the authority, but they risk setting off unmitigated litigation warfare, both domestic and internationally. We are talking hundreds of billions of dollars here.

Regulators could block monolines’ credit default swaps payments

Policy holders on structured credit products guaranteed by bond insurers may not get paid even if the contracts are triggered, as regulators may block payments to protect the interests of municipal policy holders. Any attempt by MBIA Inc to set up a new insurance subsidiary that can upstream dividends to the holding company could also be scuttled for the same reason, analysts said.

Reserves set aside to cover losses from insuring risky mortgage securities has depleted capital levels at insurers, sparking concerns that some may breach statutory minimum regulatory capital minimums. Companies that fall below the minimum requirements risk being seized by regulators, which in turn would trigger the immediate payment on insurance they sold with credit default swaps. And this would make the companies insolvent, as they would not have enough to pay out what would be billion of dollars in claims.

The New York State Insurance Department, however, "has authority to block payments on a credit default swap," said Rob Haines, analyst at CreditSights in New York. "Regulators have a lot of power." "In our opinion, it is very likely the regulators will refuse to honor the accelerated demands on the grounds that the holders of the swaps would receive preferential treatment versus the traditional policyholders, which for the most part are the municipal policyholders," he added in a recent report.

David Neustadt, a spokesman for the New York State Insurance Department, said the department won't speculate on hypothetical events. "Our job is to protect policyholders and our decisions are made on that basis," he added. Haines views FGIC, XL Capital Assurance, part of Security Capital Assurance, and CIFG Guaranty at risk of breaching their minimum capital levels in the second quarter. FGIC's owners include mortgage insurer PMI Group Inc and private equity firms Blackstone, Cypress Group and CIVC Partners LP. CIFG is owned by Banque Populaire and Caisse d'Epargne, which together own French bank Natixis.

Any plan by MBIA to set up a new insurance subsidiary to focus on municipal insurance may also come under pressure from regulators, analysts said. MBIA Inc has been considered a less risky credit than its insurance subsidiary, MBIA Insurance Corp, since the company said it will keep $900 million it had previously earmarked for its insurance arm at the holding company level. Credit default swaps on MBIA Insurance Corp surged higher than its lower rated parent, inverting its traditional relationship, as market participants bet that the parent company could receive dividends from a new, untainted insurance unit.

"The parent company's creditworthiness is a function of the cash flows from the subsidiaries," said Ricardo Kleinbaum, analyst at BNP Paribas in New York. However, "we do not think that MBIA can set up a new bond insurance entity that will generate sufficient revenues to earn a 'triple-A' ratings at the outset," he said. "The regulators might well restrict dividend payments out of a new insurance unit to the parent company, MBIA Inc."

CreditSights' Haines agreed: "MBIA is not going to get a new insurance company off the ground. First off, the regulators have to approve that new insurance subsidiary after MBIA kind of snubbed them in terms of the $900 million." The company would also need more capital than $900 million to achieve top-AAA ratings, he said, and "there is no way they would get AAA having a MBIA name on them right now because it's a damaged franchise," he added.

MBIA spokeswoman Elizabeth James countered that MBIA already has enough financial flexibility to capitalize a new, "AAA" rated insurance subsidiary. "We would not be reliant upon dividend approval from our regulators to fund this investment," she said. There are also ways of structuring a new company so that it is separate from MBIA Insurance and MBIA Inc, she said.

"We believe there would be strong interest from third parties to invest in an MBIA sponsored U.S. municipal bond insurer." Meanwhile, an influential labor group said on Wednesday it is stepping up pressure MBIA to keep its promise to put $900 million into the insurance unit, citing the need to protect pension funds that invest in municipal bonds.

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GM shares plunge in early trading

Shares of General Motors Corp. plunged Thursday to their lowest price in more than 30 years, as industry observers and investors continued to speculate about just how bad things could get for U.S.-based automakers before they start to get better.

In early trading, GM shares dropped $1.27, or 9.9 percent, to $11.54, after tumbling as low as $11.32 in the opening minutes of trading. The last time the Detroit-based automaker's shares dropped below the $12 mark was on Jan. 2, 1975 when it fell to $11.68, according to the University of Chicago's Center for Research in Security Prices.

The drop came after A Goldman Sachs analyst cut his rating for GM to "Sell" from "Neutral" and his price target to $11 from $16, saying things could still get worse for the North American automotive industry as a whole. "We expect GM shares to continue to underperform as market fundamentals deteriorate which exacerbates liquidity concerns," the investment bank's Patrick Archambault wrote in a note to investors.

"We think GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital, which we believe could lead to significant shareholder dilution and/or a cut to the company's dividend." Archambault also cut his ratings for Lear Corp. to "Sell" from "Neutral" and for Tenneco to "Neutral" from "Buy." Both auto suppliers also set 52-week lows Thursday.

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Citigroup sinks to 10-year low, Goldman urges short sale

Citigroup Inc shares fell to their lowest level in nearly a decade after a Goldman Sachs & Co analyst said investors should sell the largest U.S. bank's stock short as losses mount from troubled debt. In morning trading, the shares were down $1.03, or 5.5 percent, at $17.82 on the New York Stock Exchange.

The shares were among the biggest drags on the Dow Jones industrial average and Standard & Poor's 500, which both fell more than 1 percent. They also touched their lowest level since October 1998, the month that Sanford "Sandy" Weill merged his Travelers Group with Citicorp to create Citigroup.

William Tanona, the Goldman analyst, added Citigroup to Goldman's "Americas conviction sell" list and cut his price target on the stock to $16 from $20. He recommended a "paired" trade in which investors sell Citigroup shares short, betting on a decline, and buy Morgan Stanley shares.

The analyst said Citigroup might take $8.9 billion of write-downs for the April-to-June period, leading to its third straight quarterly loss. He also said the bank might need to cut its quarterly dividend for a second time this year, after lowering it 41 percent to 32 cents per share in January.

Tanona's forecast suggests deeper problems for Citigroup Chief Executive Vikram Pandit, who is trying to turn the bank around after nearly $15 billion of losses in the last two quarters, and more than $46 billion of credit losses and write-downs since the middle of 2007.

"We see multiple headwinds for Citigroup including additional write-downs, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales," the analyst wrote.

Pandit became chief executive in December, replacing Charles Prince, who resigned under pressure the previous month. Weill had hand-picked Prince as his replacement when he gave up the top job in 2003. Last week, Chief Financial Officer Gary Crittenden said on a Deutsche Bank conference call that Citigroup could take substantial write-downs this quarter.

Tanona said Citigroup might write off $7.1 billion related to collateralized debt obligations and associated hedges related to monoline insurers, $1.2 billion for other asset classes and $600 million for structured note liabilities. He now expects Citigroup to lose 75 cents a share this quarter, compared with his earlier forecast of a profit of 25 cents. He also expects a full-year loss of $1.20 a share, compared with his prior view for a profit of 30 cents.

As of May, Citigroup had raised some $42 billion since last fall, including injections from sovereign wealth funds, data compiled by Reuters News show. Tanona said the bank may now need to issue common stock or sell assets to raise capital, because regulators may forbid it from issuing more preferred or convertible securities. He also said halving the dividend could preserve $3.5 billion a year.

"Given the firm's current level of earnings power, we do not believe the dividend is safe," Tanona wrote.
A Citigroup spokeswoman declined to comment. On June 24, Merrill Lynch analyst Guy Moszkowski projected $8 billion of write-downs for Citigroup. Tanona also downgraded the U.S. brokerage sector to "neutral" from "attractive," saying deteriorating fundamentals will likely prolong any recovery from the credit crunch.

He projected a $4.2 billion second-quarter write-down for Merrill Lynch & Co, leading to a quarterly loss for the largest U.S. brokerage. "We expect write-downs for Citigroup and Merrill to outpace what we saw from Morgan Stanley and Lehman Brothers Holdings recently, due to Citigroup's and Merrill's large exposures to ABS CDOs (asset-backed security CDOs) and associated hedges with the monolines," Tanona wrote.

Brad Hintz, a Sanford C. Bernstein & Co analyst, on Thursday projected a $3.5 billion second-quarter write-down for Merrill. Banc of America Securities analyst Michael Hecht made the same forecast earlier this month. On June 17, Goldman analysts led by Richard Ramsden said U.S. banks may need $65 billion more capital to cope with a global credit crisis that will not peak until 2009.

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Citigroup, Merrill Estimates Lowered by Analysts on Writedowns

Citigroup Inc. and Merrill Lynch & Co. had their second-quarter earnings estimates cut by analysts at Goldman Sachs Group Inc. and Sanford C. Bernstein on expectations for additional writedowns. Citigroup, the biggest U.S. bank, may reduce the value of its assets by $8.9 billion, causing a third straight loss for the New York-based company, Goldman analyst William Tanona wrote in a note late yesterday.

Sanford Bernstein's Brad Hintz today cut his second-quarter Merrill estimate to a loss of 93 cents a share from a profit of 82 cents. "The turnaround in business trends that we had been expecting in the second half of 2008 may not occur as quickly as we should have thought," Tanona said. "We see multiple headwinds." Goldman joined UBS AG and Merrill in predicting more writedowns for Citigroup, already reeling from $44 billion of credit-related losses.

Citigroup Chief Executive Officer Vikram Pandit has announced 13,000 job cuts this year, and the bank this month forecast "substantial" additional writedowns and more losses on consumer loans. Goldman reduced its second-quarter estimate on Citigroup to a loss of 75 cents a share from profit of 25 cents. It also cut Merrill's estimate to a loss of $2 from earnings of 25 cents.

Goldman lowered its rating on U.S. brokerages to "neutral" from "attractive," saying the pace of deterioration in the industry "appears to be far worse" than it originally anticipated. "We are hard pressed to find a catalyst that will move the group significantly higher over the next few months," Tanona wrote in the note. Citigroup may write down $7.1 billion of collateralized debt obligations and associated hedges, and $1.2 billion for other asset classes, Tanona said.

It also may need to post a $600 million loss to reflect the mark-to-market value of its own structured note liabilities, he said. Tanona cut his six-month price target for Citigroup to $16 and put the bank on Goldman's "conviction sell" list. "The earnings outlook for the brokers remains bleak," Hintz at Sanford Bernstein wrote. "The high margin businesses of investment banking are entering a cyclical slowdown."

Citigroup probably won't be able to keep its current 7 percent dividend yield and may need to raise more capital, according to the Goldman report, which estimated Citigroup could generate $3.5 billion in capital a year by cutting payouts in half. "Given the firm's current level of earnings power, we do not believe the dividend is safe," Tanona said. "We believe any additional capital raises will be in the form of common equity, dividend cuts and or additional asset sales."

Citigroup is more exposed to hedges on its leveraged loan and commercial mortgage-backed securities portfolios than Merrill and JPMorgan Chase & Co., indicating higher potential losses, Tanona said. Merrill analyst Guy Moszkowski this week said Citigroup may post another $8 billion of writedowns this year. UBS analyst Glenn Schorr on June 20 said Citigroup probably will post a second-quarter loss of 40 cents a share after $8.7 billion of asset writedowns.

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Goldman downgrades fellow bankers

Goldman Sachs said it lowered its rating on the U.S. broker industry because of continued deterioration of the banking industry and the prospect of a lengthy recovery. "We are lowering our coverage view on the brokers to Neutral from Attractive, as we see limited near term catalysts," read the report, published Wednesday by Goldman Sachs analyst William Tanona.

"Fundamentals continue to deteriorate as expected, but the pace of deterioration appears to be far worse than we originally anticipated." In his report, Tanona said he upgraded the group to "attractive" after the collapse of Bear Stearns in March because he did not see a high probability of another bank failing. He said he downgraded the industry because he doesn't see many prospects for improvement in the near future.

"Although we still believe that to be the case, we are hard pressed to find a catalyst that will move the group significantly higher over the next few months as fundamentals continue to deteriorate," wrote Tanona. "In addition, we also believe a recovery will take longer than originally anticipated."

Goldman Sachs also downgraded Citigroup to "conviction sell." Tanona expects the firm to take an additional $8.9 billion in writedowns in the second quarter. The analyst also expects "significant" writedowns for Merrill Lynch.

"We see multiple headwinds for Citigroup including additional writedowns, higher consumer provisions as a result of rapidly deteriorating consumer credit trends, and the potential for additional capital raises, dividend cuts, or asset sales," read Tanona's report. The firm maintained its "conviction buy" for Morgan Stanley. 

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Ilargi: So Goldman cuts ratings for Citi and Merrill Lynch, but in turn is itself cut by Wachovia. And it gets better: Wachovia had just a few days ago hired Goldman to help it sell some stuff, AND to find a new CEO. It’s all in a day’s life for your average white trash reality show: incest comes to mind.

Wachovia cuts Goldman Sachs

A Wachovia Capital Markets analyst downgraded shares of Goldman Sachs Group Inc. on Thursday, saying the investment bank's recent strong performance will likely weaken due in part to concerns over the broader economy.

Douglas Sipkin downgraded Goldman to "Market Perform" from "Outperform" in a client note. Although Goldman remains "the top name" among investment banks, he said, banking and prime brokerage performance and the pace of capital raises are all likely to slow as banks enter the slower summer months.

"Slowing economic growth in the face of still strong commodity prices especially oil prices will likely keep capital markets activity muted for the foreseeable future," Sipkin said. "As a result, we expect the group to continue to stagnate."
The analyst maintained "Outperform" ratings on banks Morgan Stanley and Raymond James Financial Inc.

Morgan Stanley may have an opportunity to recapture market share after its disappointing second quarter, he said.

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Wachovia hires Goldman Sachs for help on loans

Wachovia Corp, the fourth-largest U.S. bank, said on Tuesday it has hired Goldman Sachs Group Inc for advice on its loan portfolio, after the housing slump caused mortgage-related losses to soar. "Goldman is performing analytics on our loan portfolio to evaluate various alternatives," said Christy Phillips-Brown, a Wachovia spokeswoman. She declined to comment further.

The hiring came after reports last week that Wachovia also retained Goldman to help it find a new chief executive. Wachovia ousted Ken Thompson from that position three weeks ago following a series of financial, legal and regulatory problems, less than a month after replacing him as chairman. Wachovia said it ended March with $480.5 billion of net loans, up 14 percent from a year earlier.

Nonperforming assets, however, more than quadrupled over that time to $8.37 billion, largely because of mounting defaults on adjustable-rate mortgages that let borrowers pay less than the interest due. Such low payments can cause amounts owed on so-called "option ARMs" to rise even as home prices fall.

"This implies to us that the bank will mark down a sizable package of loans so that they can be more easily sold," wrote Richard Bove, an analyst at Ladenburg Thalmann & Co. "This could be a meaningful charge to second-quarter earnings." Option ARMs, which Wachovia calls "Pick-a-Pay" mortgages, were a specialty of Golden West Financial Corp, a California lender that Wachovia bought for $24.2 billion in October 2006 just as the five-year housing boom was peaking.

Problems with the $121.2 billion option ARM portfolio, as well as with other loans, led Wachovia in April to raise $8.05 billion of capital and cut its dividend 41 percent. They also resulted in a $708 million loss from January to March, the bank's first quarterly loss since 2001. Wachovia shares had through Monday fallen more than 55 percent this year, prompting frequent speculation the bank could be a takeover target

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New York City Pension Funds Lose Billions

New York City officials are bracing for increased pressure on the budget as the city's pension funds are reeling from the credit crisis and posting billions of dollars in losses. In the nine months leading up to March 31, the city's five pension funds lost a total of nearly $5 billion, or 4.4%, according to data from the city comptroller's office. This is a far cry from projections published as recently as last month, when budget planners assumed the pension system would post no losses.

If those losses are not recovered by the end of the fiscal year, which ends Monday, the city will have to pay out several billion dollars through 2015, with the first payment of $190 million set for 2010. The government will have to make up the shortfall from the poor performance of the pension funds at a time when it is already suffering from tax revenue losses due to a souring economy.

"In itself, it's manageable," the research director for the Citizens Budget Commission, Charles Brecher, said of the pension fund losses. "The fact that it's going to be combined with revenue shortfalls means that we've got serious problems." The Teachers' Retirement System of the City of New York, which has lost 5.06% of its value in the nine months ending March 31, has been the worst performer so far this year.

The New York City Employees' Retirement System, which lost 3.98% in the same period, performed the best. Other pension funds include the New York City Police Pension Fund, the New York City Fire Department Pension Fund, and the Board of Education Retirement System of the City of New York. Numbers for the state pension system are not yet available, a spokesman for the state comptroller said.

The city's funds' performance so far this fiscal year "adds significantly to the amount of money the city has to contribute," a spokesman for the Independent Budget Office, Doug Turetsky, said. "The city is going to be facing bigger increases than perhaps previously anticipated." New York City's pension funds did worse during the nine months ending March 31 than other public pension funds worth more than $1 billion, which posted an average loss of 3.3% during that period, according to an index from consulting group Wilshire Associates.

New York's pension funds may have suffered more than their peers because of heavy investments in stocks. "They have such a high exposure to stocks that if the stock market isn't doing well, it's going to be more visible for them," the editor of the newsletter Pensions & Investments, Nancy Webman, said. "But in a year when the market is doing well, they're going to be fabulous."

A spokesman for Comptroller William Thompson Jr., who is an investment adviser to New York City's pension funds and is a likely candidate for mayor in 2009, said the funds have diversified in recent years. "A challenging market over the past year has affected investors worldwide," a spokesman, Michael Loughran, said in a statement. "However, the funds are performing on pace with the major market indexes, due in part to the diversification of the portfolio."

According Wilshire's index, other large public funds have returned an average of 12.01% annually over the five years ended March 31, 2008. New York's worst-performing fund, the teachers' fund, returned 11.97% during that period, while the best, the police fund, returned 12.89%. While the funds' gains over the past several years should help offset the rough times experienced during a slowing economy, legislators took advantage of the strong performance of the funds to authorize additional pension benefits, the director of the Empire Center for New York State Policy, E.J. McMahon, said.

The city's annual contribution to the pension system will have nearly doubled between fiscal years 2005 and 2009, when it will owe about $6.1 billion. "A large chunk of all the revenue generated by the economic growth of the last few years has been consumed by the increase in pension costs," Mr. McMahon said. "The way the legislature approached pension sweeteners is just to pass the union's wish list."

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Ilargi: Fortis shares are down almost 20% as of now. Not very well known in the US, they’re a new and heavily leveraged Dutch/Belgian unit which, along with RBS, got badly, if not fatally, burned by overextending itself in purchasing ABN/AMRO last year.

Fortis Aims to Raise $12.5 Billion With Capital Boost, Asset Sales

Belgian-Dutch financial group Fortis NV Thursday became the latest European bank to seek fresh capital to shore up its balance sheet amid continuing market trouble, saying it aims to boost its solvency position with €8 billion ($12.54 billion) worth of measures, including a €1.5 billion capital increase and asset disposals. Fortis also said it will cancel its interim 2008 dividend and to pay the full-year dividend in shares.

"We believe that 2008 will be a difficult year for our industry and we do not expect an improvement in the economic environment soon," Chief Executive Jean-Paul Votron said. Midmorning in Europe, Fortis shares were down nearly 10% at €11.40, underperforming the Stoxx Europe 600 banks index which was down nearly 2%.

Fortis last year as part of a trio of banks bought rival ABN Amro Holding in a €70 billion, landmark deal. But shortly after winning the takeover battle, the U.S. housing crises fully erupted and wrought havoc on banking balance sheets world-wide. Fortis now follows in the footsteps of Royal Bank of Scotland Group PLC, UBS AG and Credit Agricole SA, which were all forced to raise capital to restore their damaged balance sheets.

The measures outlined will increase the core Tier 1 ratio of Fortis Bank, which at the end of the first quarter stood at 8.5%, and will -- considering full consolidation of the acquired ABN Amro assets -- enable Fortis to keep the core Tier 1 ratio well above 6% by year-end 2009, under Basel I guidelines. Fortis said it will issue new shares worth €1.5 billion, aimed at institutional investors. The bank also said it won't pay a cash interim dividend in 2008. This will preserve solvency, given that the dividend was expected to hit second-quarter solvency by €1.3 billion.

Fortis already called on shareholders to finance the ABN Amro acquisition. In September last year completed a €13.4 billion rights issue. In addition, Chinese insurer Ping An bought a 50% equity stake in Fortis Investments for €2.15 billion and became Fortis's largest shareholder with around 5%. "We are unpleasantly surprised by today's announcement of solvency measures by Fortis," Bank Degroof said in an analyst note. "We roughly estimate that they will cost the Fortis shareholders €2 a share."

Commenting on the second quarter, Fortis said "the underlying commercial performance of the banking and insurance activities continues to be resilient and is expected to be in line with or slightly up on the previous quarter."
Fortis also said: "Lower capital gains are anticipated to be offset by lower impairments on the structured credit portfolio." Fortis will publish second-quarter results on Aug. 4.

Fortis added that its decision was based on the expected outcome in the coming weeks of the imposed sale of some of the Dutch commercial banking activities under the European Commission remedies ruling and the planned acquisition of the remaining 51% stake in the Dutch insurance joint venture with Delta Lloyd.

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Ilargi: Look: Growth!! Must be good, right? But wait, who pays when the gambles fail?

Fannie Mae's book of business grows 9.9 percent

Mortgage financier Fannie Mae's total book of business grew 9.9 percent on an annualized basis in May, according to data released by the company Wednesday.

Fannie Mae's total book of business, which includes its mortgage portfolio and all Fannie Mae mortgage-backed securities less its own securities held in portfolio, increased to $3.01 trillion during the month. Fannie Mae's book of business totaled $2.642 trillion at the end of May 2007 and $2.986 trillion at the end of April 2008.

Fannie Mae's gross mortgage portfolio grew 15 percent to $736.93 billion in May, while mortgage-backed securities business grew 11.6 percent to $2.532 trillion. Securities held in its own portfolio totaled $259.64 billion at the end of May. Separately, Fannie Mae said seriously delinquent loans on single-family homes rose to 1.22 percent in April, according to the company's most recent data.

Fannie Mae's serious delinquency rate was 0.62 percent during the same month last year and 1.15 percent in March. The serious delinquency rate measures loans more than 90 days past due or in foreclosure as a percentage of the total number of single-family loans. 

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Ilargi: Trying to figure out who does what: both California and Illinois sue Countrywide AND Mozilo, Washington state only revokes a licence and issues a fine, no suit so far.
There should be much more coming. Where are the other states? Is Florida asleep?

Washington Latest State To Take On Countrywide

On Wednesday, the state of California said it had filed a lawsuit accusing Countrywide Financial Corp. (CFC) of predatory lending practices. Later the same day, Washington State's governor announced that her state, too, will go after the nation's largest mortgage lender.

The office of Chris Gregoire, Washington's governor, said she would hold a press conference on Wednesday afternoon to announce that her state will both fine Countrywide for "discriminatory lending practices" and ask regulators to withdraw its state license to do business in Washington. A brief release from Gov. Gregoire's office said the government will accuse Countrywide of "targeting Washington's minority communities."

Earlier Wednesday, California Attorney General Edmund Brown Jr. sued Countrywide and both its CEO and president, Angelo Mozilo and David Sambol, for "engaging in deceptive advertising and unfair competition by pushing homeowners into... risky loans."

The nation's housing woes have badly bruised California real estate markets, which have been among the hardest-hit regions since mortgage crisis began. Bank of America Corp. has inked a closely watched deal to buy Countrywide later this year.

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Ilargi: Karl Denninger has largely the same view that I do (not a first) in the Countrywide case. It’s just that I have the feeling we will see some unexpected things crawling out of closets and drawers; it’s too easy, too clean till now. The idea that Angelo’s -D.C.- friends will be called on to testify doesn’t sit well with me; these guys and dolls are career politicians; they have no principles or scruples, they’re masters at slithering out of embarrassing situations. The timing of the suits a stroke of genius? Or is it just too convenient? One thing I think is certain: Mozilo is the fall guy.

Countrywide: just plain damned

In this case, its Bank America that's on the "receiving" end. Lookie what got filed yesterday - a document in Washington State that essentially threatens to put Countrywide out of business in that state for the next five years. This adds on to the pile from Illinois and California.

Now here's why it matters - BAC is purchasing Countrywide and intended to stuff the company into a separate LLC - a place where they are presumably "bankruptcy remote", and if push comes to shove, they could let die on the vine. Not so fast!  Now, with the suits filed, if they close the transaction there's no way they're going to be able to slither out from under the liability. 

Transferring the shares into an LLC once the suit has been filed is like trying to transfer assets out of our estate after someone slips and falls on your porch and sues you - it won't work and the courts will forcibly unwind the transaction so your soft underbelly (and money) are exposed.

Now this was always a losing gambit for BAC anyway, because the acts that gave rise to the liability happened in the past.  But - up until yesterday, they might have gotten away with it. In my opinion the odds of that working today are now zero. The calculus for Lewis over at BAC got a lot more difficult yesterday.

Yes, The Housing Bill was basically written by Bank America (and allegedly UBS), but does it really matter now?  How much liability is there in these suits?  $10 billion?  $20?  Half or more of all the business Countrywide wrote in the last five years?

There's no way to know.  But the Illinois suit in particular asked for the right to break any loan that had fraud in it and force it back on CFC; such relief, if granted, is certainly going to be in the many billions of dollars. Now multiply by 50 because there is zero chance that this remains local to one or two states; I expect 47 more lawsuits in the next few days.

The filing of these suits was a stroke of genius on the part of the State AGs that are involved.  They in essence put a fork into the idea that Congress (or anyone else) was going to let Countrywide off the hook for all this garbage within their jurisdiction - not so fast, says the AG.

If BAC closes then they own the liability - a liability they willingly assumed.  You can't stick that in a separate LLC and bankrupt it - that won't be allowed as this is not a "hypothetical" liability it is a known, filed lawsuit! If BAC doesn't close then CFC dies immediately under the crushing weight of all the suits and, I would assume, an immediate lack of funding.  Bang.

Lewis would have to be an absolute idiot to close the deal under these circumstances.  Nothing short of an explicit backstop by The Feds helps here, and I doubt very much that any such thing is forthcoming, as the potential damages run into the tens or even hundreds of billions.

Worse, if Lewis does close the transaction I believe that he risks an immediate shareholder lawsuit from Bank America's shareholders as it sure appears that he has just chosen to intentionally damage their stake in the firm. Damned if you do, damned if you don't. Or if you prefer, just plain damned. I like it.

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U.S. Senate housing bill snags on lone lawmaker

U.S. Senate progress toward approving a sweeping housing rescue plan was delayed on Wednesday by the objections of a Republican lawmaker who wants to attach an amendment dealing with renewable energy. Nevada Sen. John Ensign -- whose state is among the hardest hit by a deep housing market slump -- was refusing to allow the housing bill to proceed without a vote on extending tax incentives for renewable energy technologies.

"I'm going to do everything I can to try to get my renewable tax credit amendment done," Ensign told Reuters. "We've got a lot of procedural tools. We can delay this (housing) bill quite a bit unless they allow us a vote on our amendment. That's all we want," he said. Ensign's position drew criticism from senior Democratic backers of the housing measure, which would create a multibillion dollar fund to help hundreds of thousands of troubled homeowners refinance their mortgages.

The legislation would also overhaul regulation of Fannie Mae and Freddie Mac, the nation's largest mortgage finance companies, while sending federal money to states and communities to buy and fix foreclosed properties. "One United States senator has decided this bill isn't going to go forward," Democratic Sen. Christopher Dodd, chief architect of the housing bill, said on the Senate floor.

Dodd said the housing bill has broad, bipartisan support in the Senate and in the House of Representatives. It cleared a key Senate procedural hurdle on Tuesday by an 83-9 vote. "I had hoped that before we left here for the Independence Day recess, we would be able to send a bill to the president for his signature," said the Connecticut lawmaker. But, he said, "One United States senator has decided we shouldn't do anything but his bill. Unfortunately that's the way this institution works too often."

The Bush administration has threatened to veto the bill, citing objections to the provision that would send federal money to states and localities. But it has indicated a willingness to work with lawmakers on it. Illinois Democratic Sen. Richard Durbin, a member of the Senate leadership, told reporters:

"We're facing one obstacle, one senator, Sen. Ensign. Sen. Ensign has decided that he wants to bring in a matter that has nothing to do with housing and is threatening this housing bill. It's unfortunate that he's doing this." Ensign played a key role in getting a renewable energy tax credit amendment attached to an earlier Senate housing bill in April. The House later took up portions of that bill in its version of a housing market rescue plan.

But Ensign's amendment was excluded from the House bill and the new Senate plan. "This amendment represents the most realistic option to encourage renewable energy development," Ensign spokesman Tory Mazzola said. "... Sen. Ensign wants a vote."

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Americans, Hurt by Rising Gas Prices, Curb Spending

Most Americans say they are feeling the pain from rising gasoline prices and many are tightening their belts in response, a Bloomberg/Los Angeles Times survey shows. "It costs me double to fill up the tank," says J.L. Harder, a 75-year-old retiree and poll respondent in Peoria, Texas. "We don't go on vacation and don't visit the relatives."

He isn't alone. Seven in 10 of those surveyed say higher gas prices have caused them "financial hardship." More than 1 in 3 respondents say they have cut back on their spending over the last six months as oil and food prices surged and unemployment rose. That's bad news for the economy. With consumers accounting for 70 percent of gross domestic product, any pullback in their spending would have an outsized impact on the economy.

In a note to clients this week, Deutsche Bank AG economists estimate that U.S. annual growth may be cut by a half to a full percentage point if consumers spend less and save more. "Consumers are facing so many different headwinds," says Jonathan Basile, economist for Credit Suisse Holdings Inc. in New York. "It going to hold back growth for a while."

Poll respondents pin most of the blame for the 35 percent surge in gas prices over the last year on President George W. Bush, according to the poll. Almost 3 in 10 singled out Bush as the one responsible, followed by the oil companies, identified by 25 percent, and speculators, by 13 percent. Only 9 percent blamed foreign oil producers and the Organization of the Petroleum Exporting Countries.

The poll of 1,233 adults surveyed from June 19 to June 23 has a margin of error of plus or minus 3 percentage points.
Poll respondent Michael King, a 47-year-old Chicagoan who works for an auto-parts supplier, says he is considering selling one of his three cars, a Mazda Millenia, that runs on higher- priced premium gas.

The increase in gas prices has been a double whammy for King. Dearborn, Michigan-based Ford Motor Co., one of his company's major customers, has cut production as demand for gas- guzzling sports utility vehicles and light trucks declined.
"It's not a ripple effect," King says. "It's a tsunami."

Americans want the government to do more besides the rebates to help the economy, according to the poll. A majority favor the federal authorities allowing more drilling for oil and gas in and offshore the U.S. They also want the government to do more to help homeowners facing foreclosure and to regulate Wall Street in the wake of the subprime-mortgage crisis that exploded in August.

Not surprisingly, Americans are feeling gloomy about the economy. Eighty-two percent of those surveyed describe the economy as performing badly; that's the worst assessment in 15 years. Half of the respondents say it is doing very badly.
And it isn't likely to get better, those surveyed say. Only 18 percent of respondents see the economy improving six months from now. Thirty-one percent say it would get worse. Forty-five percent see conditions as the same.

"I'm starting to understand how my grandfather felt in the Depression," says Joyce Wilkinson, a 58-year-old retiree in Lake Barrington, Illinois. "Do I need to take all my money out of the stock market and put it under the mattress?'

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Souring sentiment among American workers

The Marlin Company 14th Annual Attitudes in the American Workplace Poll reports the following results on June 24:

More than one third (41%) of US workers are cutting back on utilities, nearly half have reduced food purchases (48.5%) and a large percentage are buying less clothing.

The national survey of US workers, conducted May 12-14, 2008, also found that younger workers (between the ages of 18 to 29) are being hit the hardest by the economy and are the most desperate about their economic future. More than one third (34.3%) of young American workers say their financial situation has caused them to “feel hopelessness or despair about their economic future.” That compares with 28.8% of workers age 30 to 49, 23.5% of workers 50-64 and 17.9% of workers 65 or older.

Nearly a third (31.4%) of workers report being occasionally kept awake at night because they worry they will not meet housing payments, credit cards, or other personal expenses, 36.8% of whom were between the ages of 18 and 29.

And nearly one fourth (23.4%) of US workers say their financial situation has distracted them on the job, with the most distracted being young workers, age 18 to 29 (36.8%). “US workers are hurting on multiple fronts, and their pain is growing,” stated Kenna.

“This year’s poll clearly illustrates exactly how damaging the current state of the US economy is to its workers.” In particular, with gas prices topping $4 a gallon this summer, more than a quarter of workers (25.7%) are already choosing alternatives to driving into work – such as carpooling or public transportation? 35.9% were between the ages of 18 and 29, with more females (32%) than males (23.1%) conserving.

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Brewing storm over Labour's dream of wind power future

As the British Government today prepares to embrace green energy with a vengeance, it is worth remembering that all the world's major powers are toying with the same agenda. The US is all of a sudden the new Mecca for wind power. Turbines towering over 400ft are sprouting up across Texas and the lower Prairies, and GE is betting that power generated by wind could reach 15pc of all US electricity supply in a decade. Roughly 30pc of America's corn crop this year will be used for bio-fuels. Fat subsidies help.

China is already the world's number-two maker of solar panels. The kit is now routinely fitted on new houses. This month's National Energy Plan shows the country is hellbent on cutting oil imports. The latest batch of 6m students will have to master the new green energy doctrine to get into university.

Washington and Beijing are making cold geo-political calculations. Neither wants to be pushed around by hostile petro-powers, or fall hostage to oil at $200 a barrel. Both are going nuclear, but uranium is scarce. Both have coal, but the technology of carbon capture has not yet been cracked.

This is the global picture as Labour releases its long-awaited Renewable Energy Strategy today, hopefully ending years of drift, muddle, and a string of ostrich policy papers. It is very late in the day to play catch-up. It aims to raise the green share of Britain's energy to 15pc by 2020, from under 2pc today. This much we knew already. Labour agreed to the target at an EU accord last year.

From what has been trailed, it boils down to a dash for wind. Fast-track planning authority will allow officials to rush through approval for at least 3,500 wind turbines on hilltops and offshore sandbanks on 11 sites along the coasts. An estimated £100bn will be spent on wind subsidies in one form or another. The Severn tidal barrage will help, perhaps producing 5pc of the country's electricity. Pity the salmon. The rest will come from coaxing us to fit solar heaters in our homes, and forcing us to insulate.

There will be tax breaks for electric cars, the new hope. Specialists think lithium-ion batteries run off the mains could slash fuel demand for motor engines by half. But this is a long way off. Strip out the frills and the entire strategy comes down to wind. It means lifting wind generation from 4 gigawatts to 25GW, a 525pc leap. The UK's current capacity is 76 GW from all sources.

"This target is not feasible," said Dr John Constable, director of the Renewable Energy Foundation. "We are talking about a phenomenal amount of energy. There are not enough machines or boats available to build it all." Siemens has sold out of turbines until 2012. The world has only one ship able to place the 200-ton turbines offshore. "The Government is being insincere. They know they won't be around in 12 years when this fails," added Dr Constable.

Wind enthusiasts say the debate in Britain is stuck in a time-warp, rehearsing the cost arguments of the late 1990s when oil was cheap. The latest 2.5 megawatt giants are vastly more efficient that the old mini-mills. Drawing on aerospace technology, they have rotors that dwarf the wingspan of an Airbus A380 superjumbo.

They have cut costs to $0.08 a kilowatt hour in Texas, easily undercutting gas at today's price. This compares to $0.065 for nuclear and $0.05 for coal ( without carbon capture), according to the US Electric Power Research Institute.

Costs are higher in the UK. Offshore farms are yet more expensive. A report by the Centre for Policy Studies said the experience of Denmark shows that windmills add almost no net electricity because power plants have to be kept running for when the wind fails to blow.

The claims infuriate the British Wind Energy Association. "This is ridiculous. If it were true, why would Denmark now be raising the average wind share of its electricity from 20pc to 27pc in five years?" said the BWEA's director, Chris Tomlinson.

The BWEA said tracking systems are now so sophisticated that they can predict wind supply on an hourly basis, greatly reducing the need for slack. While some back-up capacity is needed, the plants can run at much lower levels - cutting the need for fossil fuels.

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