Investors run for cover as Dow plunges 416 points, worst day since Sept. 2001

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More writedowns hit Wall Street...

Here come more financiers' writedowns
February 25 2008: Another day, another prediction of red ink for banks and financial firms. But some analysts caution against taking these numbers at face value.

Another winter writedown storm hit Wall Street Monday. Shares in Citi, Fannie Mae and Freddie Mac sank after analysts predicted another round of multibillion-dollar losses at the struggling financial firms. The expected writedowns, which reflect rising loan defaults and sharp declines in indexes tracking debt-related securities, come as falling house prices and a slow economy weigh on U.S. consumers. Shares in Citi (C, Fortune 500) dropped 2% after Oppenheimer analyst Meredith Whitney slashed her full-year earnings forecast to 75 cents a share from $2.70 previously.

Whitney, who made headlines late last year by being the first analyst to predict Citi would cut its dividend - which it soon did - said the bank's profits will be hammered by Citi's need to reduce the value of loans and bonds on its balance sheet. The analyst, who rates the stock the equivalent of sell, predicts "further writedowns to their carrying values of [collateralized debt obligations] related to sub-prime mortgages, further writedowns from leverage lending commitments, and further writedowns associated with on balance sheet consumer loans."

That's a lot of writedowns, but Citi isn't alone in facing big hits to its earnings. Goldman Sachs downgraded Fannie (FNM) and Freddie (FRE, Fortune 500) to sell from neutral, saying it expects $4.2 billion of writedowns at Freddie and $2.6 billion worth at Fannie when the government-sponsored enterprises report fourth-quarter earnings this week. The downgrade comes on the heels of a similar move Friday by analysts at Merrill Lynch. Goldman even recommended that investors short Freddie Mac shares ahead of Thursday morning's expected earnings release. And it also significantly reduced earnings predictions for other Wall Street giants, including Bear Stearns, Morgan Stanley, Merrill Lynch and Lehman Brothers.

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Super B to the rescue...

Bernanke vs. the economy
February 26 2008: Monetary policy will be the focus of Fed chief's remarks on Capitol Hill, but so will the health of U.S. economy and credit market woes.

It's no rest for the weary, or at least for Federal Reserve Chairman Ben Bernanke. After testifying before lawmakers earlier this month alongside Treasury Secretary Henry Paulson, the Fed chief returns to Capitol Hill Wednesday and Thursday to appear before the House Financial Services and Senate Bank committees.

While his remarks will center on the state of the central bank's monetary policy, the Fed chairman is widely expected to face questions about the shaky state of the U.S. economy, the health of the credit markets and the rising risk of inflation. Less than two weeks ago, Bernanke and Paulson faced questions when they testified before a Senate Banking committee.

At the time, the two policymakers warned of slower economic growth in the coming year but said they believed the U.S. economy would avoid tipping into a recession, helped in part by the $170 billion economic stimulus package signed by President Bush on Feb. 13 and the most recent interest rate cuts by the Federal Reserve.

While Bernanke will probably elaborate on those remarks, the consensus among economists is that he won't stray from his current script. "It would be a surprise if he deviated too much from what he said two weeks ago," said Scott Brown, chief economist at Raymond James.

Policy position

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Banks fall on hard times...

US Bank Profits Fall To Lowest Since 1991
Wednesday, February 27, 2008; US bank and thrift earnings dropped to the lowest level since 1991 in the fourth quarter, hurt by trading losses and increased reserves for bad loans, the Federal Deposit Insurance Corp. said

Profit for FDIC-insured institutions was $5.82 billion, an 83 percent decline from the $35.2billion reported in the fourth quarter of 2006, the regulator said in its quarterly report on the banking industry. "Weakness in the housing sector and the credit squeeze in financial markets made it a very challenging time," FDIC Chairman Sheila C. Bair said. "We can expect these problems to continue throughout 2008." Six large lenders accounted for more than half of the year-to-year drop in quarterly profit, the FDIC said.

Funds set aside to cover loan losses grew the most in 20 years to a record $31.3 billion, an increase from $16.7 billion in the third quarter. Loans 90 days or more delinquent increased the most in the 24 years since FDIC-insured institutions have reported the information, making up 1.4 percent of the industry's loans at the end of the fourth quarter, the FDIC said. Still, an "overwhelming majority" of banks and thrifts remain well-capitalized and profitable, and "are successfully coping with the challenges they face," Bair said yesterday. Nearly 90 percent of lenders were profitable last year and 99 percent had sufficient capital at the end of the year, she said.

The FDIC plans to "keep a close eye" on loan portfolios beyond housing, including credit cards, commercial real estate and small business, Bair said. Lenders with assets concentrated in commercial real estate, a "high-risk" area, are under close scrutiny, said John Corston, the FDIC's associate director of large bank supervision. "The way a lot of these credits are structured, it will take a while for problems to begin to show up on the financial performance of the institutions," Corston said.

Bair also said the agency plans to re-hire former employees to bolster a division that handles bank failures, as the industry faces "uncertain times." The FDIC managed three shutdowns last year, and 76 institutions are on its "troubled bank" list, Bair said. The FDIC insures deposits at 8,534institutionswith $13 trillion in assets.

Source

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Granny says, "Looks like Fannie Mae fell on her fannie...

Fannie Mae financial fallout
Thursday 28th February, 2008 - A US$3.6 billion quarterly loss, due to the housing slump, has deepened the money crisis at Fannie Mae, the largest provider of financing for US home loans.

The government-chartered company posted a $US3.80 per share net loss for the fourth quarter.

According to estimates, analysts expected the company to post a fourth-quarter loss of $US1.39 per share. Fannie Mae and rival Freddie Mac have been severely damaged by the housing crisis.

Rising foreclosures have led the companies to write down values of mortgage securities they own and increase reserves to cover their guarantees of payment on bonds held by investors.

Fannie Mae financial fallout

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Brutal selloff on Wall Street...

Stocks get slammed on recession fears
February 29 2008: Dow tumbles 315 points, the second worst day of the year for stocks, after AIG's big loss and UBS's outlook on financials.

Stocks tumbled Friday, in the second worst day of 2008, after AIG's record loss added to worries about the financial sector and more weak economic news intensified fears about a recession. Treasury prices rallied, sending yields higher, as investors sought safety in the comparatively safer haven of government debt, while the dollar held near a record low versus the euro. Oil prices dipped after topping all-time highs over $103 a barrel during the session. Gold prices jumped too.

The Dow Jones industrial average (INDU) lost nearly 316 points, or 2.5%. The broader Standard & Poor's 500 (SPX) index lost 2.7% and the Nasdaq composite (COMP) fell 2.6%. The Russell 2000 (RUT) small-cap index also got slammed, tumbling 2.7%. Stocks tumbled for the month of February as well, extending the wretched start to 2008. "It's a debacle today," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "There's just no good news out there."

AIG (AIG, Fortune 500) reported a steep $5.3 billion quarterly loss after the market close Thursday and said it took an $11 billion writedown related to big losses in investments tied to bad mortgage bets. Shares of the Dow component tumbled 7% Friday. Brokerage UBS said financial firms could end up facing $600 billion in losses as the credit crisis continues to unfold. Banks, brokers and insurers have already lost more than $160 billion related to bad mortgage bets. UBS also cut its first-quarter earnings estimates on a number of investment banks.

Financial stocks were also under pressure as municipal bonds continued to be liquidated as fund managers struggle to raise capital. "The lack of liquidity in areas of the bond market is spooking people," said Rob Lutts, chief investment officer at Cabot Money Management. He said banks are reviewing their asset portfolios and anything that is seen as having too much risk is being reviewed, cut back or eliminated altogether. "Today the casualty is the municipal bond market," he said.

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Dollar: It will only get worse
February 29 2008: Greenback likely to stay under pressure in near term but find relied by mid-year, currency experts argue.

Despite all the pain the U.S. dollar has endured in recent days, the greenback may still have further to fall before seeing any sort of relief, according to currency experts. Driving much of the dollar's decline this week were tepid remarks about the U.S. economy by Federal Reserve Chairman Ben Bernanke, who hinted that the central bank would cut interest rates once again at the Fed's March meeting.

Those comments, combined with a number of troubling signs about the strength of the U.S. economy, helped send the dollar tumbling to multi-year lows against a host of currencies including the Swiss franc, the Malaysian ringgit and Japanese yen. "It all points towards a weaker U.S. economy and currency traders don't want to be exposed to that kind of risk," said Gareth Sylvester, senior currency strategist and self-described "dollar bear" at HFIX Plc in San Francisco.

But perhaps the most notable move of the week was the dollar hitting successive all-time lows against the euro, breaking the key psychological barrier of $1.50 for the first time since the 15-nation currency was launched in 1999. Currency experts, however, argue that the dollar will remain under pressure at least through the next month or longer.

If next Friday's February employment report is as bad as economists are anticipating, argues Joe Francomano, manager of foreign exchange with Erste Bank in New York, the greenback could possibly hit rock bottom at that point. "You are going to see the momentum of this week carry over as far as dollar weakness goes and culminate next Friday," said Francomano.

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No more stampeding bulls...

Don't expect another bull market
March 3 2008: Stock returns may never be the same - at least for this generation of investors.

Although you won't find it listed on your calendar, we're approaching the anniversary of an epochal event. No, it has nothing to do with the NCAA basketball tournament. It's a different kind of March Madness: The end of the bull market that lasted for a generation and changed the way that Americans think about stocks. When the greatest bull market in U.S. history started in the summer of 1982, only a relative handful of people owned stocks, which were cheap because they were considered highly risky. But by the time the Standard & Poor's 500 peaked in March 2000 amid a fully inflated stock bubble, the masses were in the market. Stocks were magical, a supposedly can't-miss way to pay for your kids' college, save for retirement, enrich employees by giving them options, and regrow hair. (Just kidding about the hair. Alas.)

Stocks might go down in any given year, the mantra went, but in the long term they'd produce double-digit returns. However, one of the lessons of the past eight years is that the long run can be ... really long. As I write this in late February, the U.S. market - which I'm defining as the Standard & Poor's 500 - is well below the high that it set on March 24, 2000. Even after you include dividends, which have run a bit below 2% a year, you've barely broken even, according to calculations for Fortune by Aronson & Johnson & Ortiz, a Philadelphia money manager. Hello? Eight years of dead money in the broad stock market? How can that be, given that Ibbotson Associates says the S&P has returned an average of 10.3% a year, compounded, since 1926? Think of it as a six-foot man drowning in a pond with an average water level of six inches - if you step in at the wrong place, the water can be eight feet deep.

To be sure (the favorite phrase of us journalistic hedgers), this has been a flukishly bad period. Ted Aronson says that it's in the bottom 2% of the almost 900 different 96-month periods in the Ibbotson statistical universe. Nevertheless, it's the return we have. Barring a miracle - or the creation of a New Math of the market variety - there's no way we'll ever see a bull market along the lines of what so many of us grew up with. During that enchanted period, the boring old S&P returned more than 19% a year. When you include compounding, your money more than doubled every four years. Pretty slick. That was more than twice what stocks earned in the previous 56 years, when they returned about 9%. More than half of that was from dividends, which were almost triple their current level.

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Europe to U.S.: Stop the Falling Dollar...

Europe Raises Pressure on U.S. to Halt Dollar Slide
Mar 4, 2008 - European Policymakers Worry After the Dollar Hits a Record Low Against the Euro

Worried euro zone policymakers pressured on Washington on Tuesday to do more to halt the dollar's decline, a day after the U.S. currency hit a record low against Europe's single currency. Guy Quaden, Belgium's representative at the European Central Bank, said in an interview on Belgian radio: "Things are becoming exaggerated."

"It's up to the relevant authorities to assume their responsibilities and particularly for U.S. authorities, who repeat that they are in favor of a strong dollar but who should reaffirm their words," he said. The Europeans are worried that the slide is getting out of hand after the dollar sank below $1.50 per euro last week.

Belgian Finance Minister Didier Reynders, attending a second day of meetings with European colleagues on Tuesday, put it less bluntly than Quaden but the basic message was the same, that Europe was counting on active U.S. help to tackle an issue which makes life harder for euro zone exporters in world markets. "We are also happy to see the reaction in the U.S. They are also concerned about that. So it may be a first step to a good collaboration between Europe and the U.S. in this field," he told reporters.

French Prime Minister Francois Fillon added his voice to the rising chorus of complaint, echoing similar declarations overnight at a Brussels meeting of the euro zone's finance ministers and ECB President Jean-Claude Trichet. "There is a problem in the relationship between the dollar and the euro," he told French Europe 1 radio, saying exchange rate developments were partly to blame for the rising price of commodities, which from oil to wheat are soaring.

VERBAL INTERVENTION ONLY?

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Government: U.S. needs foreign cash
March 5, 2008: Still, both regulators and lawmakers stress greater transparency into sovereign wealth funds' U.S. investments.

Federal regulators stressed the importance of leaving the United States open to investments by sovereign wealth funds Wednesday, but warned of the need to push for better transparency among these growing state-sponsored entities. Testifying before two subcommittees of the House Financial Services Committee, representatives from the Treasury Department, Securities and Exchange Commission and Federal Reserve said that these funds not only foster domestic economic growth but have provided stability to financial markets and U.S. companies.

"If we were to prohibit sovereign wealth funds from investing in our market for fear they might introduce market distortions, there is a risk we might actually end up doing precisely this to ourselves," said Ethiopis Tafara, director of the office of international affairs for the Securities and Exchange Commission.

Congress is examining these controversial investments after foreign funds pumped more than $40 billion into Wall Street firms in recent months. Some world leaders, as well as the American public, are concerned that these funds may try to wield these investments as a diplomatic tool. The worries are fueled by the funds' lack of transparency about their operations. A majority of American voters think these foreign infusions harm both the national security and the economy of the United States, according to a recent survey by Public Strategies Inc.

America for sale

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Investigation into subprime CEO pay...

Mortgage Millionaires to Answer to Congress
March 6, 2008 - Three CEOs Behind the Subprime Market Face Inquiry About Their Pay Packages

Three CEOs who made millions of dollars off the housing market -- even as homeowners and their companies started to suffer -- are expected to testify before Congress Friday about why they deserved such large compensation packages. Countrywide Financial Corp. chairman and chief executive officer Angelo Mozilo, former Merrill Lynch CEO E. Stanley O'Neal and Charles Prince, former chairman and CEO of Citigroup, have all been asked to tell Congress whether they believe their pay was justified.

Take Mozilo. As CEO of Countrywide, the nation's largest lender, he stands to make millions if Bank of America's proposed $4 billion acquisition of his company goes through. Facing mounting public opposition, Mozilo has already said that he would give up $37.5 million of severance pay, fees and benefits linked to his expected departure after the Bank of America deal closes. He also gave up some other benefits, such as use of the company's aircraft. But he still won't leave empty-handed. Separate from his severance package, Mozilo will still keep various retirement benefits and deferred compensation already earned. Those add up to about $44 million.

And there is more. Mozilo sold more than $127 million in stock options early on in 2007. Those sales came before he announced a $388 million write-down on profits and Countrywide's growing problems became apparent. As the company's troubles continued, Mozilo kept selling shares, cashing out an additional $30 million in options.

More ABC News: Mortgage Millionaires to Answer to Congress

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These are the guys who were supposed to be responsible for the mortgage market NOT getting out of control...

Subprime CEOs Explain Why They Made Millions While Americans Lost Homes
March 7, 2008 - Three CEOs Testify About the Subprime Mortgage Collapse and Their Pay Packages

Congressional Democrats got right to the point today: How could the CEOs of three companies behind the subprime mortgage market make millions of dollars while thousands of Americans lost their homes and investors lost billions of dollars?

"There seem to be two different economic realities operating in our country today. And the rules of compensation in one world are completely different from those in the other," said Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. "Most Americans live in a world where economic security is precarious and there are real economic consequences for failure. But our nation's top executives seem to live by a different set of rules."

In 1980, chief executives in the United States were paid 40 times what the average worker made. They now make 600 times the average worker's salary, Waxman said. "I think there's merit to pay for performance," Waxman said. "But it seems like CEOs hit the lottery even when their companies collapse."

But the Republican ranking member on the committee warned that he would not let the hearing turn into a witch-hunt. Rep. Tom Davis, R-Va., said it is not the job of Congress to second-guess investor decisions or to help plaintiffs gather evidence for their lawsuits. He said it is fair to question compensation packages but warned that the debate should not turn into a "sanctimonious search for scapegoats." "Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano," Davis said.

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Congressional panel rips subprime CEOs' lavish pay
Fri Mar 7, 2008 WASHINGTON - The fat compensation packages of three US CEOs whose companies are being hammered by the widening mortgage crisis came under harsh criticism on Friday at a congressional hearing on executive pay.

In the last two quarters of 2007 alone, the three executives' firms lost more than $20 billion on investments in subprime and other risky mortgages, said the House of Representatives Oversight and Government Operations Committee. Yet the three took home fortunes in 2007 -- $120 million for Countrywide Financial Corp CEO Angelo Mozilo; a $161 million retirement package for ex-Merrill Lynch CEO Stanley O'Neal; and $39.5 million in stock, options, bonus and perks for former Citigroup CEO Charles Prince.

"The mortgage crisis is having enormous repercussions. Families are losing their homes ... Thousands are losing their jobs. It seems like everybody is hurting, except for the CEOs who had the most responsibility," said California Democratic Rep. Henry Waxman, committee chairman. In a hearing room packed with bank lobbyists and lawyers, Waxman said, "I have no problem with paying for success. But it looks like when you're a CEO you get paid for failure."

Mozilo, O'Neal and Prince told Waxman's panel that they earned their compensation. They conceded misjudgments in the subprime debacle, while one Republican lawmaker blasted the hearing as "a sanctimonious search for scapegoats." Virginia Rep. Tom Davis said, "Punishing individual corporate executives with public floggings like this may be a politically satisfying ritual -- like an island tribe sacrificing a virgin to a grumbling volcano.

More Congressional panel rips subprime CEOs' lavish pay | Reuters

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The third wave...

Markets rattled by signs of renewed credit crisis
March 9, 2008 : Tight money markets, tumbling stocks and the dollar are expected to heighten worries for investors this week as pressure mounts on central banks facing what looks like the third wave of a global credit crisis.

Last week, money markets tightened to levels not seen since December, when year-end funding problems pushed lending costs higher across the board. In response, the U.S. Federal Reserve Board unveiled new measures to ease liquidity strains Friday, injecting $200 billion into the banking system, and said it was in close consultation with central bank counterparts.

However, the Fed failed to lift the mood much. Investors, who want to see if any further plan is in the works to prevent a financial market seizure, will probably scrutinize words from major central bankers including Fed officials this week. The European Central Bank president, Jean-Claude Trichet, is expected to hold a news conference in Basel, Switzerland, on Monday after a meeting of the Group of 10 central bankers, who masterminded a joint cash injection plan last year.

"It's another round of the credit crisis," said Jesper Fischer-Nielsen, interest rate strategist at Danske Bank in Copenhagen. "Some markets are getting worse than January this time. There is fear that something dramatic will happen and that fear is feeding itself. "Central banks have shown great resolve to try to solve the problems and I'm sure they will do again," Fischer-Nielsen said. The vice chairman of the Swiss National Bank, Philipp Hildebrand warned last week that the world might be in a new, more dangerous phase of the crisis. If that is the case, the latest wave is the third one.

More Markets rattled by signs of renewed credit crisis - International Herald Tribune

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Banks may lose $325 billion over mortgages
Sun., March. 9, 2008 - JPMorgan says financial institutions facing a ‘systemic margin call’

Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co., said in a report late on Friday. JPMorgan, which sent a default notice to Thornburg Mortgage Inc. after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week.

"A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call." The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said.

Indeed, corporate bond spreads widened to a new record on Friday, surpassing levels seen in October 2002 during a boom in bankruptcies following the dot-com crash. U.S. employers cut payrolls in February for a second consecutive month, slashing 63,000 jobs, the biggest monthly job decline in nearly five years, the U.S. Labor Department reported on Friday. "The weak February employment report points to an economy in recession," JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related home prices. The bank now sees prices falling 30 percent, from its prior 25 percent forecast. Those prices have declined 14 percent since mid-2006, JPMorgan said. The U.S. jobs results also came after the Federal Reserve expanded the amount of its short-term auctions to $100 billion in total in the central bank's latest effort to ease credit concerns. Ongoing concerns about bond insurers, known as monolines, and their effort to save their top ratings also are weighing on market sentiment.

Banks may lose $325 billion over mortgages - Mortgage mess - MSNBC.com

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Dollar still in freefall...

Dollar dives as Fed rate cut eyed
March 10, 2008: Greenback sinks but off lows against the yen, euro on expectations the Fed will lower rates next week.

The dollar slipped against the euro Monday, but traded above the all-time lows from last week when investors recoiled from dire U.S. jobs figures. The 15-nation currency bought $1.5386 in morning European trading compared with the $1.5335 it bought in New York late Friday. The euro reached a record high of $1.5459 on Friday after a Labor Department report showed U.S. job cuts hitting the biggest monthly number in five years, but the euro then fell back after the Federal Reserve announced it would provide more cash to the banks that need it.

"Friday's disappointing non-farm payroll data looks set to weigh on the dollar for some time yet," said Gary Thomson of CMC Markets. He said that the euro could reach $1.55 this week - particularly if the Federal Reserve continues to cut its interest rate. Lower interest rates can jump-start a nation's economy, but can also weigh on its currency as traders transfer funds to countries where they can earn higher returns.

"We've already seen the German trade balance data come out better than expected and this has helped shore up (the euro-dollar) just under the $1.54 level but really many are now eyeing that next big test of $1.55," Thomson said. German exports were up 9% in January, showing healthy growth despite the euro's climb, government figures showed Monday. The British pound traded above $2, buying $2.0204 - better than the $2.0173 it bought in New York late Friday. The dollar fell to 102.12 Japanese yen from 103.89 yen on Friday.

Source

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Fed's hands tied by weak dollar
March 10, 2008: Yes, the economy is in rough shape. But if the Fed keeps cutting rates, it risks further weakening the anemic dollar...and spurring more inflation.

The Fed is in a bind. The report last week showing a loss of 63,000 jobs in February was the clearest sign yet that the economy may be heading into recession...if it isn't already in one. But can the Federal Reserve really afford to cut interest rates by another three-quarters of a percentage point next week, as some are predicting? With inflation still a major cause for concern, the Fed is running out of wiggle room if it hopes to successfully accomplish both of its mandates: keeping inflation in check and ensuring that the economy continues to grow at a steady pace.

The dollar hit a three-year low against the yen Friday and is trading at a near all-time low against the euro. And if the Fed keeps slashing interest rates to prop up the economy, it risks further weakening the dollar. And that could spur more inflation in commodities such as oil, gold, corn and wheat. In addition, the weak dollar is likely to make the price of imported goods more expensive. The Fed has to be aware of this and cannot continue to repeatedly hit the rate-cut button.

To be sure, the weak job market should help control inflation since increasing salaries are typically the biggest contributor to rising prices. "Current subdued wage gains and economic weakness in the first half of 2008 should help squash inflation fears over the next few months," wrote David Kelly, chief market strategist with JPMorgan Funds in a note Monday morning.

But inflation is not going away. In fact, according to a recent semiannual survey of investment advisors conducted by Schwab Institutional, a division of brokerage firm Charles Schwab, 62% of advisors surveyed now expect a rise in inflation over the next six months, up from 53% who thought inflation would increase when the survey was last conducted in July 2007.

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