Bad Day on Wall Street

The weekend retail numbers were good, so the market started off OK (an exception was Circuit City, down 8.0%). But then came multiple banking whammies, and the Dow Jones Industrial Average slid 237 points to 12743, as 28 of its 30 components retreated.

Citigroup fell 3.15% amid news of massive layoffs. The official number is not known, but analysts said it could be as many as 45,000. I don't understand that. Citi may have lost money in sub-prime, but doesn't the work of those 45,000 people still need to get done? If not, then why weren't they laid off BEFORE the sub-prime losses? The absurdity of big business! In after hours trading, Citi dropped an additional $1.

JP Morgan Chase fell 3.55% on no particular news.

UBS downgraded both Fannie Mae (down 10.19%) and Freddie Mac (down 7.44%).

And the current news from Asia is likewise bad...

Japan is down 2.1% (both Topix and Nikkei indices). Hong Kong's H-share index is down 3.4%. Seoul's Kospi index was down 2.7%.

Tomorrow is going to be a bad day on Wall Street.

Barclays Write-down

Barclays Plc, Britain's third-biggest bank, unveiled a 1.3 billion pound ($2.7 billion) writedown for losses on securities linked to the U.S. subprime housing crisis.

In related news...

Capital One Financial said it expects to take a writedown of about $5 billion. Washington Mutual said it will take $2.7 billion to $2.9 billion in writedowns because of falling home values (and at least one analyst at Lehman Brothers expects that amount actually to be closer to $3.8 billion).

Bank of America Write-Down

Bank of America said it expects to write down $3 billion of debt in the fourth quarter as fallout from the nation's housing slump deepens.

Money Market Issues

Bank of America, stung by the fallout in subprime mortgages, acted to safeguard its money market mutual funds. The bank planned to set aside $600 million to cover potential losses in its money market funds and an institutional cash management fund. The action is the largest recent step by a financial institution to ensure that its money funds aren't forced to reduce the value of their shares below $1.

The crisis in subprime mortgages has jolted the market for the short-term securities in which money funds invest. Bank of America's move is a sign of how the crisis has gone beyond complex institutional portfolios to potentially affect everyday savers. The bank said $300 million will be used by a group of its money funds that are offered to individuals. The other $300 million will support an institutional cash fund, which isn't technically a money fund. The money would help keep the funds' share price at $1 if some of their holdings defaulted.

Several other financial institutions have also bolstered their money funds:
• SEI, an institutional money manager, has set aside $129 million to support two of its money funds.
• Legg Mason has set up a $238 million line of credit for two money funds. It also invested $100 million to buoy an offshore money fund.
• SunTrust Bank has received SEC permission to set up credit lines for two money funds.

What's tripped up many funds are investments in Structured Investment Vehicles. SIVs use short-term loans to buy longer-term assets, such as mortgage-backed securities, that pay higher rates. The SIVs with the worst problems were often invested in subprime mortgages. As a result, some SIVs have stuck money funds with losses.

Money funds fear that if any fund "broke the buck," falling below $1 a share, investors would flee. That's why they're moving fast to try to avoid defaults.

The USA Today article does not mention (online, the print version does) that the only time in history when a money fund has broken the buck was Community Bankers U.S. Government Fund, a small institutional fund run by Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of losses on interest-rate derivatives. The fund, which had more than 27% of its assets in the derivatives, paid investors 96 cents on the dollar.

The reason the fund lost money despite US Government in its name explains the problems that it (and a lot of other funds in that period) got into trouble in the first place. While US Treasuries are of course guaranteed by the US government with regards to both principal and interest, derivatives based on them such as Interest-Only bonds (IOs) or Principal-Only bonds (POs) can rise or drop in price because of movements in interest rates. That caused losses at many money funds although only Community Bankers actually broke the buck. Money funds had no business investing in IOs and POs in the first place.

CA and FL lead in foreclosures

More homeowners across the United States are having trouble making mortgage payments on time, but borrowers in metro areas of California, Florida and other once-booming housing markets are accounting for the biggest spikes in foreclosure filings.

Bear Stearns Woes

Bear Stearns will take a $1.2 billion write-down in the fourth quarter related to weakness in its credit portfolios, CFO Samuel Molinaro said today, adding that the worst of its mortgage write-downs are behind it. Molinaro said the $1.2 billion write-down will lead the company to post a loss during its fiscal fourth quarter, which ends Nov. 30.

Blackstone Quarterly Loss

Blackstone Group reported a $113.2 million third-quarter loss on charges related to its initial public offering and lower real estate fees, sending shares down more than 8%. It was Blackstone's first full quarter operating as a public company. Blackstone's stock is down about 39% since the firm went public. Shares closed yesterday at $22.26, down $2.02.

Citigroup Woes

Citigroup announced significant declines since September 30, 2007, in the fair value of the approximately $55 billion in US sub-prime related direct exposures in its Securities and Banking business. Citi estimates that, at the present time, the reduction in revenues attributable to these declines ranges from approximately $8 billion to $11 billion (representing a decline of approximately $5 billion to $7 billion in net income on an after-tax basis).

(ETA: Note that this writedown is in addition to the $6.5 billion writedown already taken for the third quarter.)

And another CEO goes down...

Citigroup says its chairman and CEO, Charles Prince, has retired and is being replaced as chairman by former Treasury Secretary Robert Rubin. Citigroup also said Sir Win Bischoff, chairman of Citi Europe and a Member of the Citi management and operating committees, would serve as interim CEO.

And one last (mostly symbolic) piece of news...

Bank of America is now the largest bank in the country by market capitalization, and it may stay that way for a while. After weeks of flip-flopping with Citigroup for market-cap supremacy - with the financial rivals no more than $3 billion apart at various points - Bank of America surged ahead on the heels of Citigroup's implosion. Bank of America's total market value was $197B while Citigroup was at $179B.

Bring on the lawyers!

Three different shareholder lawsuits...

Law Offices of Brian Felgoise Announces Class Action Lawsuit Against Merrill Lynch

Abraham Fruchter & Twersky LLP Files Class Action Lawsuit Against Merrill Lynch

Coughlin Stoia Geller Rudman & Robbins LLP Files Class Action Suit against Merrill Lynch

And just for good measure an ERISA lawsuit against the 401(k) plan...

Keller Rohrback L.L.P. Announces ERISA Investigation of the Merrill Lynch 401(k) Savings and Investment Plan

Citigroup CEO on way out

Citigroup's board plans an emergency meeting tomorrow, and CEO Charles Prince is expected to offer to resign, according to the Wall Street Journal, which cited people familiar with the situation.

People familiar with the matter said the Securities and Exchange Commission is looking into the bank's accounting for its off-balance sheet investment funds that have recently attracted scrutiny. Citigroup may report further losses on Monday, reflecting continued declines in the value of some mortgage-linked securities since the third quarter ended Sept. 30, people familiar with the matter said.