GDP Contracts 3.8%

The US economy contracted at a 3.8% annualized rate in the fourth quarter, a decline that would have been worse except that the Commerce Dept counts an unwanted buildup of goods on store shelves as growth. A clearer picture of the scope emerges if the inventory buildup is excluded. Adjusted GDP contracted at a 5.1% pace in the final three months of 2008, the weakest since 1981. Even with inventories, the performance is the worst since 1982.

Today's News

Bank of America

Shareholder Steven Sklar charged in a complaint in US federal court that Bank of America failed to disclose about $15.3 billion in losses by Merrill Lynch before shareholders voted to approve the acquisition of Merrill. The complaint states that Bank of America CEO Kenneth Lewis never revealed Merrill's problems "despite his knowledge of Merrill Lynch's staggering losses." [Source: Bloomberg]

Merrill Lynch paid out billions in employee bonuses a full month early, three days before its sale to Bank of America closed. At the time, Merrill's losses were piling up rapidly, and Bank of America CEO Kenneth Lewis asked the US government for money from TARP to help finance the acquisition. [Source: Financial Times]

Only three weeks after its acquisition of Merrill Lynch was officially completed, Bank of America ousted former Merrill CEO John Thain. [Source: International Herald Tribune]

Other Headlines

Microsoft's second-quarter profit declined to $4.17 billion, or 47 cents per share, down 11% from a year ago and missing Wall Street forecasts of 49 cents per share. The software firm blamed a weaker PC market and economic troubles for the result and also said it plans to cut 5,000 jobs during the next 18 months.

Northrop Grumman expects to record a loss when it releases its fourth quarter results. The defense contracting giant cited $3 billion to $3.4 billion for impairment of goodwill. The company expects 2008 earnings per share from continuing operations before the charge to meet the upper end of $5.20 per share for its forecast. Wall Street analysts expect earnings of $5.21 a share, according to a survey by FactSet Research.

Ugly day for financials

STT 14.89, -21.46, -59.0%
BAC 5.10, -2.07, -28.9%
WFC 14.23 -4.45 -23.8%
JPM 18.09 -4.73 -20.7%
C 2.80, -0.70, -20.0%

FHLBs in trouble

When banks take loans from a Federal Home Loan Bank, besides paying interest, they have to buy FHLB stock, based on how much they borrowed and the credit quality of the collateral they posted. The system was set up as a way to support the FHLBs’ capital as banks borrow against it. When a member first signs on, the Home Loan bank sets up a clearing account that works like a checkbook; when member banks borrow money, the FHLB takes cash out of this account and in return gives the borrowing bank stock that pays a dividend. As a bank pays off the loan, the FHLB credits back their cash account by repurchasing the stock. At least, that’s how it usually works. Now, reports are surfacing that suggest that the FHLBs themselves are running into their own problems, from owning billions in toxic mortgage bonds that are becoming worthless.

Moody’s said in a report earlier this week that the FHLB System’s $76.2 billion MBS portfolio contained $13.5 billion in unrealized losses at the end of Q3; values have likely fallen [A LOT] further since that time. At least five Home Loan banks have already notified members as early as mid-December that they will not pay dividends and will stop buying back the excess FHLB stock members hold. Citigroup holds $4.7 billion, JP Morgan Chase holds $4.1 billion, Bank of America holds $2 billion, and Wells Fargo holds $1.6 billion.

Jobs, Jobs, Jobs

They had been preparing us for over a week. Financial journalists kept telling us that when jobs data were released they could show that "as many as" 500,000 jobs were lost in December. Well, as scary as the "worst-case scenario" previews were, the actual number was much worse ... 693,000!