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.

O'Neal out

Stan O'Neal, chairman and CEO of Merrill Lynch, has decided to retire from the company effective immediately.

The board of directors has elected Alberto Cribiore as interim non-executive chairman. Ahmass Fakahany and Gregory Fleming will continue as Merrill Lynch co-presidents and chief operating officers.

Countrywide

Countrywide Financial Corp., the nation's largest mortgage lender, said Tuesday it will begin calling borrowers to offer refinancing or modifications on $16 billion in loans whose interest rate is set to adjust by the end of 2008.

There's two aspects of the story on which I'd like to comment...

Countrywide said it would refinance about $10 billion in loans and modify another $4 billion. It also plans to contact borrowers of some $2.2 billion who are late on their loans and having trouble paying because of a recent rate reset. In total Countrywide's plan would reach out to about 82,000 borrowers for some kind of relief. [...] The company estimates some 10,000 borrowers with subprime loans who are now behind on their payments due to their mortgage interest rate resetting will be offered rate reductions by the end of the year.

So if you did the right thing and did NOT overextend by taking on more mortgage than you could afford, Countrywide only has one thing to say to you: SUCKER!

So far this year, Countrywide has completed about 20,000 loan modifications -- a figure that represents less than 5% of the more than 500,000 loans the lender reports were behind in payments as of last month and about 24% of the roughly 82,000 loans the company said were in foreclosure as of September.

There's over 80,000 loans in foreclosure and another420,000 behind? That doesn't mean anything good for Countrywide.

Bank of America moves to cut jobs

Bank of America is acting swiftly in the wake of its disappointing earnings, announcing cuts in its work force that run deeper than investors had foreseen. The bank said late Wednesday that it planned to cut 3,000 jobs, mostly in investment banking, after incurring about $4 billion of trading losses, defaults and write-downs in the third quarter. Brian Moynihan, head of wealth management, will replace Gene Taylor as head of the 20,000-person securities unit, the bank added.

The chief executive, Kenneth Lewis, said he would scale back in investment banking after profit at the division plunged 93% to $100 million. Lewis, who blamed the drop mainly on the company's mistakes, promised to weed out units that posted four or five annual profits "and then give it all back in one year."

"While some of these changes are a direct result of our underperformance, others have been contemplated for a number of months as we looked at how we could operate more effectively," Lewis said. Lewis, 60, was reversing a strategy outlined by Taylor at an investor conference in February, when he said Bank of America would lift corporate and investment banking profit by 70% and revenue by 50% over the next five years. The goal was to gain a top-three share of investment banking in the United States within five years. In the third quarter, Bank of America marked down the value of financing for leveraged buyouts and other lending by $247 million, and trading mistakes led to $717 million in losses. Lewis signaled the job reductions were coming last week during his earnings conference call with analysts when he said the results were "not acceptable."

"I've had all the fun I can stand in investment banking," Lewis said October 18. The next day, Chris Hentemann left as head of global structured products, which had reported a net revenue loss of $527 million.

Merrill (and its CEO) in trouble

Merrill Lynch chairman and chief executive, E. Stanley O’Neal, broached the possibility of a merger with Wachovia without first getting the approval of Merrill’s board, a major breach of corporate protocol.

Bank of America Exits Wholesale Mortgage Business

Today Bank of America announced that it will exit the wholesale mortgage business in order to devote increased energy to its expanding retail channels.

Merrill Lynch Loss Wider Than Expected

From Yahoo...

Merrill Lynch said it was taking a sharper-than-expected writeoff of 7.9 billion dollars for losses in its mortgage activities in the third quarter. Merrill Lynch said the charge was "significantly greater" than the 4.5 billion dollars forecast earlier this month. The investment bank reported a third-quarter net loss from continuing operations of 2.24 billion dollars compared with a net profit of 2.14 billion dollars a year ago. The loss amounts to 2.85 dollars a share, far wide that that the Wall Street consensus forecast for a loss per share of 45 cents.

From TheStreet...

Merrill Lynch stunned Wall Street for the second time this month with the disclosure that it was forced into a $7.9 billion writedown of bad debt tied to risky mortgages and structured paper. The announcement comes three weeks after Merrill surprised investors by estimating that its third quarter would swing to a loss under the weight of $4.5 billion in writedowns on certain securities. Merrill said the writedown increased after the firm took a second look at its valuation of collateralized debt obligations and subprime mortgage backed securities.

Merrill's third-quarter report has to rank among the worst in modern Wall Street history. The firm swung to a loss of $2.24 billion, or $2.85 a share, from continuing operations from a year-ago profit of $3.05 billion, or $3.14 a share. The firm took a $5.9 billion loss on its in-house trading operation. said $6.9 billion of the third-quarter writedown was related to its CDO positions and $1 billion to its subprime holdings. The firm said its net exposure to those securities dropped from second-quarter levels, but it continues to have $15 billion worth of CDO exposure and nearly $6 billion worth of subprime exposure.

What I (and I'm sure others) want to know is how could the loss be SIX TIMES as large as expected just three weeks ago. What kind of risk management do the guys at Merrill Lynch have in place?

[Obsolete] Bear - Citic Swap

Bear Stearns and Citic Securities [a Chinese firm, not to be confused with Citi] will each invest about $1 billion in each other. In return for its investment in Bear Stearns, Citic will receive securities that can be converted into about 6% of Bear Stearns's outstanding shares. As part of the deal, Citic has the right to buy an additional 3.9% of the brokerage's outstanding shares [for that magic 9.9% share]. In return for its investment in Citic, Bear Stearns will receive a 2% stake in the firm. It has the option to buy an additional 5%.

Edited (3/17/2008): Citic Securities has canceled this investment deal with Bear Stearns. "The situation has changed," said Citic Chairman Dan Kong, after Bear's buy-out yesterday by JPMorgan Chase.

Bank of America Earnings Drop 32%

Bank of America reported that third-quarter earnings plummeted 32% because of problems in mortgage and credit markets.

More Recalls

US retail giant Target has become the latest company to recall Chinese-made toys because of safety fears.

Another Chinese product in the United States is under scrutiny. Federal officials ordered a recall of 450,000 Chinese-made tires.

Imagine that. Offshoring production to China (or elsewhere) only results in savings if those other countries cut corners on the safety regulations that are required here in the US. Who could have imagined such a thing? It's not like Economics 101 would suggest that such a thing was likely.

Investment Bank Results

Goldman Sachs earned $2.85 billion, or $6.13 a share, in the three months ended Aug. 31, compared to $1.59 billion, or $3.26 a share, in the third quarter a year ago. Net revenue rose 63% to $12.33 billion from $7.58 billion a year ago.

Bear Stearns reported net income of $171.3 million, or $1.16 a share, for the quarter ended Aug. 31, down from $437.6 million, or $3.02 a share, earned in the same period a year earlier. Net revenue declined 37% to $1.33 billion. Lehman Brothers and Morgan Stanley also reported a profit decline.

In trading (as of 2:40pm today), Lehman Brothers (LEH) is down around 3% and Morgan Stanley (MS) is down around 5%. Goldman Sachs and Bear Stearns are essentially flat. Bear Stearns' troubles had already been priced into its stock since its disastrous bailout of two hedge funds, but I am very surprised that GS has not spiked on the earnings surprise.

Top Ten International Accounting Firms

Ranked by 2007 fiscal year revenue...

PricewaterhouseCoopers International, $25.2B
Deloitte Touche Tohmatsu, $23.1B
Ernst & Young Global, $21.1B
KPMG International, $19.8B
BDO International, $4.7B
Grant Thornton International, $3.5B
RSM International, $3.1B
Praxity, $2.8B
Baker Tilly International, $2.5B
Horwath International, $2.5B

[Updated with 2007 numbers]

Top Ten US Accounting Firms

Ranked by fiscal year 2007 revenue...
1 Deloitte & Touche $9,856,000,000
2 PricewaterhouseCoopers $6,922,000,000
3 Ernst & Young $6,890,000,000
4 KPMG $4,438,000,000
5 RSM McGladrey $1,389,260,000
6 Grant Thornton $939,551,000
7 BDO Seidman $589,000,000
8 CBIZ & Mayer $466,810,000
9 Crowe Group $430,276,000
10 BKD $318,078,000

http://www.wolterskluwer.com/WK/Press/Product+Press+Releases/2007/Sep/pr_19Sep07b.htm

CIT Shuttering Home Lending

CIT Group said it will take a $35 million pre-tax charge in its third quarter associated with its previously announced plans to shutter its home lending business. Its loan collection and customer service activities are unaffected by the announcement.