Archive for the ‘Finance’ category

Bush Administration Subprime Mortgage Freeze — A Virtual Symposium


Treasury Secretary Henry Paulson’s idea for rescuing subprime borrowers from foreclosure was announced in a speech today:

The freeze would apply to adjustable-rate mortgages originated between Jan. 1, 2005, and July 31, 2007, which would reset between Jan. 1, 2008, and July 31, 2010. The program is designed to help those with two-year or three-year low teaser rates on their mortgages.

It would only affect borrowers living in their homes, not those who purchased housing for investment purposes. According to the source briefed on the plan, those who have a 3 percent equity stake or more in their property also would not be eligible for the freeze.

Under the reasoning of federal officials, those who currently have financial wherewithal to make their payments but would struggle to pay a higher reset rate could qualify for refinancing.

The Bush administration is expected to seek authority to enable state and local governments to use tax-exempt bonds to fund these refinancings, an idea floated by Treasury Secretary Henry Paulson in a speech on Monday.

So what did everybody think? (more…)


Staggering Write-Down Forecast


From here, the news for U.S. banks can only get better, because right now looks like the worst.

An economist at the Royal Bank of Scotland Group is forecasting $250 to $500 billion in write-downs, in part because of their subprime mortgage exposure, but also because of a new accounting rule. I’ll let the folks at Bloomberg explain:

The Financial Accounting Standards Board’s rule 157 makes it more difficult for companies to avoid putting market prices on their hardest-to-value securities, known as Level 3 assets, Royal Bank chief credit strategist Bob Janjuah wrote in a note today. While the rule hasn’t gone into effect yet, the biggest U.S. lenders and brokerages have already begun reporting their Level 3 holdings.

“This credit crisis, when all is out, will see $250 billion to $500 billion of losses,” said Janjuah, who’s based in London. “The heat is on and it is inevitable that more players will have to revalue at least a decent portion” of assets they currently value using “mark-to-make believe.”

Great phrase. Something Lewis Carroll might have come up with if he stopped chasing rabbits and started chasing auditors.

Wall Street’s biggest firms have written down at least $40 billion as prices of mortgage-related assets dwindle because of record foreclosures. Morgan Stanley has 251 percent of its equity in Level 3 assets,

How can they have more than 100 percent? This can’t be good.

making it the most vulnerable to writedowns, followed by Goldman Sachs Group Inc. at 185 percent, according to Janjuah. Goldman, the biggest U.S. securities firm, fell 4 percent in New York trading today.

Dana Cimilluca, who writes the Deal Journal blog at, tries to make everyone feel better by pointing out a time when even worse things happened.

Big as those numbers are, they still don’t come close to the last major crop of write-downs, when another accounting change prompted eye-popping losses at companies including AT&T and AOL Time Warner in 2002. The media-and-Internet conglomerate had write-downs that year for goodwill and soured Internet assets of roughly $100 billion.

But then, just when you start to relax a little…

Still, Janjuah’s number is in a league by itself. Not only is the upper end of his range roughly what the U.S. has spent on the Iraq War, it is about equal to the market caps of the three largest U.S. banks, Citigroup, J.P. Morgan Chase and Bank of America, combined.

As Chris Farley used to say, “Holy Schnikes!”

Where Leaders Don’t Grow


In Monday’s Wall Street Journal, a page-one meditation on how the financial industry’s emphasis on quick profits in every unit, or else, has crushed a generation of top leaders, leaving both Citigroup, Inc. and Merrill Lynch & Co. without obvious successors to their two newly-cashiered CEOs.

So many worthy candidates carry the taint of having been fired for a bad quarter. Meanwhile, the combination of skills needed to run these institutions don’t all fit inside one Dolce & Gabbanna. Neither of the ex-CEOs had the “technical expertise to figure out the mess involving mortgage-backed securities whose value is uncertain,” but their possible successors either lack that kind of knowledge or the leadership qualities needed to run immense public companies.

Mergers and expansion have made the job of leading a Wall Street giant tougher. It may no longer be enough for the leader of Merrill Lynch to be a longtime brokerage executive like David Komansky, who headed the firm from 1997 to 2002, or for the head of Citigroup to be a top investment or commercial banker.

Roy Smith, a professor of finance at New York University and former partner at Goldman Sachs Group Inc., said Wall Street chiefs, obsessed by their stock price, are quick to let go anyone whose unit has a bad quarter. That may show their boards that they are aggressively managing their subordinates, but it means talented executives who make mistakes can be quickly shown the door.

During Mr. (Charles) Prince’s tenure at Citigroup, more than a dozen top bankers have departed, been forced out, or been given different responsibilities. They include Marjorie Magner, who ran global consumer banking, and Michael Dunn, a 30-year Citi veteran who served as finance and operating chief for Citigroup’s global consumer unit.

Similarly, Merrill’s Mr. (Stan) O’Neal acquired a reputation for purging top executives — prompting some of those executives to agitate behind the scenes for his departure. Wall Street has become a more “volatile place to grow managers,” Mr. Smith says.

(The article is behind the WSJ’s pay wall.)

Countrywide Punched


You don’t want ACORN after you. They are relentless. They are the heir of Saul Alinsky, the most pragmatic and successful radical organizer of the 20th century.

ACORN’s been howling about subprime lenders — “predatory” lenders, “loan sharks” — for years. Now, even Alan Greenspan might have to tip his cap to them. They saw what he didn’t.

Countrywide, according to the New York Times, “is increasingly at the center of the mortgage storm that began this year.” How do they know? Because several hundred people organized by ACORN — it stands for the Association of Community Organizations for Reform Now — protested outside Countrywide offices in eight cities Thursday, including Boston, New York, Baltimore and San Jose.

There are lots of subprime lenders. Countrywide (NYSE:CFC) is one of the biggest, to be sure, but why is it the whipping boy all of a sudden?

Could it be because they’re asking for it? Last week, they let the Wall Street Journal listen in to an employee pep talk that is part of a new PR campaign titled “Protect Our House.” (Link is to the Ventura County Star, a free site.)

No, they don’t mean your house, or some poor customer’s house. They mean the company and its “demoralized employees.”

Leading the counterattack is Andrew “Drew” Gissinger III, a former offensive lineman for the San Diego Chargers football team who serves as executive managing director, residential lending, at Countrywide.

“Let’s call it like it is: As I mentioned earlier, it’s gotten to the point where our integrity is being attacked. Now it’s personal,” says the transcript of a talk made last week by Gissinger, “… and we’re not going to take it!”

The transcript, prepared from a phone call with 250 “opinion leaders” at Countrywide on Sept. 26, offers a peek inside one of the biggest crisis-management efforts under way in an American corporation. Along with Gissinger on the call was Jason Schechter from WPP Group’s Burson-Marsteller, a public-relations firm with a long history of crisis management.

“We wanted to assure you that my firm and I have brought companies through the worst type of publicity,” Schechter said, according to the transcript. He added that a six-person Burson team was ensconced at Countrywide’s Calabasas headquarters, and about 25 people overall were working on the campaign.

Rick Simon, a Countrywide spokesman, said the transcript was sent to employees Friday. It says that employees are expected to sign a pledge to “demonstrate their commitment to our efforts,” and Simon says about 11,000 have signed. Each employee who signs up receives the Protect Our House wristband made of green rubber. “We believe there’s a great story about the strength of the business,” says Simon.

Now ACORN’s saying: “Game on.”