Merrill to Shut Down Subprime Lending Unit

Merrill Lynch plans to wind down most of its First Franklin subprime mortgage lending unit, CNBC reported.

The move could result in the elimination of 400 to 500 jobs starting next week, CNBC said.

Merrill would reportedly keep First Franklin’s loan servicing business, which could perform well in the current mortgage and housing markets.

Merrill, which ceased originating subprime mortgages on December 28, on Monday said it was “evaluating continued involvement in this market.”

Merrill, the nation’s largest brokerage house, bought First Franklin from National City, a bank based in Cleveland, in December 2006 for $1.3 billion to expand in a business that had generated big profits for rivals like Lehman Brothers.

The deal closed just before the subprime mortgage market began to collapse.

On Monday, Merrill Lynch disclosed in its 10-K annual report that last year it cut back on subprime home lending, mortgage purchasing and extending credit facilities to other lenders.

Merrill reported mortgage-related losses and write-downs totaling $24.4 billion in 2007. The annual report shows that Merrill still has significant exposure to risky home loans and related assets.

Full story At:

http://www.nytimes.com/reuters/business/business-merrilllynch.html?_r=1&dlbk&oref=slogin

Ackermann Sees More Subprime Pain

Deutsche Bank managed subprime mess that has swamped its rivals. Now it’s chief executive says that he expects further writedowns at other banks.

“One must expect that the next six to nine months will remain difficult for the financial markets,” Mr. Ackermann said in a speech to entrepreneurs in Frankfurt, according to Bloomberg News. Mr. Ackermann said he expects the declining value of both asset-backed securities and leveraged loans as contributors to these write-downs.

Earlier this month, the bank said that it did not suffer any subprime-related losses in the fourth quarter of 2007, though market turbulence did affect its overall profit and it could not rule out future write-downs of other loans.

Deutsche Bank reported a $3.1 billion write-down in its third quarter tied to subprime-backed investments. It currently holds about $36 billion in leveraged loans.

Full Story at:

http://www.bloomberg.com/apps/news?pid=20601087&sid=assbtSiemE1Q&dlbk

When Bankers Fear to Act

In times of market crisis, the safest course for any one market participant may be the riskiest course for the entire market.

In past financial crises, it has fallen to someone — regulators, investment banks or even a single banker — to organize collective action and avert disaster.

Such moves involved persuading people to take steps that seemed to go against their own private interests. Buy stocks when everyone wants to sell? Lend money to a bank in danger of failing, when your own bank might need the money tomorrow? It goes against the basic principle of markets, that your job is to look out for yourself.

In 1907, Morgan demanded that presidents of New York trust companies — then a type of second-class bank — act together to save one of their own, the Trust Company of America, from a bank run.

Morgan, then the dominant figure in American finance, called the presidents to a Saturday meeting in his library — and locked the door. Not until dawn Sunday did he let them out, after they had committed the needed cash.

In 1987, on Tuesday, Oct. 20, it appeared that the crash of the previous day was going to get worse. Market makers had little capital and less appetite to risk it, and one by one trading in the shares of major companies was halted because there were no buyers.

That changed when two major brokerage firms — Goldman Sachs and Salomon Brothers — sent word to the New York Stock Exchange floor that they would buy any stock in the Standard & Poor’s 500 if their orders were needed to keep the shares trading. Just after that word was sent, the market turned around.

In 1998, when a possible hedge fund failure seemed to threaten the financial system, it was the Federal Reserve Bank of New York that called in all the major financial institutions and organized a bailout.

But efforts to organize concerted action this time have been limited. Treasury Secretary Henry M. Paulson Jr. has sought to get agreements in two areas — renegotiating mortgages and putting together a fund to deal with structured investment vehicles.

In part, that may reflect the slow realization of what is at stake. For many months, we called it the subprime mortgage crisis, because that was where the problem first became apparent. But that label is far too narrow, and serves to obscure what is at stake.

“The principal cause for concern today is the paralysis of the credit markets,” said Martin Feldstein, a Harvard economist.

The latest area of crisis is one that Morgan would have recognized in 1907. The major Wall Street houses refused to commit capital to the auction-rate market.Now many auctions are failing.

When the crisis storms gathered in late 2007, much of the problem was with complicated securities — collateralized debt obligations. The big banks were unable or unwilling to either buy the securities or find customers to buy them.That lack of action has damaged the reputation of each of the houses. Bosses are no longer are sure just how adequate their capital is, and they are afraid to commit it while the financial crisis swirls around them.
It is not clear what the Fed or the Treasury could, or should, do now. The players can no longer be gathered into a single room, and they are regulated in different countries around the world, if they are regulated at all. Things are far more difficult because many of these markets are unregulated, making it difficult to gauge who is at risk and for how much.

But it is hard to see this ending until something is done to, in Mr. Feldstein’s words, assure “that necessary extension of credit.” Lowering interest rates will not, by itself, do that so long as the banks and investors are too scared to lend money at any rate.

In their book on the Panic of 1907, published last year before the crisis began, Mr. Bruner and Mr. Carr hailed Morgan’s actions, as well as the Fed’s 1998 move to salvage the hedge fund. But they warned, presciently as it turned out, that the current environment might hamper similar efforts in a new crisis.

“In a globally complex financial system, will such collective action be possible if the crisis is triggered beyond the reach of any of today’s regulators?” they asked.

So far, it appears the answer is no.

Go to Article from The New York Times »

Bond Insurers Deepen Sub-Prime Crisis

The sub-prime market is focused on providing home loans to those with limited or poor credit histories.

Many of these mortgages were converted into financial instruments and sold on to investors including banks.

But a series of interest rate rises over the past two years has meant many sub-prime borrowers could no longer afford their monthly payments, causing them to default.

This led to a steep fall in the value of investments linked to sub-prime loans and has caused many banks to report massive losses.

Bond Insurers (like Ambac, MBIA) sells policies that protect banks against losses on investments backed by sub-prime mortgages. To do that it relies on a strong credit rating.

But analysts are concerned that the insurers will not be able to pay out.

Credit rating agencies Moody's and Standard & Poor's have threatened to downgrade the firms on fears they do not have the ability to pay claims on mortgage-backed securities that soured as a result of the credit crisis.

A poor rating would force the banks to acknowledge a drop in the market value of bonds insured by the guarantors.

Some fear that if bond insurers like Ambac and MBIA were stripped of their 'AAA' rating, that could spark the next wave of writedowns at the nation's largest financial firms.

To date, major financial firms have endured losses totaling more than $100 billion as a result of bad bets on mortgage securities and some analysts are warning that that number could grow.

Right now, the credit rating agency estimates that about 20 different financial institutions have about $120 billion worth of credit default swaps on asset-backed collateralized debt obligations guaranteed with different bond insurers.

Moody's said that financial firms may have to ante up as much as $30 billion in reserves to offset worsening conditions related to the bond insurance industry.

John Varley Raises Dividend, In Tough Environment

Barclays, Britain’s third-biggest bank, reported a 2007 pretax profit of 7.08 billion pounds, down from 7.14 billion in 2006 but just above an average forecast of 7.05 billion from Reuters Estimates. Underlying profits, which exclude sales of businesses, rose 3 percent. The results included a £1.6b ($3.1 billion) writedown on the value of risky assets.

Barclays’ shares have fallen 40% in the past year on uncertainty over its exposure to US sub-prime mortgages following the US housing slowdown.

Barclays increased its dividend 9.7% to 34 pence from the 31 pence paid on 2006 earnings. The rise represented a slight slowdown from the 10% dividend increase a year ago.

Profits at Barclays Capital, its investment bank arm, rose 5 percent to a record 2.34 billion pounds.

Within its divisions, Barclays said that profits at its UK retail business grew 9pc to £1.28bn, while its commerical bank saw profits rise 5pc to £1.3bn. Profits at its international retail business, excluding its South African arm Absa, reached £246m.

Earnings at Barclaycard jumped 18pc to £540m.

"Barclays delivered a resilient performance in 2007, with profits broadly in line with the record prior year results,"" said chief executive John Varley.

Chief Financial Officer Chris Lucas said the final net write-down of £1.64 billion had three components: £1.4 billion on super-senior exposures: £800 million against other credit exposures; and a positive effect of £600 million, as the same spread that caused write-downs caused a "write up" of its own credit.

Altogether, Barclays's impairment charges rose 30% to £2.8 billion. The figure includes the credit-market-related write-downs, loan-loss provisions and credit-card impairments.

Looking ahead the firm Mr. Varley said he expected ""significant opportunities for growth"".

John Varley admitted that he was “disappointed not to acquire” ABN Amro last year. Buying the Dutch bank would roughly doubled its market capitalization, becoming one of the world’s largest banks.

Mr. Varley went on say that failing to win ABN “hasn’t affected our strategy”. However not? It can be argued that the merger would have merely accelerated Barclays’ own growth plans, and that the UK bank was being opportunistic

For 2004 to 2007, the target was in the range of £6.5 billion to £7 billion, or a compound annual growth rate of 10% to 13%. It outperformed both, with an £8.3 billion economic profit and a compound annual growth rate of 16%.

In the next three years, Barclays wants compound annual growth of 5%-10%, to a cumulative total economic profit of between £9.3 billion and £10.6 billion by 2011.

Asked about the modest target for the next three years, Mr. Varley said it reflects the increased cost of doing business: "The cost of capital has risen over the last 12 months," risks have changed and the environment is less benign.

JP Morgan Takes Stakes In Asia-Pacific

JP Morgan Chase is launching a private equity unit in the Asia-Pacific region with its own capital of $750 million and client funds.

JPMorgan is expanding its Asian operations by absorbing a Hong Kong-based firm called TVG Capital Partners.

TVG is a private-equity investment firm with offices in Hong Kong; Bangalore, India; and Sydney, Australia. Its Web site says it manages more than $700 million in capital. TVG had focused on the technology, communications and media sectors.

Varun Bery and John Troy, co-founders of TVG Capital Partners, who will join JPMorgan as managing directors, will head the expansion. The 10-person team is also joining from TVG.

Varun Bery was a telecom banker for Credit Suisse Group and a consultant for McKinsey & Co. John Troy worked at the Asian Infrastructure Fund since its inception in 1994 and was previously at several global telecom firms.

The team from TVG will be the Asian arm of JP Morgan's Private Equity Principal Investments business, which is headed by Bob Case in New York.

JP Morgan will take stakes in consumer, retail, industrial, health care, technology and natural resources in businesses in Asia-Pacific region, where buyouts are notoriously difficult.

JPMorgan said it would allow its corporate and financial sponsor clients to put their own capital together with that of the bank to "co-invest" in the opportunities it finds.

JP Morgan's investments are minority stakes of between $75m and $100m.

JPMorgan has invested in Asian private equity through its units One Equity Partners and Principal Investment Management.

Lets look at Good things in this

The move demonstrates JP Morgan's ability to finance new investments at a time when many of its rivals are seeking sovereign wealth funds and other outside investors to help shore up their balance sheets following massive losses related to the turmoil in credit markets.

It also indicates JP Morgan's desire to catch up with investment banks such as Morgan Stanley and Goldman Sachs that were quicker to commit a significant portion of their own money to Asia.

JP Morgan decision to hire TVG staff to run the fund will get new operation up and running faster than if it built a team from scratch. TVG is bringing in 10 people, and J.P. Morgan expects to add to that quickly.

The new fund will evaluate investments across many sectors, but has avoided the real estate and financial institutions.

IMF has forecasted that Asia-Pacific economic growth may outpace the USA during the current year. The developing Asian economies have been driving corporate profits higher during the recent years, with the annual growth of about 8.6 percent. In the USA the index could only reach 1.5 percent.

Difficult listing conditions in Asia due credit squeeze, may open new doors for principal investments by banks because many in Asia's huge pool are privately held or family companies that will not go ahead with IPOs amid such stock market volatility.

Companies faced with difficult market conditions are looking increasingly to private-equity funds as stakeholders. Recent declines in stock prices and a fallback in markets have led to more favorable investment conditions for private equity funds.

Buffett Try’s To Rescue Wall Street….Really!!

Warren E. Buffett offered to help three insurance companies whose plunging fortunes have become a threat to the financial system.

The companies are MBIA, the Ambac Financial Group and the Financial Guaranty Insurance Company. The three companies are struggling to maintain their AAA ratings after writedowns on the value of mortgage guarantees.

Mr. Buffett said he would stand behind, or reinsure, policies that the three companies had written on $800 billion of municipal bonds.

For years, bond insurers mainly provided credit-enhancement for municipalities in exchange for an upfront fee. A bond insurer would take a bond with a midling investment grade rating – like single-A, -- and offer to pay investors what they were due (interest and principal payments), if the issuer defaulted. These insurers had sufficient assets and expertise to garner triple-A ratings, so the issuers could pay less interest on their bonds than they would have without the backing.

Few bond issuers have gotten greedy in recent years, by insuring subprime-linked securities. Those bad bets now threaten their credit ratings and their future. The downgrade of a bond insurer would force some insurers to sell any municipal debt that didn't have an underlying AAA rating.

Speaking on CNBC, Buffett said his holding company, Berkshire Hathaway, is willing to commit $5 billion to reinsure the municipal bonds in exchange for a fee equal to 1.5 times the remaining unearned premium over the life of the bonds. The deal, he added, would ensure that the bonds would sell at a fair price. Currently, he said, the bonds sell at significant discounts because of concerns about the financial health of the bond insurers.

The bond insurers that lend their AAA rating to municipal debt, If reinsured by AAA rated Berkshire, the municipalities would also retain the top rating.

The insurers were considered unlikely to agree to Mr. Buffett’s stringent terms. Ambac, in a statement, said the offer would not benefit the company.
Mr. Dinallo, who regulates MBIA and F.G.I.C., has asked large banks like Citigroup, Merrill Lynch and UBS, many of which hold insurance policies from the guarantors, to devise a plan to shore up the insurers. The officials are discussing investing in the insurers or providing them with lines of credit to cover future losses and restore confidence in them. (Ambac is regulated by Wisconsin regulators.)

My Views

Take a closer look and you will see that the billionaire investor is prepared to provide an extra safety net only for insurance policies covering municipal bonds — debt issued by cities, sewer authorities and the like, which rarely default anyway. His offer doesn’t extend to collateralized debt obligations and other risky securities linked to subprime mortgages whose value has plunged in recent months.

Buffett is effectively offering the companies to give up future profits, insurers make on their traditional business in order to free up capital to deal with the situation. — “It does not make sense to give up what is the good part of your business.”

Buffett is trying to be opportunistic — Buffett is using his higher credit rating to extract value for his shareholders — it seemed a better deal for Berkshire Hathaway than for the troubled firms that might need his help.

This offer may force banks to come to the table as fast as possible and probably do it on better terms than, what Mr. Buffett is offering.