|
|
Financial stocks led the way down in the first year of this vicious bear market. Now it seems they’re intent on leading in Year Two as well.
A sell-off in bank, brokerage and other financial issues dragged the market lower Monday, deepening a decline that has clipped 12.4% off the financial-sector index of the Standard & Poor’s 500 over the last five trading days.
That’s by far the worst performance of any of the 10 major industry sectors in the S&P 500, and it’s more than twice the 4.9% drop in the S&P 500 as a whole in that period.
 More troubling is that the financial-sector index, which includes 84 stocks, now is just 2.5% above the 12-year closing low it set Oct. 27.
Wall Street optimists who believe the bear market is over have been counting on major share indexes to hold above their October lows, to confirm that the worst of the selling has passed.
The S&P 500 itself, at 919.21 on Monday, was 8.3% above its closing low Oct. 27.
A slide through the October lows by the S&P financial index would be a bad sign, said Ryan Detrick, senior technical analyst at Schaeffer’s Investment Research in Cincinnati.
"That’s one of our major concerns" for the market, he said. "The financials are starting to break down once again."
One way to look at it: The latest sell-off is a vote of no confidence by investors, despite the trillions of dollars that the federal government has thrown at the financial system this year to end the credit crunch and keep lenders from failing.
Citigroup Inc. shares fell to a new 12-year closing low of $11.21 on Monday, down 5.2% for the day. Goldman Sachs Group slid 8.4% to $71.21, the lowest since 2003. Credit card giant Capital One Financial dropped 5.8% to $32.56, also the lowest since 2003.
All three companies are among those that have received capital infusions under the Treasury’s plan to bolster banks’ finances.
In Goldman’s case, investors were reacting to analysts’ warnings Monday that the investment banking powerhouse is likely to post a loss in the current quarter -- which would be the firm’s first unprofitable quarter since it went public in 1999.
 Other news from the financial sector also set a grim tone. Fannie Mae, which was essentially nationalized in September, said it might need more than the $100 billion the Treasury already has committed to keep it afloat.
And the Bush administration was forced to overhaul its bailout of insurance titan American International Group, boosting the cost to about $150 billion.
"They had to go to Plan B" to save AIG, said Joe Battipaglia, chief investment officer at investment firm Stifel, Nicolaus & Co. in Yardley, Pa. "That’s not a confidence builder" for investors in financial stocks.
Indeed, with many banks expected to take another round of massive loan write-offs this quarter, investors may already be wondering if the companies in 2009 will be heading back to the Treasury for a second helping of taxpayer money -- with the end result that shareholders would surrender more of their stakes in the businesses to Uncle Sam.
Photo credit: Nick Ut /Associated Press
Bailout trickle-down: BlackRock Inc., Pimco and Legg Mason’s Western Asset Management unit served as informal advisors to the Treasury on the $700-billion financial-system rescue plan and now are offering to manage some of the assets the government will buy from banks, Bloomberg News reports, citing people familiar with the matter.
The Treasury will choose five to 10 money managers to help it buy and manage troubled mortgage debt, officials reiterated today, according to Bloomberg.
More from the story: The Treasury's first attempt to hold an auction to buy troubled assets from financial firms will take at least four weeks to set up. Managers will be evaluated based on the cost and scope of services they offer. The Treasury is still working out a conflict-of-interest policy and details for guidelines on compensation.
BlackRock, Pimco and Western Asset all are veteran bond-fund managers. BlackRock is in New York, Pimco is in Newport Beach and Western Asset is in Pasadena. Spokesmen for the companies declined to comment.
What everyone’s waiting to see, of course, is the pricing scheme Treasury and its advisors set up for loan purchases. How much is this mortgage dreck really worth if, like Uncle Sam, you’re planning to hold it for years rather than days?
Separately, the Treasury today hired State Street Corp. and Barclays PLC to manage a previously announced $10-billion program to buy mortgage-backed securities of Fannie Mae and Freddie Mac -- an attempt to lend support to that market and bring down mortgage rates.
Thankfully, there’s no shortage of out-of-work Wall Streeters available for hire as the Treasury morphs into a giant hedge fund.
The numbers coming out of Washington in the last few weeks have been so huge, it all begins to sound like Monopoly money.
Too bad it’s all real, and mostly coming from taxpayers’ pockets -- if not right away, then down the line.
This seemed like the perfect set-up for the famous quote from Everett Dirksen, Illinois' Republican senator from 1951 to 1969, about government spending in his era: "A billion here, a billion there, pretty soon you're talking real money."
 But according to Wikiquote, the quote was fabricated. "Oh, I never said that," Dirksen supposedly told someone who asked about the line. "A newspaper fella misquoted me once, and I thought it sounded so good that I never bothered to deny it."
Of course, a billion here or a billion there is chump change in the current debacle.
Here is a handy tally from Merrill Lynch & Co. economists of the money now committed as part of the financial-system bailout:
--- Treasury commitment to buy mortgage-related assets from banks: $700 billion.
--- Treasury capital commitment to Fannie Mae and Freddie Mac: up to $200 billion.
--- Expansion of temporary dollar "swap" lines with foreign central banks: $180 billion.
--- Treasury fortifying of the Federal Reserve’s balance sheet: $100 billion.
--- Federal Reserve loan to American International Group: $85 billion.
--- Treasury commitment to insure money market mutual funds: $50 billion.
--- Federal Reserve loans to banks via discount window: $33 billion.
--- Federal Reserve loans to securities dealers: $20 billion.
--- Treasury initial planned purchases of Fannie Mae and Freddie Mac mortgage securities: $10 billion.
Photo: U.S. Capitol. J. Scott Applewhite / Associated Press
Read on »
No really did mean no.
Treasury Secretary Henry M. Paulson told reporters today that he "never once considered it appropriate to put taxpayer money on the line" to save Lehman Bros. Holdings Inc.
Over the weekend, Bank of America Corp. and Barclays reportedly had been willing to consider bids for failing Lehman if federal aid was provided to backstop a purchase -- similar to what the Federal Reserve anted-up to persuade JPMorgan Chase & Co. to buy crippled Bear Stearns Cos. in March.
 But one week after Paulson committed up to $200 billion of taxpayers’ funds to keep mortgage giants Fannie Mae and Freddie Mac solvent, he made clear that he wasn’t going there for Lehman.
"Moral hazard is something I don’t take lightly," Paulson said, referring to the potential for government bailouts to encourage companies and investors to believe there’s no penalty for taking excessive risks.
Lehman filed for bankruptcy protection today. Its stock was last trading at 18.5 cents a share, down from $3.65 on Friday.
As for the next shoe that Wall Street fears will drop -- insurance titan American International Group -- Paulson said a meeting today in New York between AIG executives and Treasury and Fed officials wasn’t about federal financial assistance.
The rumor last night was that AIG wanted a $40-billion 'bridge' loan from the Fed to help shore up the company's capital and avoid a possible credit-rating downgrade.
"What is going on right now in New York has got nothing to do with any bridge loan from the government," Paulson said. "What's going on in New York is a private sector effort, again, focused on dealing with an important issue that's, I think, important for the financial system to work on right now."
AIG shares plunged as low as $3.50 this morning but at about noon PDT were off $6.71 to $5.43.
Photo: Henry Paulson. Credit: Pablo Martinez Monsivais / Associated Press
It’s looking like a second straight weekend of no Sunday football-watching for Wall Street or Washington.
Federal regulators and Wall Street executives finished meeting today without hammering out a plan to either sell crumbling Lehman Bros. Holdings Inc. to a bigger financial institution or to foster the orderly liquidation of the 158-year-old investment bank.
The Wall Street Journal’s website reported shortly before 4 p.m. PDT that the talks had ended for the day, and would restart on Sunday: "A sense of optimism that a rescue could be arranged today dimmed as a growing sense of gloom descended on Wall Street," the Journal said.
A major sticking point continues to be that other investment banks want the government to provide a backstop for Lehman’s troubled real estate assets, so that the banks don’t have to absorb the full hit if they step in to rescue the firm.
From the Journal: Under one plan, either Barclays PLC or Bank of America Corp. would buy Lehman's "good assets," such as its equities business, people familiar with the matter say. Lehman's more toxic real-estate assets would be ring-fenced into a "bad" bank that would contain about $85 billion in souring assets. Other Wall Street firms would try to inject some capital into the bad bank to keep it afloat for a period of time so that a flood of bad assets don't deluge the market, damaging the value of similar assets held by other banks and insurers. The banks are also looking for the government to somehow financially backstop the bad bank.
Many banks are worried about shoring up their own balance sheets as defaults on real estate loans continue to rise, and so want the government to guarantee that a Lehman bad bank wouldn’t become a black hole for the rescuers.
But the Treasury and the Federal Reserve have said they won’t provide government aid for a Lehman deal. The government is drawing a line in the sand after committing up to $200 billion last weekend to keep mortgage giants Fannie Mae and Freddie Mac solvent.
If no agreement on a good bank/bad bank arrangement can be reached, Lehman could have to be liquidated beginning on Monday. That was the subject of a second meeting at the Fed’s New York branch, the Journal said: On Saturday afternoon, the credit-trading heads of major investment banks gathered at the meeting to discuss how to deal with their exposures to Lehman in the intertwined credit-default-swap market. The lack of a central clearinghouse in this market means that dealers, hedge funds and others are directly facing each other in insurance-like contracts that are tied to trillions of dollars in debt instruments. Credit derivative traders at some firms were asked to come to work over the weekend to help quantify their exposures to Lehman and compile lists of outstanding contracts they have with the investment bank.
The potential for a cataclysm in the giant derivatives market has long been a major concern on Wall Street, and has been one key element over the years in the argument that some financial firms were "too big to fail," as I note in my column this weekend in the Times. (Read it here.)
Lehman is looking like it's going to be the biggest test case yet for dealing with a monumental disruption in derivatives trading.
Some late night or early morning reading from around the markets:
--- Your tax dollars at work: The U.S. Treasury on Thursday put up a Q&A on its website, answering what it said were frequently asked questions about its plan to pump up to $100 billion each into Fannie Mae and Freddie Mac via purchases of special preferred stock. Read it here.
Pointedly, the Q&A seeks to dispel the idea that "a future Congress could pass a law that would abrogate the agreement" to support the companies. The Treasury assures us that "any such law would be inconsistent with the U.S. government's longstanding history of honoring its obligations."
In other words, the admonishment to the next administration and Congress is: "Don’t mess with this deal."
 --- Fannie and Freddie, off the floor: The New York Stock Exchange on Monday had given Fannie Mae and Freddie Mac an exemption from the exchange’s normal rules about penny stocks, by allowing them to continuing trading on the NYSE floor even after they fell below $1 (as I noted here on Wednesday). On Thursday the NYSE reconsidered, and booted the stocks off the floor and into the all-electronic NYSE Arca market.
The exchange said it believed that the market impact of the government’s seizure of the companies on Sunday "has been fully absorbed by the market," so it no longer felt the need to accord Fannie and Freddie special treatment.
Floor trading has the advantage of human oversight, but I’m not sure any of the speculators trading Fannie and Freddie will notice a difference in the Arca market. If there is a big difference, I’d like to know, so feel free to share your comments.
--- Downer of a day at the beach: Downey Financial Corp., already operating under the close scrutiny of its federal regulators, got more bad news Thursday: Standard & Poor’s cut the Newport Beach-based thrift’s credit rating deeper into "junk" territory, to B-minus from B-plus. S&P predicted that Downey wouldn’t be able to find enough new capital to keep the Office of Thrift Supervision happy. "We are also concerned that continued publicity of Downey's problems could lead to material deposit outflows that would overwhelm Downey's liquidity," S&P said.
Downey’s stock slid 8 cents to $1.54 on Thursday, before the S&P move. Year to date the loss now is 95%.
Photo: Michael Phelps was welcome on the NYSE floor this week; Fannie and Freddie no longer are. Emmanuel Dunand / AFP Getty Images
From Times staff writer Walter Hamilton
Who wants to buy Lehman Bros.? And with what kind of government help?
Those questions dominated Wall Street today amid rumors that the struggling investment bank had decided to put itself up for sale, after investors reacted negatively to the firm's restructuring plan unveiled Wednesday.
Lehman’s shares plunged as low as $3.79 and ended at $4.22, down $3.03, or 42%.
The company’s stock market value now is just below $3 billion -- making an acquisition feasible for a range of potential suitors, particularly if the federal government intervenes to grease a sale, as it did with Bear Stearns Cos.’ sale to JPMorgan Chase & Co. in March.
 "It’s a great play for somebody at this price," said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.
The leading contenders are believed to be Bank of America Corp. and British banks HSBC Holdings and Barclays. But other European, Japanese and Middle Eastern banks aren’t out of the question, analysts said.
The Wall Street Journal said Bank of America appeared to be loss-ridden Lehman’s best hope. Neither BofA nor Lehman would comment.
The Washington Post said the Federal Reserve and the Treasury were "talking to a wide range of firms and examining multiple scenarios" to assist in the sale of Lehman. It wasn’t clear whether "assist" meant government aid would be involved or the feds would simply help broker a deal.
However, sources told The Times that government aid was unlikely to be forthcoming.
WIth a $3 billion market value, Lehman could be in the cross-hairs of a private-equity firm such as Blackstone Group or money-management giant BlackRock Inc., said Richard X. Bove, an analyst at Ladenburg Thalmann.
"They’ve got to sell the company, and they’re definitely going to sell it," Bove said. "My guess is within two weeks we will have a buyer."
But the continuing dive in the stock, despite the buyout rumors, indicated that investors doubted a buyer would pay much more than the current price.
The major risk for a suitor is that Lehman could suffer greater losses on its giant real estate portfolio -- the root of its troubles. So to get a deal done, buyers might demand that the government guarantee some of Lehman’s troubled assets, as the Fed did to entice JPMorgan to swallow Bear Stearns.
Naturally, the number of potential bidders would jump if the government offered help, analysts said.
The argument for federal assistance is that the collapse of Lehman -- a 158-year-old Wall Street institution -- could cause a domino effect in the financial system, given the extent of its investment holdings and its lending relationships with many other banks, brokerages, hedge funds and other players.
But a government-assisted sale of Lehman could spark a political firestorm, just days after the Treasury seized mortgage giants Fannie Mae and Freddie Mac and agreed to invest up to $100 billion of taxpayers’ money in each firm to keep them solvent.
What’s more, Lehman doesn’t appear to be in the same dire financial straits that Bear Stearns was in March. Other investment banks say they continue to trade with Lehman. And all big brokerages now have the ability to borrow short-term money from the Fed, a concession the central bank granted after Bear's near-collapse.
Photo: Outside Lehman Bros.' headquarters in Manhattan. Jin Lee / Associated Press
In this latest episode of panic selling in the financial sector, Wall Street is targeting a relative handful of the usual suspects -- including Lehman Bros. Holdings Inc., Washington Mutual Inc. and insurance giant American International Group.
Unlike in mid-July, the damage to financial stocks overall hasn’t been severe.
Market bulls see that as a positive sign. The bears say investors are delusional.
Lehman’s shares, which plunged 42% today to $4.22, have dived 74% since Friday. WaMu has lost 34% since Friday and fell as low as $1.75 today but got a late bounce and finished up 51 cents at $2.83. AIG is off 21% in four days, although it edged up 5 cents to $17.55 today after falling as low as $13.82.
 By contrast, the Standard & Poor’s index of 87 financial stocks in the S&P 500 index has declined just 1.5% since Friday -- despite the wipeout of shares of Fannie Mae and Freddie Mac since the government seized the companies Sunday. The index rallied 1.5% today to close at 285.67.
What’s more, the financial-stock index is 23% above its 10-year low reached July 15, when the last major selling wave hit banks, brokerages and insurers.
Jim Swanson, chief investment strategist at MFS Investment Management in Boston, says this time the market is differentiating between financial companies that clearly face serious capital threats and those that appear much more likely to survive the credit crunch.
Unlike during the July storm, "the investing community worldwide doesn’t feel like the dike has broken this time," Swanson said.
Interestingly, the S&P financial-stock index has held up much better than the broader market. Early today the S&P 500 fell as low as 1,211.54, below its July 15 closing low of 1,214.91. It rallied back to finish at 1,249.05, up 1.4% for the session. That left it less than 3% above the July low.
The broader market has been weighed down this time by losses in energy and other commodity stocks and by selling in the tech sector.
Despite the resilience of most financial stocks in recent days, some market pros say it’s ridiculous to think that Lehman, WaMu or AIG could fail, or be forced into shotgun marriages with rivals, without broader fallout.
"Lehman doesn’t go away without repercussions," said Peter Boockvar, equity strategist at investment firm Miller, Tabak & Co. in New York. "AIG is the biggest insurance company in the world. That doesn’t go down without repercussions."
The disturbing message in the troubles of these giants, Boockvar says, is that "the credit contraction is intenstifying."
"People can’t forget the real-world effect this is having" on the economy, he said. "We’re still in a bear market."
In their heyday, Fannie Mae and Freddie Mac got used to special treatment on Capitol Hill. Now they’re getting it from the New York Stock Exchange.
With their stocks below $1 since the government seized control Sunday -- Fannie closed at 74 cents Wednesday, Freddie at 66 cents -- the NYSE’s rules say they should be booted off the exchange floor and should trade only in all-electronic markets.
But the NYSE is allowing the shares to stay on the floor until at least Monday, even as penny stocks that may ultimately be worthless.
 Why? The exchange, in a statement, said it believed that "the market will substantially benefit from having the most available liquidity and the greatest number of venues in which investors can trade the securities of Fannie Mae and Freddie Mac, and would further benefit from the efforts of the NYSE specialists in those securities to stabilize the markets as public investors react to the news."
Granted, there’s still plenty of reaction going on. Trading in Fannie topped 331 million shares Wednesday; Freddie’s volume was 215 million.
One big group of investors had no choice but to wait until this week to sell: funds that track the Standard & Poor’s 500 index. S&P waited until Tuesday to kick Fannie and Freddie out of the index, effective at the start of trading Thursday. Fannie will be replaced by nut-and-bolt maker Fastenal Co. Freddie will be replaced by software firm Salesforce.com.
And who’s buying Fannie and Freddie at this point? "Short sellers" who borrowed the stocks and sold them, betting on lower prices, have to purchase new shares to close out their trades and book their profits. Fannie's shorted total reached a record 182 million shares as of Aug. 29, the NYSE said in its latest short-interest report, issued Wednesday. Freddie's shorted total was a record 158 million shares.
Except for short-coverers, Fannie and Freddie now are just a vast play area for day traders and other speculators.
Photo: At the booth where Fannie Mae is traded on the NYSE floor, on Monday. Andrew Harrer / Bloomberg News
John McCain today threw himself into the fray over compensation for the ousted chief executives of Fannie Mae and Freddie Mac.
"CEOs that led us into this mess are walking away with over $20 million, and we're not going to let that happen as president," the Republican presidential nominee said at a rally in Fairfax, Va., Bloomberg News reports.
"They deserve nothing. They should be paying it back," he said.
Bloomberg noted that the Democratic nominee, Barack Obama, two days ago called on Treasury Secretary Henry M. Paulson Jr. and Federal Housing Finance Agency Director James Lockhart to deny "inappropriate" exit payments to the CEOs, Daniel Mudd of Fannie and and Richard Syron of Freddie.
The two were fired on Sunday after the government seized the mortgage companies, saying that their financial health was in jeopardy.
McCain apparently took his pay figure from a letter that Sens. Charles Schumer (D-N.Y.) and Jack Reed (D-R.I.) wrote on Tuesday to Lockhart and Paulson. They said the executives might be paid more than $24 million, in total, in golden-parachute payments.
Sen. Jim Bunning (R-Ky.) today introduced a bill to bar former Fannie and Freddie executives and directors from getting severance payments.
You wonder why Wall Street will so miss Fannie Mae and Freddie Mac?
In their golden years -- and there were many of them -- Fannie and Freddie generated spectacular returns for their shareholders.
Check out the accompanying chart. It measures the "total returns" of Fannie and Freddie, meaning stock price appreciation plus dividend payments, from the end of 1989 through the end of 2006. I wanted to see how well the stocks performed before the bottom began to fall out of the housing market in 2007.
 Freddie was the star: The stock’s total return was 1,536% in the 17-year period, an average of 17.9% a year -- compared with a 475% (10.8% a year) return for the Standard & Poor’s 500 index.
What’s more, Freddie’s return far exceeded the 900% gain of the average financial stock in the S&P 500.
Fannie Mae, with a 909% total return in those 17 years (14.6% a year, on average), performed just slightly better than the average financial stock, but left the S&P 500 in the dust.
The poor Nasdaq composite index could do no better than a 431% return (10.3% a year) in the period, which encompassed both the tech boom of the late-1990s and the bust of 2000-’02.
How did Fannie and Freddie do it? Leverage, of course. On relatively small capital bases the companies dramatically expanded their mortgage portfolios. They could do so because they were able to borrow at such low interest rates, thanks to the implied government guarantee of their debt.
In the boom years the payoffs were great, and they flowed like water to the shareholders -- not to the taxpayer, whose money always stood behind Fannie and Freddie, and who now is being tapped to clean up the mess they helped make in the housing market.
Privatizing gains, socializing losses -- that’s the enduring story of Fannie and Freddie.
Looks like the credit crisis was fixed -- for one day.
Wall Street today careened back into panic mode over the financial system, as a collapse in shares of brokerage Lehman Bros. Holdings Inc. triggered widespread fear that it would be the next major domino to fall.
That sparked a huge sell-off across the stock market, one day after the Dow Jones industrials gained 290 points on the government’s move to take control of mortgage titans Fannie Mae and Freddie Mac.
Today, the Dow gave back nearly all of Monday’s advance, sliding 280.01 points, or 2.4%, to 11,230.73. Broader indexes fared worse: The Standard & Poor's 500 sank 3.4% after rising 2.1% on Monday.
Losers swamped winners by more than 7 to 1 on the New York Stock Exchange -- a sign of deepening pessimism. And let’s not forget that we’re not even halfway through September, historically the worst month of the year for the stock market.
 The sell-off accelerated today despite what used to pass for good news: another sharp drop in commodity prices. Crude oil futures fell $3.08 to $103.26 a barrel, the lowest since April 1.
Fearful investors again rushed into U.S. Treasury securities, driving the yield on the 10-year T-note to 3.57%, down from 3.68% on Monday and the lowest since mid-April.
"The entire day was dominated by Lehman," said Tom Di Galoma, who trades Treasuries at brokerage Jefferies & Co. in New York.
Lehman’s stock ended down $6.36, or 45%, to $7.79 as investors fled. More than 370 million shares changed hands. Investors also hammered other financial issues, including Washington Mutual Inc., which dived 82 cents, or 20%, to $3.30, and American International Group, which slid $4.39, or 19%, to $18.37.
Lehman’s shares plunged early in the session on reports that the government-owned Korea Development Bank had decided against buying a stake in the firm, which needs a capital infusion to bolster its balance sheet. The stock fell further on rumors that other major banks and brokerages had stopped trading with Lehman -- the same rumors that preceded Bear Stearns Cos.’ demise in March.
But Citigroup, Goldman Sachs Group, Merrill Lynch & Co. and Morgan Stanley all said they still were doing business with Lehman. And analysts noted that all major brokerages, including Lehman, have an option that wasn’t available to Bear Stearns: They now can borrow directly from the Federal Reserve.
Late in the day, Lehman said it would announce its fiscal third-quarter earnings on Wednesday, a week in advance -- apparently in an attempt to calm investors.
The market's lack of faith in Lehman is a harsh reminder that the housing-centered credit crisis is far from solved. The brokerage’s woes stem in large part from losses it has racked up on mortgage securities.
By seizing Fannie Mae and Freddie Mac -- and guaranteeing all of their debts -- the government hopes investors will be more willing to fund the companies, which in turn could drive mortgage rates lower.
There was more evidence today that that strategy is working: The average yield on Fannie Mae's 30-year mortgage-backed bonds fell to 5.16%, after tumbling to 5.21% on Monday from 5.63% Friday. Falling yields indicate that the bonds are attracting more buyers.
But whatever fix that provides for housing, it will be a slow process. And the stock market's message is that it’s just too late for some financial companies whose balance sheets have been ravaged, and who can’t find deep-pocketed investors willing to put up fresh capital.
From Times staff writer Walter Hamilton:
Uncle Sam saved Fannie Mae and Freddie Mac, but brokerage Lehman Bros. Holdings Inc. is having a harder time finding a sugar daddy -- raising new fears about the firm’s future and about the financial system overall.
The company’s shares have plunged today, losing more than one-third of their value, after news reports said talks between Lehman and a South Korean bank about a possible cash infusion had ended.
Worries about Lehman are hammering financial stocks across the board, one day after a relief rally stoked by the government’s rescue of Fannie and Freddie.
Lehman’s shares were down $3.83, or 27%, to $10.32 at about 10:30 a.m. PDT. The price fell as low as $8 early on. The Dow Jones industrial average was off 112 points, or 1%, to 11,399.
 CNBC reported that the company may rush out its fiscal third-quarter earnings report today, to try to calm investors, instead of waiting to report them on schedule next week.
Lehman had been negotiating to have government-owned Korea Development Bank pump in money to bolster the brokerage’s capital, which has been eroded by the mortgage crisis. But Dow Jones News Service reported today that the talks had ended. Neither Korea Development Bank nor Lehman would comment.
Following the emergency takeover of Bear Stearns Cos. by JPMorgan Chase & Co. in March, Lehman was left as the smallest of the four remaining independent investment banks -- and, as with Bear, its future has become increasingly clouded by heavy losses tied to mortgage-related assets.
Analysts expect Lehman to divulge another round of mammoth asset write-downs when it reports third-quarter results. Meredith Whitney at Oppenheimer & Co. estimates a $4-billion write-off and a $2.70-a-share loss for the period.
The company’s inability, so far, to find a partner to bolster its capital is deepening concerns about the financial system as a whole today. It looks as if the once plentiful supply of outside investors ready and willing to bail out U.S. banking institutions is running low.
Continuing losses and stock-price declines at giants such as Citigroup Inc. and Merrill Lynch & Co. have pounded the investments that sovereign wealth funds and other outside investors made in those companies over the last year. So it's no wonder other institutional investors are gun-shy, analysts say.
Lehman faces tough choices in trying to raise money on its own. It could sell its prized Neuberger Berman asset-management unit to boost its capital reserves, but that would sacrifice what could be a lucrative future profit stream.
Some analysts say the company is dragging its feet.
Lehman refuses to rid itself of distressed assets -- reasoning that it doesn’t want to sell at fire-sale prices -- but is simply prolonging it woes by overestimating their actual worth, Richard Bove, an analyst at Ladenburg Thalmann & Co., said in a report today.
"This is depressing shareholders and infuriating insiders," he wrote.
Lehman has promised to unveil "key strategic initiatives" in its quarterly earnings report. The market seems to be demanding to see them ASAP.
Photo: Lehman's headquarters in New York. Credit: Gino Domenico / Bloomberg News
For one day, at least, Henry Paulson is the toast of financial markets worldwide.
The U.S. Treasury chief’s rescue plan for mortgage giants Fannie Mae and Freddie Mac had the desired effect on Monday, driving down the companies’ borrowing costs and opening the door to lower mortgage rates.
That fueled a powerful rally on Wall Street and gave another big boost to the dollar. Before the opening bell in New York, stocks also had surged around the world on hopes that the U.S. might finally be getting a handle on its credit crisis. (Yes, I know, we’ve all heard that one before.)
American investors had more to go on than just hope: They focused on the sharp drop in yields on the companies’ mortgage-backed securities, as investors jumped in to buy the bonds in the open market.
 The annualized yield on the benchmark Fannie Mae 30-year mortgage-backed bond tumbled to a five-month low of 5.21% from 5.63% on Friday. A similar security issued by Freddie Mac fell to 5.39% from 5.74%.
Paulson on Sunday announced that the Federal Housing Finance Agency, which regulates Fannie and Freddie, would take control of the companies under a conservatorship. The government justified the move by saying that the companies risked running out of capital because of rising loan losses.
By seizing Fannie and Freddie, Uncle Sam is effectively guaranteeing all of their debts. Investors, who've been increasingly worried that the companies could fail, now view their bonds as money-good. And with mortgage-bond yields still well in excess of the 4.27% yield on 30-year U.S. Treasury bonds, there’s a decent premium there for buyers.
If investors demand less on mortgage securities, Fannie and Freddie can demand less in buying or guaranteeing loans from banks and thrifts. If mortgage rates fall, that could bring more buyers into the glutted housing market, while also giving an assist to strapped homeowners who are trying to refinance.
"This was exactly what [Paulson] wanted to see," said Scott Simon, a mortgage bond fund manager at Pimco in Newport Beach. "It sends a very strong signal to the market" about the direction of home loan rates, he said.
The average 30-year mortgage rate as tracked by Freddie Mac had jumped from 5.48% early in January to a recent peak of 6.63% in late July, even as short-term interest rates fell. The loan rate has been easing in recent weeks but still was 6.35% last week.
Of course, there’s no guarantee that lower loan rates will fuel a new home-buying wave. But they certainly can’t hurt -- unless you’re a potential buyer who would like to see prices come down much more than they already have.
For Fannie and Freddie bonds, one key is what happens to foreign investors’ appetite for the securities. Historically, they have been big buyers. And with the dollar on a hot streak, U.S. assets should be more attractive to foreigners.
"It is likely that foreign investors will step up and buy more agency debt, not less," said Tony Crescenzi, bond market strategist at Miller, Tabak & Co. If they don’t, he said, that could suggest a bigger problem: fear abroad that the Treasury has taken on too heavy a burden in shoring up Fannie and Freddie.
Photo: Treasury Secretary Henry M. Paulson Jr. announcing the takeover of Fannie Mae and Freddie Mac on Sunday. Susan Walsh / Associated Press
Today is a huge payday for short sellers who never gave up believing that shares of Fannie Mae and Freddie Mac would end up worthless.
The terms of the government’s rescue plan for the mortgage giants, announced on Sunday, make it highly likely that common shareholders will be wiped out. Although the shares will keep trading, investors may not know for years whether they have any real value; that will depend on how much taxpayer money Fannie Mae and Freddie Mac suck up to stay solvent.
Investors aren’t waiting to find out: Both of the stocks have collapsed today. Fannie was trading at 90 cents at about 10:45 a.m. PDT, a drop of 87% from its Friday closing price of $7.04. Freddie was trading at 88 cents, down 83% from $5.10 on Friday.
 Short sellers -- traders who borrow stock and sell it, betting that the price will drop -- have been all over Fannie and Freddie this year as their financial outlooks have worsened. The number of shorted shares of Fannie mushroomed from 35 million at the start of the year to 141.4 million by mid-August, the latest data available. Freddie’s shorted-shares total rocketed from 19 million to 118.6 million in the same period.
Some short selling is done as a hedge rather than as an outright bet on a lower stock price. For example, investors may go short on one stock in an industry while being long another, hoping that one position makes more money than the other loses.
In any case, being short Fannie and Freddie was the right call -- despite Securities and Exchange Commission Chairman Christopher Cox’s attempt in mid-July to rein in short sellers. Remember that move? Refresh your memory here.
Meanwhile, because many Wall Street analysts are supposed to have "target" prices for the stocks they cover, some have felt compelled to put new price targets on Fannie and Freddie -- laughable as that may sound.
Here’s a sampling: Merrill Lynch & Co.’s Ken Bruce now has a price target of 50 cents for Fannie and 25 cents for Freddie. Citigroup’s Brad Ball puts a 32-cent target on Fannie and a 31-cent target on Freddie.
And in case there was any doubt, they both advise selling the stocks.
Photo: SEC Chairman Christopher Cox testifying before the Senate in July, where he announced a temporary plan to rein in "abusive" short selling. Credit: Chip Somodevilla / Getty Images
The Treasury surprised a lot of people on Wall Street by sacrificing the preferred-stock owners of Fannie Mae and Freddie Mac in the rescue package.
They’ll stop earning dividends, and they’re now on notice that their shares ultimately may be worthless -- depending on how much capital taxpayers will have to put up to keep the companies afloat.
So let’s say you’re a pension fund or other big investor who owns preferred shares in some of the biggest U.S. banks -- say, Citigroup Inc., Bank of America Corp. or JPMorgan Chase & Co.
If you’re worried that there’s even a modest chance that one of those banks could need government help to survive (because they’re most likely too big to fail), you now see that Uncle Sam regards preferred shareholders as expendable.
Are the stocks worth the risk?
"Preferred stocks are going to be for sale all over the place" on Monday, said Jeffrey Gundlach, chief investment officer at L.A.-based TCW Group, parent of Trust Co. of the West.
And he doubts that the stock market overall will get anything more than a temporary lift from the rescue announcement.
"How is this good news?" Gundlach asks. "All it says is that things are really, really bad."
| |
