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From Times staff writer Walter Hamilton:
Who would have expected Citigroup Inc. to ride to the rescue of the financial sector?
The banking giant reported a smaller-than-expected second-quarter loss this morning, relieving some of the pressure on financial issues that was expected the day after Merrill Lynch & Co. uncorked terrible results.
Citigroup Inc. lost $2.5 billion in the quarter (54 cents a share), wrote off $7.2 billion in mortgage-related debt and recorded an additional $7.2 billion in credit costs -- mostly also tied to the housing meltdown, as consumer loan losses mount.
But analysts had expected the New York-based company to lose about $3.7 billion, according to Bloomberg data, and to suffer a larger asset write-down.
 Given that anything less than a catastrophe passes for good news these days in the financial industry, Citigroup's shares are getting a bounce, for a third straight session. The stock was up $1.59, or almost 9%, to $19.56 about 10:30 a.m. PDT. After reaching a nearly 10-year low of $14.56 on Tuesday, the shares rebounded 13.1% on Wednesday and 9.1% on Thursday.
Short sellers -- traders who had borrowed Citi stock and sold it, betting the price would keep falling -- probably are helping to push it higher today as some of them close out their bets. The total of shorted shares of Citigroup reached 152 million as of June 30, up from 108 million just since mid-May.
The financial stock sector index of the Standard & Poor’s 500 initially fell early today after Merrill’s larger-than-expected quarterly loss, reported after the closing bell Thursday. But the index was up about 0.6% at 10:30 a.m. PDT after surging 19.6% in the two previous sessions.
"All things considered, it was a decent quarter for Citigroup," William Tanona, an analyst at Goldman Sachs Group, wrote in a note to clients.
Still, Citigroup's report underscored the heavy exposure that the mastodons of American finance continue to have to the subprime mortgage market. The company’s subprime assets were reduced from $29.1 billion in the first quarter but still totaled $22.5 billion as of June 30.
Citigroup was able to sell or otherwise dispose of $3.2 billion in subprime assets but got rid of the biggest chunk -- $3.5 billion -- by simply writing it off.
Analysts expect that to continue for the foreseeable future.
"We still believe the company will face additional write-downs on these assets in coming quarters," Tanona wrote.
Photo: Citigroup's headquarters in New York. Credit: Justin Lane / EPA
From Times staff writer Walter Hamilton:
Merrill Lynch & Co. just threw cold water on the idea that the housing crisis was letting up on Wall Street.
Better-than-expected second-quarter earnings from Wells Fargo & Co. on Wednesday and JPMorgan Chase & Co. this morning had boosted hopes that major banks and brokerages could sidestep more worst-case profit hits from the housing collapse.
Earnings dropped at both Wells and JPMorgan, but far less than analysts had feared. Wells even raised the dividend on its stock.
But Merrill late today reminded investors that the end isn't close for companies that played in the deep end of the pool during the housing boom.
 The New York-based brokerage giant reported after the end of regular trading that it lost $4.7 billion in the latest quarter, or $4.97 a share, including almost $10 billion in write-offs tied largely to the faltering mortgage-securities market. The numbers were significantly worse than even the most pessimistic analysts had expected.
The news drove Merrill's shares down $1.97 to $28.76 in after-hours trading. The stock had jumped $2.73 to $30.73 in the regular session amid another big rally in financial shares.
The upshot, it seems, is that "the companies that have been steady sources of bad news will continue to be sources of bad news," said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.
Merrill's latest write-offs included $3.5 billion for those exotic -- and toxic -- mortgage securities known as collateralized debt obligations, and $1.3 billion for residential-mortgage "exposures."
On the company's earnings conference call today, one analyst asked Merrill CEO John Thain a technical question about the CDOs "you guys" created.
Thain shot back: "First of all, I take exception to the 'you guys' comment. I did not create any of these CDOs."
Thain, 53, took the brokerage's helm in December after Stanley O'Neal got the boot.
Like others, Merrill has been scrambling to get bad assets off its books. It slashed its U.S. asset-backed CDO exposure to $4.5 billion as of June 30 from $6.7 billion at the end of the first quarter. It whittled its U.S. subprime exposure 29% to $1 billion, primarily because of $544 million in write-offs.
But Merrill and other investment banks are on the proverbial treadmill. As quickly as they're taking mortgage write-offs, the value of the underlying assets is deteriorating further.
The result is that the firms still have significant exposure to the most troubled areas of the mortgage-securities arena. And it's doubtful that Merrill and others can stop the bleeding -- or even accurately calculate how much bleeding they have left to do -- until the housing market stabilizes.
And we all know that hasn't happened yet.
Photo: Merrill CEO John Thain. Associated Press
Wall Street had its mojo working for a second straight session today.
Then came three buzz killers named Google, Microsoft and Merrill Lynch.
Another plunge in oil prices and some better-than-expected bank earnings reports fueled a powerful rally in the regular trading session, lifting the Dow Jones industrial average 207.38 points, or 1.8%, to 11,446.66.
That put the Dow’s two-day gain at 484 points, or 4.4%, after it hit a two-year low on Tuesday.
But after the closing bell, Google, Microsoft and Merrill each reported second-quarter earnings that failed to meet analysts’ estimates. Their stocks are being hammered in after-hours activity, with Google off $40 to $493, Microsoft down $1.60 to $25.92 and Merrill sliding $1.97 to $28.76.
 Everything had been going so well for Wall Street’s bulls. Crude oil in New York slumped $5.31 to $129.29 a barrel, the lowest price since June 5 and the third consecutive decline.
Banking giant JPMorgan Chase this morning reported quarterly results that were down but still came in above expectations. The stock zoomed $4.86, or 13.5%, to $40.80, leading a second day of frenzied buying of battered financial issues. Smaller banking firms PNC Financial Services and Huntington Bancshares also beat estimates.
The sudden turnaround in bank, brokerage and other financial stocks has squeezed so-called short sellers, traders who have been betting that the stocks would continue to slide. In a short sale a trader sells borrowed stock, expecting to replace it later with new shares bought for less.
So if a stock they’re targeting rises instead of falls, that’s a problem for short sellers: It triggers many of them to rush in to close out their bets. Their buying just drives prices higher. Check out East West Bancorp and Downey Financial today, both of which have been heavily shorted.
"The short-squeeze definitely added to the buying" today in financials, said Todd Leone, a trader at Cowen & Co. in New York. Even so, he said, "I think there’s real buying, too. These stocks have been absolutely devastated."
Anthony Conroy, head trader at BNY Convergex in New York, says many investors are reassessing financial stocks in the wake of the massive and indiscriminate selling in the sector since late May.
"There are some very solid companies that were getting hit for no reason," he said. "People are asking, 'How many babies got thrown out with the bathwater?' "
But Merrill Lynch’s quarterly results -- a net loss of $4.7 billion -- may revive fears that the financial system is a long way from recovery. And results from Google and Microsoft won’t help the mood at the next opening bell.
Then again, if the market can overcome that troika on Friday, the idea that stocks just scratched out their summer bottom may gain more currency.
Photo: Nothing wrong with this baby; back in the bath you go. Bob Carey / Los Angeles Times
The "shorts" are on the run again today, particularly in stocks of some small California banks.
Financial issues that had been brutalized for the last six weeks are up sharply for a second day, in a rally that has all the earmarks of a short-covering panic.
The day’s winners include many California community banks that have been heavily shorted in recent months by bearish traders. In a short sale, a trader borrows stock and sells it, hoping the price will drop so he can replace the borrowed shares later with stock bought at a lower price.
That strategy has worked well for much of this year with financial stocks as the companies’ earnings have withered amid rising loan losses.
 The problem for short sellers is that, once a heavily shorted stock begins to rebound, the turn can trigger a rush to close out those bearish bets. As shorts jump in to buy, they become each other’s worst enemies, driving prices higher.
Panicked buying? Look at Pasadena-based East West Bancorp, which was up $1.05, or 12.1%, to $9.72 at about 10 a.m. PDT, after soaring as high as $13 early in the session. The stock rose 16% on Wednesday.
Struggling mortgage lender Downey Financial, based in Newport Beach, has gained 86 cents, or 39%, to $3.08 after rocketing 66% on Wednesday. Downey shares, which closed at $1.28 on Monday, spiked as high as $3.80 early today.
Other big gainers among California community banks include L.A.-based Cathay General, up 14% so far today, and San Francisco-based UCBH Holdings, parent of United Commercial Bank, which is up nearly 10%.
Threats by the Securities and Exchange Commission this week to crack down on what it labels abusive short selling may be giving some short sellers another reason to close out their bets.
Wells Fargo & Co. depositors generally earn a lot less on their money than they could get elsewhere.
The bank’s shareholders should be very grateful: Those cheap deposits are buffering the company’s bottom line against loan losses.
San Francisco-based Wells on Wednesday reported better-than-expected second-quarter earnings and a 10% boost in the dividend on its stock.
 The news -- which reinforced the view that Wells is certain to be a survivor of the current banking industry mess -- sent the company’s shares rocketing $6.72, or 33%, to $27.23. It was a bad day for short sellers who’ve been betting against the stock. They picked the wrong horse to lose.
Wells’ net income in the quarter ended June 30 fell 23% from a year earlier, to $1.75 billion, or 53 cents a share. But that beat analysts’ average estimate of 50 cents a share.
And the company portrayed itself as benefiting from its rivals’ woes. "We are open for business and getting lots of it," CEO John Stumpf said in the earnings report.
Wells is facing higher loan losses, like nearly all banks. The company last quarter recorded a $3 billion provision for credit losses, which is what pulled earnings down. Non-performing assets totaled $5.23 billion at June 30, or 1.3% of all loans, up 16% from the level just three months earlier.
Within its substantial real-estate-loan portfolio, the bank warned that the quality of its $84-billion in home-equity loans "continued to deteriorate as property values search for a bottom." And Wells has unrealized losses of $2.1 billion on its portfolio of mortgage-backed securities, up from $598 million three months ago. Those could turn into real losses if the market doesn’t improve and Wells decides to sell out.
Still, the bank has a big advantage with its core deposit base of $318 billion: The cost of holding on to that money remains relatively low, which helps to give Wells a wider profit margin on its loans than many of its rivals earn.
Wells says it benefited last quarter from its "disciplined deposit pricing." Translation: It isn’t paying much for that cash. In California, the bank’s current yield on a one-year, $25,000 certificate of deposit is just 1.6%, compared with a national average of 2.48%, according to rate-tracker Informa Research Services.
If Wells’ depositors began to look elsewhere in large numbers, that would be a problem. But given the TV images of long lines of depositors outside the branches of failed IndyMac Bank -- which was notorious for paying high yields -- it could be that many Wells customers will be content to stay just where they are.
And they might soon have more company: "The hysteria being spread concerning bank safety is likely to result in deposits from smaller banks moving to Wells," said Richard Bove, an analyst at Ladenburg Thalmann.
Photo: Paul Sakuma/Associated Press
The Securities and Exchange Commission would never say it wanted the stock market to rally today.
But given the agency’s ramped-up offensive against what it believes to be market manipulation by bearish traders, the session’s spectacular rebound had to be more gratifying to the SEC than, say, another dive.
Wall Street had its biggest one-day gain since April 1, with the Dow Jones industrial average rocketing 276.74 points, or 2.5%, to 11,239.28.
Financial issues, which have been brutalized for the last six weeks, led the way higher. The Standard & Poor’s 500 financial-stock sector soared 12.3%, the biggest advance in its 19-year history.
To put today’s jump in the financials in perspective, though, the S&P’s sector index still is down 33.5% year to date. And it’s just back to where it was five days ago.
 Wall Street had virtually the perfect setting for an explosive rally: The gloom had been extreme Tuesday, as financial-system fears sent the Dow to a two-year low and trading volume reached the second-highest-level ever on the New York Stock Exchange. A key measure of investor fear reached its highest since mid-March.
It was "a crescendo on the downside," said John O’Donoghue, head of equities at Cowen & Co. in New York. "The selling became exhausted."
Then, as the market opened today, it had the tailwinds of a better-than-expected second-quarter profit report from banking titan Wells Fargo and another steep drop in the price of oil.
All in all, it was a good moment for short sellers -- traders who’ve been betting on falling stock prices, and who’ve been right for the last six weeks -- to take some profits by buying shares to close out at least some of their bets.
"I would guess most of this was short-covering," said Todd Clark, head of trading at Nollenberger Capital Partners in San Francisco.
For the SEC, this looks like a happy coincidence: On Sunday the agency warned that it would come after people who it says are spreading "false information intended to manipulate securities prices." That’s code for short sellers.
On Tuesday, SEC Chairman Christopher Cox announced a temporary plan to curb what he called illegal short selling in 19 major financial stocks, including mortgage giants Fannie Mae and Freddie Mac. Today, just adding to the confusion over the SEC's move, Cox told reporters that the measure was "prophylactic," not based on an actual jump in abusive shorting of the 19 stocks.
Did the SEC scare some short sellers out of their bets today? Maybe some of them. But as noted above, the market was primed for a rebound anyway. The SEC may just have been very lucky with its timing.
It’s worth remembering that professional short sellers generally aren’t pushovers. If they believe the market is going lower, they’ll be back. As Clark notes, there have been plenty of short-term rallies since this bear market began last fall, but "you haven’t been rewarded for chasing any of them."
And as the SEC fully concedes -- and hopefully truly believes -- as long as short sellers are playing by the rules, the government has no business getting in their way.
Photo: Dakota the Grizzly and challenger. J. Emilio Flores / Los Angeles Times
In its battle against abusive short sellers, the Securities and Exchange Commission may risk burning down the market in order to save it.
SEC Chairman Christopher Cox today surprised Wall Street with a plan to curb short selling in major financial company shares. In his initial comments he mentioned Fannie Mae and Freddie Mac as two stocks that would get protection under the plan, but a list the SEC released late in the day also included 17 other big financial firms, including Bank of America Corp., Citigroup Inc., Lehman Bros. and Credit Suisse Group.
Short sellers, of course, are traders who bet on falling stock prices. In a short sale a trader borrows stock (usually from an investment firm’s inventory) and sells it, expecting the market price to decline thereafter. If the bet is correct, the trader can buy new shares later at a lower price, repay the borrowed stock, and pocket the difference between the sale price and the repurchase price.
That’s all legal -- unless short sellers are ordering stock sales without having arranged to borrow actual shares. Shorting what you don’t have is “naked” shorting, which can be illegal, says John Coffee, a securities-law professor at Columbia Law School.
But the rules against abusive naked shorting haven’t been enforced much, Coffee adds.
 So now comes the SEC to crack down, amid what has been a severe hammering of financial stocks -- to the point where investors are beginning to question the firms’ survival.
Beginning on Monday, the agency will require that “anyone effecting a short sale in these securities arrange beforehand to borrow the securities and deliver them at settlement.” The emergency rule will be in effect through July 29, but could be extended until Aug. 21, the SEC said. And Cox said the agency eventually expects to cover the entire stock market with the new rule.
For the 19 stocks on the list, the change means that brokers no longer will be able to take a short seller’s word that he actually has borrowed the shares he wants sold. (“Sure, I have ’em for you, I’ll deliver ’em later.”) And that, in turn, could curb situations where multiple short sellers are expecting to borrow the same shares for sale -- like, say, five different people all putting the same car up for sale, even though only one of them can deliver the vehicle.
The SEC suspects that some short sellers are ganging up on financial stocks, engaging in naked shorting while spreading rumors that the companies are in dire straits. Bear Stearns Cos.' rapid collapse in March has been Exhibit A for many people who are ranting about short-selling abuses.
The first salvo in the SEC’s latest offensive came Sunday, when it announced that it would “immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices.”
It’s part of the SEC’s job to go after people who spread lies about publicy traded companies. But Wall Street can’t help but wonder if this anti-short-seller campaign is about more than just the naked shorts. If the SEC can curb short selling in general -- and trigger a wave of buying to cover outstanding short positions -- imagine what that could do for the stock market’s abysmal mood.
But the longer-term effect could be to raise questions about just how free the U.S. market is from government interference. That kind of stuff is supposed to happen in Third World countries, not in America.
Legitimate short sellers bet against companies whose shares they believe are overvalued. That makes the shorts an important element of what academics call “price discovery” in the market. The shorts find out things companies often would rather that shareholders didn’t know.
For the long-term health of the market, “You don’t want to restrict people’s ability to invest on negative information,” warns Jill Fisch, a securities-law professor at Fordham University.
Photo: Christopher Cox, testifying today on financial markets before a Senate panel today. Also at the table: Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry M. Paulson Jr. Chip Somodevilla/Getty Images
Was today just manic enough on Wall Street to mark a short-term bottom in the stock market?
The Dow industrials slumped 227 points early in the day on Federal Reserve Chairman Ben S. Bernanke’s depressing assessment of the economy, rallied 295 points from the low (to a net gain of 68 points) as oil fell more than $6 a barrel and stayed there, then sank again in the final hour with financial stocks, as usual, leading the way down.
The Dow ended off 92.65 points, or 0.8%, to 10,962.54 -- the first close below 11,000 since July 2006. That extended the index’s decline from its October peak to 22.6%. Trading volume today was massive on the New York Stock Exchange.
 The market is "alternating between euphoria and depression. Sometimes in the same hour," said Steve Todd, editor of the Todd Market Forecast in Crestline, Calif.
But it’s often when the market looks the nuttiest that it’s on the verge of wringing itself out.
The bulls got one sign they’ve been waiting for: The so-called VIX index, which measures Wall Street’s fear level by tracking activity in put and call option contracts on the Standard & Poor’s 500 index, jumped above the 30 level for the first time since mid-March.
The last four times the index has been above that threshold -- in August, November, January and March -- it foreshadowed that the market sell-off of that moment was cresting, and that a rally (however fleeting) was imminent. Go here for more on the VIX’s recent history, including a chart.
The VIX surged as high as 30.81 early today before falling back to close at 28.54, up from 28.48 on Monday.
Something else that could push the bears back, for better or worse: The Securities and Exchange Commission’s new plan to curb short selling of major financial stocks, as reported here.
Still, financial-stock sellers -- short and otherwise -- continued to drive many big-name issues to new multiyear lows today, indicating no let-up in fears about the state of the banking system. They have TVs on Wall Street; they can see those lines outside IndyMac Bank branches.
Investors are betting "there are going to be a lot more shoes to drop" in the financial sector, said Art Hogan, veteran trader at Jefferies & Co.
Fannie Mae fell $2.66, or 27%, to close at $7.07, Freddie Mac tumbled $1.85, or 26%, to $5.26, Bank of America slid $1.63, or 8.1%, to $18.52 and Citigroup was off 66 cents, or 4.3%, to $14.56. For Citi, that was the lowest closing price since the company was created by the October 1998 merger of Citigroup and Travelers Group.
Photo: Edvard Munch's Expressionist masterpiece "The Scream." Solum, Stian Lysberg/AFP/Getty Images
The government’s rescue plan for mortgage giants Fannie Mae and Freddie Mac, announced by Treasury Secretary Henry M. Paulson Jr. on Sunday, sparked a brief rally in the stocks early today. Very brief.
The shares bounced up at the opening of trading but couldn’t hold their gains. Both ended down for the session, at new 17-year lows. Fannie Mae rose as high as $13.50, then closed off 52 cents, or 5.1%, at $9.73. Freddie Mac rose to $9.80, then ended down 64 cents, or 8.3%, at $7.11.
The stocks are down more than 75% year to date, but today's action suggested the bottom still may not be in sight.
 Yet investors had no fear of buying three- and six-month debt securities from Freddie Mac today. The company sold $3 billion of the bills, and the offering attracted a larger-than-usual number of bids.
In an otherwise frazzled market, investors’ split views of the companies’ stocks and their debt instruments actually make sense. Wall Street has no real doubt that Uncle Sam will back the debt, if that’s what it comes to. We’re talking trillions of dollars' worth of the company’s bonds in the hands of investors worldwide, including foreign central banks.
If anything is "too big to fail," it’s the debt side of Fannie and Freddie. That's good news for popular bond mutual funds like Pimco Total Return, which owns heaps of Fannie and Freddie bonds. Pimco Total Return's shares edged up 4 cents to $10.68 today.
As for the companies’ equity investors, however: After an initial burst of optimism today, "I think they realized that there is a distinction between saving Fannie and Freddie and bailing out the shareholders," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.
If the Treasury ends up buying equity stakes in the companies to bolster their capital, current shareholders will be left with little or nothing.
It wasn’t just the common shares of the companies that fell further today. So did many of their preferred issues -- stocks that pay high dividends and are ahead of the common shares in any claim on the companies’ assets. Presumably they fell on the assumption that any government stake in the companies also would be senior to existing preferred shares.
It’s the least the Treasury could do for taxpayers if an equity bailout becomes inevitable.
Photo: Treasury Secretary Henry M. Paulson Jr.
The sight of depositors lined up outside IndyMac Bank branches today to pull their money can’t be giving comfort to bank regulators.
It gave none to bank stock investors: Wall Street hammered bank shares across the board. The BKX index of 24 major and regional bank issues plunged 8.5%, deepening its year-to-date loss to 43%.
Check out the day’s percentage declines in National City Corp., Washington Mutual, Zions Bancorp and Downey Financial, to name just four.
Investors who are dumping bank stocks, even at these severely depressed levels, are voting with their feet. The question is, how many bank depositors around the nation today are doing the same?
 There’s the potential for a vicious circle here: Investors fear bank failures, so they pound the stocks. Depositors, seeing Wall Street’s reaction, begin to pull their funds, worrying (probably needlessly) that their money is in another IndyMac. A deposit run then can turn a reasonably healthy bank into a problem bank in a hurry.
Sheila Bair, head of the Federal Deposit Insurance Corp., is trying her best to induce calm, saying over the weekend that "the overwhelming majority of banks in this country are safe and sound."
But we’re in an environment where there has been no payoff for taking chances in the financial system.
By the FDIC’s count, about 10,000 IndyMac customers held a total of $1 billion in uninsured deposits in the bank. If those customers believed that the deposit insurance limit didn’t matter -- and that the government would back all of their savings if IndyMac failed -- they have just now come to realize how wrong they were.
Too late.
If you’re over the FDIC’s insurance limit at IndyMac, the agency will let you pull out half of whatever you have on deposit above the limit. Then you’ll wait to find out what the FDIC can get as it sells off IndyMac’s assets.
The FDIC can’t predict what portion of the remaining uninsured deposits, if any, will be repaid.
That is a horrible situation for those depositors. They should have known better, but they either ignored the insurance limits or put off doing something about their funds.
So we can imagine what’s going on around the nation today. How many bank customers, now realizing that it is possible to lose money if your deposits exceed the federal insurance limits, are trying to make sure that they don’t repeat IndyMac customers’ grave mistake?
The banks aren’t going to tell us if they’re facing a wave of customers either withdrawing money to get below the FDIC’s limits or restructuring their accounts to stay within those limits. It isn’t in any bank’s interest to be that upfront.
The FDIC may be right when it says the risk of your bank failing is extremely low. But the fate of uninsured depositors at IndyMac is a bell-ringer. It says you can lose.
For many Americans, that now may be all they need to know.
Photo: Customers wait outside of IndyMac's headquarters office in Pasadena today. Al Seib / Los Angeles Times
Sen. Chuck Schumer today went on another counterattack against federal banking regulators who’ve blamed him for helping cause the failure of IndyMac Bank.
At a news conference, the New York Democrat repeated his contention that the bank’s regulator had been "asleep at the switch." He said his public questioning of IndyMac’s financial health in late June merely stated the obvious.
"The administration is doing what they always do, blaming the fire on the person who called 911," Schumer said, according to the Associated Press’ story from the news conference in New York.
 Pasadena-based IndyMac, with $32 billion in assets, was seized by the government Friday. The loss-ridden mortgage lender had faced an outflow of deposits since Schumer on June 26 made public a letter he sent to the Office of Thrift Supervision and the Federal Deposit Insurance Corp., saying he was "concerned that IndyMac's financial deterioration poses significant risks to both taxpayers and borrowers."
Schumer’s decision to go public with those comments ignited a firestorm in Washington. Regulators on July 2 said he was contributing to "rumors and innuendo" about the bank that could hasten its demise.
On Friday, regulators specifically fingered Schumer for IndyMac’s failure. The Office of Thrift Supervision said in its statement announcing the seizure that "the immediate cause of the closing was a deposit run that began and continued" after Schumer went public with his concerns.
"This institution failed due to a liquidity crisis," OTS Director John Reich said Friday. "Although this institution was already in distress, I am troubled by any interference in the regulatory process," a reference to Schumer.
The FDIC estimates that IndyMac’s failure will cost the agency between $4 billion and $8 billion as it unloads bad loans and makes insured depositors whole.
Schumer today said his June 26 letter contained "no new revelations" about IndyMac. He repeated much of his previous defense of his decision to go public about the bank’s ills, including his assertion that the OTS was "a weak regulator" and that "my job was to try and toughen them up, and that's what I tried to do."
Photo: Sen. Charles E. Schumer by Mark Wilson/Getty Images
The federal government is doing a lot of jawboning this weekend to try to keep the crisis surrounding mortgage giants Fannie Mae and Freddie Mac from worsening. Still unclear is whether the feds will take specific action to bolster the companies’ finances.
The clock is ticking: Asian financial markets will open later this afternoon, U.S. time, and a massive sell-off in Asian stocks, or in the dollar, could set the scene for another harrowing day in Europe on Monday and then on Wall Street.
Here’s what’s going on so far:
--U.S. cash infusion for Fannie and Freddie? The Times of London reported that the Treasury is working on a plan to inject up to $15 billion of capital into Fannie Mae and Freddie Mac. The government would make the infusion in return for a new class of shares in the companies, the newspaper said.
But the Times is alone on this report, at least among major news organizations. The Wall Street Journal, in a short dispatch on its website, says the Treasury today is expected to make a statement "supportive" of the companies, but that it is merely expected to be "a statement of facts designed to reassure markets."
The problem is that "facts" about the companies, including their regulators’ assertion that they are adequately capitalized, did nothing to halt the collapse of their stocks last week.
--Please buy this debt: Treasury officials on Saturday were calling major financial institutions to try to assure there would be plenty of buyers for Freddie Mac’s offering of $3 billion of short-term debt Monday, the Washington Post reported.
The debt sale is a routine offering by Freddie Mac, but given the heightened fears about the company’s solvency the sale looms as a crucial test of the markets' faith in the company.
Sen. Jon Kyl (R-Ariz.) told CNN today that the government had "a lot of different options" to ensure that the companies could meet their obligations. Many on Wall Street expect the Federal Reserve to invoke emergency powers to allow Fannie and Freddie to borrow directly from the central bank if investors balk at providing the short-term funding the companies need in their day-to-day operations.
--Rumor-mongers put on notice: The Securities and Exchange Commission today signaled a fresh crackdown on the spreading of "false information" aimed at driving down stock prices. The clear target: "short" sellers, traders who borrow stock and sell it, hoping the price plunges.
Shares of financial firms, including Fannie and Freddie, have become favorite targets of short sellers this year.
The SEC, in a rare weekend announcement, said it and other regulators would "immediately conduct examinations aimed at the prevention of the intentional spread of false information intended to manipulate securities prices."
The timing of the SEC’s announcement also seemed to be aimed at bolstering confidence in U.S. markets ahead of Asian markets’ opening today.
William Poole has long warned that mortgage titans Fannie Mae and Freddie Mac had grown so large that they posed a serious threat to the U.S. financial system.
It looks like the former Federal Reserve policymaker had it right. Stocks of both companies are in meltdown mode this week, sending ripples through U.S. markets, on fears that they don’t have the capital they’ll need to survive rising mortgage defaults.
So let’s admit the obvious, Poole suggests: Fannie and Freddie should be nationalized.
In America, nationalization is among the dirtiest of words. It conjures the image of the government grabbing control of private-sector assets.
But Fannie and Freddie, which buy or guarantee mortgages to support the housing market, are strange animals. They are owned by shareholders, but they were chartered by the government, and they’ve grown to their gargantuan sizes ($843 billion in assets at Fannie, $803 billion at Freddie) because investors worldwide believe their debts have the implicit backing of the U.S. Treasury.
 If Fannie and Freddie face a wipeout of their capital because of loan losses, then, Uncle Sam couldn’t possibly allow the companies to collapse. So why not just nationalize them now, turning them into full-fledged government agencies and thereby taking away the uncertainty on Wall Street about their ability to continue buying home loans?
Poole, who was president of the Fed’s St. Louis branch until he retired in March, said in an interview with Bloomberg News this week that nationalization was "the only practical course" for Fannie and Freddie.
Though he’s often labeled a curmudgeon, the 71-year-old Poole isn’t alone in his view of what to do with Fannie and Freddie, which combined either own or guarantee a total of $5 trillion of U.S. home loans, nearly half the entire market.
"We have to stop pretending these are private companies," said Christopher Whalen, a managing director at research firm Institutional Risk Analytics.
There has always been an inherent conflict in the structure of Fannie and Freddie, Whalen notes: Their shareholders would reap the benefits if the companies took big risks and won, while it was presumed Uncle Sam would have to pick up the pieces if the companies blundered.
In Washington, Treasury Secretary Henry M. Paulson Jr. and others want Fannie and Freddie to get back on their feet on their own. But if the companies try to raise massive sums of new capital by issuing stock, they will severely dilute the ownership of their current shareholders (that’s a big reason the stocks have nosedived).
And what if, six months from now, the loan losses turn out to be so massive that any additional capital the companies raised in the interim is burned up?
Politically difficult as it may be, Whalen says, if you make Fannie and Freddie government agencies now, "you take a major source of instability out of the market. You don’t have to worry about it anymore." That would be one less issue for the housing market, which obviously has plenty.
Given the dilution risks they already face, shareholders of Fannie and Freddie ought to welcome a buyout even at these depressed prices, Whalen says.
In terms of stock market value, all that’s left of Fannie and Freddie now is about $18.2 billion, combined. Wall Street wouldn’t even notice that amount disappearing from the public market.
Citigroup Inc.’s shareholders have nothing but losses to show for Chuck Prince’s four-year tenure as CEO of the financial giant.
Now he gets a chance to give advice to Xerox Corp.’s CEO, Anne Mulcahy: Xerox’s directors today elected Prince to join them on the copier company’s board.
 It just goes to show that even when CEOs fail massively, they rarely get kicked out of the club.
Prince was ousted from Citi in November as the bank began to reel from losses on high-risk bonds. Citi had loaded up on subprime-mortgage-related debt on Prince’s watch, and it’s still sinking under the weight of its bad bets: Analysts expect the company in the second quarter to record its third straight quarterly loss.
Citi’s shares today closed at $16.28, their lowest in nearly 10 years. The price has been cut in half since Prince was booted.
Xerox, in announcing Prince’s board seat today, noted that he “was appointed CEO of Citigroup in 2003 and remained in this position until his retirement in 2007.” Ah, yes, retirement -- at the ripe old age of 57.
Mulcahy, in a statement, hailed Prince as a “visionary leader” with “unique talent and exceptional business experience.”
You can read that any way you want.
Xerox's shares fell 2 cents to $13.16 today before the announcement. They're down almost 19% this year.
Photo: Chuck Prince. Daniel Acker/Bloomberg News
Can it get any worse for financial stocks? Oh yes it can. Here’s the rundown on today’s crises:
--FANNIE MAE and FREDDIE MAC: Shares of the mortgage giants plummeted again on fears that they won’t survive without a government bailout that could wipe out their shareholders’ stakes. Fannie fell as low as $11.70 early today, from $15.31 at Wednesday’s close; Freddie fell as low as $6.75, from $10.26.
The stocks have since rebounded somewhat as Treasury Secretary Henry M. Paulson Jr. and a host of politicos have tried to assure investors. Paulson, testifying on Capitol Hill at a previously scheduled hearing on financial regulation, said Fannie and Freddie were "adequately capitalized."
But that was contradicted by Federal Reserve Chairman Ben S. Bernanke, who said at the same hearing that he believed the companies needed to raise more capital.
On Wednesday, former Federal Reserve Bank of St. Louis President William Poole labeled Freddie as "insolvent" in an interview with Bloomberg News and said Fannie was on the verge of insolvency.
The market is voting with Poole: At about 11:45 a.m. PDT Fannie still was off $1.81 to $13.50; Freddie was down $2.10 to $8.16.
--LEHMAN BROS.: The brokerage’s shares plunged as low as $15.40 early today, in part on rumors that Newport Beach-based bond fund titan Pimco had stopped trading with the firm because of concerns it could fail. Deja vu? In mid-March, Bear Stearns Cos. collapsed when its trading partners pulled away.
But Bill Gross, Pimco’s chief investment officer, went on CNBC today to say Pimco hadn’t backed off from Lehman. He said Pimco had "no question" about Lehman’s solvency.
Lehman shares were off their lows at about 11:45 a.m. PDT but still were down $3.22 to $16.52.
--WACHOVIA CORP.: The market is giving no rousing welcome to Robert Steel, the former Treasury undersecretary who was named CEO of struggling Wachovia on Wednesday by the bank’s board. The shares are off 81 cents, or 5.7%, to $13.48, a 17-year low, after Steel declined to answer questions about the bank’s capital situation or its dividend, saying investors would have to wait for the company’s second-quarter earnings report on July 22.
Here it is again, on the record: Bank of America Corp. CEO Ken Lewis doesn’t expect the bank to need to raise more capital or to cut the dividend on its stock, two moves many of its struggling rivals have been forced to make.
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