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Further Bank Writedowns: Barclays Says $143 Billion for Bond Insurance; Oliver Wyman Says $300 Billion in General

Bad credit-related news continues, and if the Dow is any measure, the stock market response is subdued.

Barclays estimates that the losses that banks would take due to bond insurer credit rating downgrades and the impact on the instruments they insured would be $143 billion if they are downgraded to single A (I find that remarkably precise). A downgrade to AA has a mere $22 billion impact.

Given that Egan Jones has downgraded MBIA to B= and the bond and credit default swaps markets price the bond insurers at distressed credit levels, this estimate may prove to be light.

Needless to say, findings like this increase the pressure on regulators and banks themselves to orchestrate a rescue.

From Bloomberg:


Banks that raised $72 billion to shore up capital depleted by subprime-related losses may require another $143 billion should credit rating firms downgrade bond insurers, according to analysts at Barclays Capital.

Banks will need at least $22 billion if bonds covered by insurers led by MBIA Inc. and Ambac Assurance Corp. are cut one level from AAA, and six times more for downgrades by four steps to A, Paul Fenner-Leitao wrote in a report published today. Barclays' estimates are based on banks holding as much as 75 percent of the $820 billion of structured securities guaranteed by bond insurers.

``This is a huge amount, but the assumptions we use are also very aggressive,'' Fenner-Leitao in London said in a telephone interview. The estimate shows how bank capital could be diminished in the event of significant downgrades, he said....

Fitch is likely to cut the rankings of other bond insurers in the ``very near term,'' with Financial Guaranty Insurance Co. at greatest risk, Fenner-Leitao wrote in the report. New York- based FGIC insures $315 billion of bonds.

Standard & Poor's cut New York-based ACA Capital Holdings Inc.'s rating by 12 levels to CCC last month, causing Merrill Lynch & Co. to write down $1.9 billion of securities and Canadian Imperial Bank of Commerce to sell more than C$2.75 billion ($2.7 billion) in stock to cover writedowns.

Consulting firm Oliver Wyman, which specializes in financial services, issued a press release on a report, "State of the Financial Services Industry" which foresees another $300 billion in subprime-related losses to the banking industry (hat tip Boom2Bust). Note that this computation does not appear to consider the impact of bond insurer downgrades; ie, it looks at subprime-related losses and carries them through to bank balance sheets. From the Telegraph:

"While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting."

Tumbling property prices - especially in the UK and Spain - a weakening dollar, a possible collapse in commodity prices, and a fall in Chinese and Indian stocks will "disrupt" the global economy, the report claimed.

Banks are already coming off one of the worst trading periods in memory, with shares across the industry plummeting 40pc in the past six months.

Oliver Wyman has estimated that financial services companies have already taken a $300bn hit on their sub-prime exposure.

It estimates that $1,300bn worth of sub-prime mortgages were written in total.

US banks will feel the pinch in particular, Oliver Wyman predicts. "North American financial services firms will have a tough year," it said. "Market uncertainty, combined with further write-downs and expected home-price and loan-volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves."


Be prepared for more writedowns

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omg!

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Fortis to write off up to S$4.2b euros: report


Sat, Jan 26, 2008
Reuters



BRUSSELS - BELGIAN-Dutch financial services group Fortis is to write one billion to two billion euros (S$4.2 billion) off its sub-prime portfolio, Belgian daily De Standaard said on Saturday on its website.

'According to a well informed source Fortis will have to write down 1 or 2 billion euros off its subprime portfolio,' the newspaper said.

Shares in Fortis closed down over 10 per cent on Friday on market talks of profit warnings and possible exposure to US sub-prime, traders said.




A source briefed on the situation said there would be higher than announced write-offs due to Fortis' sub-prime exposure.

Fortis declined to comment on the market speculation but said it was not aware of any element that could explain the sharp fall of its shares.

A spokesman for Belgian Finance Minister Didier Reynders said he was unaware of any problems relating to Fortis.

A banking source said that Fortis was holding a board meeting on Friday. The Fortis spokeswoman declined to confirm this.

Fortis Chief Financial Officer said in November that the bank may take a 120 million euro net charge in the fourth quarter on sub-prime investments if current conditions continued. -- REUTERS

http://news.asiaone.com/News/Latest%...126-46781.html

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Close freezes property fund

The crisis in the commercial property sector has claimed another prominent victim after Close Investments was forced to last night suspend trading in an open-ended property fund owned purely by retail investors.

This is the first time that a retail open-ended investment company has been forced to close its doors to investors wanting to take their money out.

A number of funds have implemented similar emergency measures in the past few weeks, but to date these either been retail pension funds or institutional funds.

Close Investments' Property Investment Portfolio (Closepip) is a £125m property fund of funds that invests in UK and European property though a range of specialist "sub-funds". It includes both commercial and residential property.

The fund has seen cash levels sink below 2 per cent as investors cashed in their holdings to flee a sector that has suffered its worst performance on record in recent months.

About 16.3 per cent of the fund's value has been wiped out since November because of redemptions. Trading has also been suspended in one of its sub-funds, Active Commercial Estates.

In a further worry to its investors, Close would not say how long the fund would remain closed. The fund manager said that it anticipated that the suspension would be in place initially for six months, although added "this may change depending on market conditions".

Close said that the decision was made in the interests of the remaining investors in the fund to ensure that a high level of redemption requests does not force property sales.

"We continue to believe in the long term future performance of Closepip," said Peter Roscrow, chief investment officer of Close Investments Property.

The fund is one of the better performing against the retail unit trust sector, losing some 4 per cent in the past three months, significantly above the sector average.

But performance is no longer the key statistic for property funds, which are more concerned with levels of liquidity after a run on their money by departing investors.

Retail pension fund managers such as Scottish Widows and Scottish Equitable also recently imposed a redemption freeze after cash assets dropped to near 2 per cent.

The freeze allows them time to sell property, generating cash to repay investors.

Copyright The Financial Times Limited 2008

http://www.ft.com/cms/s/0/301afe82-c...077b07658.html

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Countrywide's Underwriters Sued for Fraud by New York Agencies

By David Mildenberg and Karen Freifeld

Jan. 26 (Bloomberg) -- Three New York agencies sued Goldman Sachs Group Inc., Citigroup Inc., JPMorgan Chase & Co. and 23 more underwriters for allegedly helping Countrywide Financial Corp. to defraud investors.

New York's city and state comptrollers and their pension funds added the securities firms, two accounting firms and Countrywide officers and directors as defendants in a federal securities-fraud lawsuit filed against the home lender in August.

``The underwriters and accountants enabled Countrywide to release false statements. Investors lost millions and New Yorkers lost their homes,'' New York State Comptroller Thomas DiNapoli said in a statement. ``We need to recover the pension fund's losses and find a way to help all those families.''

Falling home prices and rising defaults pushed Countrywide down 85 percent in the past year and Chief Executive Officer Angelo Mozilo has called the housing market the worse since the Great Depression. That view contrasts with his view during the previous three years that Countrywide's superior risk management disciplines set it apart from other lenders, according to the lawsuit.

The state and city pension funds' combined losses from Countrywide's declining stock price were as much as $100 million, City Comptroller William Thompson Jr. said Nov. 30. Countrywide's market value, which peaked at $25.9 billion last January, is now $3.5 billion.

Losses, Writedowns

The world's biggest financial companies have posted at least $133 billion in credit losses and writedowns tied to declining values of subprime mortgages, typically given to people with weak credit. Overdue payments on subprime loans rose to a 10-year high in the third quarter, according to the Mortgage Bankers Association.

Calls to Calabasas, California-based Countrywide's media office weren't returned.

Grant Thornton LLP and KPMG are the accounting firms named in the lawsuit. Grant Thornton spokeswoman Kristi Grgeta didn't return voice-mail and e-mail messages. KPMG spokesman Dan Ginsburg said, ``We have not seen any filing referenced in the Bloomberg article and have no basis for comment.''

Lucas van Praag, a spokesman for Goldman, and Citigroup spokeswoman Danielle Romero-Apsilos declined to comment. JPMorgan Chase & Co. spokesman Tom Kelly also declined to comment. Wachovia Corp. spokeswoman Christy Phillips-Brown said the company hadn't seen the lawsuit and couldn't comment.

Buyout Pending

Bank of America Corp., the nation's second-largest bank by assets after Citigroup, agreed to buy Countrywide on Jan. 11 for stock then valued at $4 billion. Bank of America spokesman Scott Silvestri declined to comment on the suit.

The transaction involves ``the mother of all due-diligence deals'' because of risks from litigation and increasing defaults and late payments by Countrywide borrowers, Bank of America Chief Executive Officer Kenneth Lewis said in a Jan. 15 interview.

U.S. District Judge Mariana Pfaelzer in Los Angeles appointed the New York State Common Retirement Fund, the second- largest U.S. pension fund, as co-lead plaintiff on Nov. 28 and consolidated five related suits. The lawsuit is on behalf of everyone who bought shares of Countrywide from April 7, 2004, to Aug. 9, 2007, when the company disclosed in a regulatory report that ``unprecedented market conditions'' were forcing it to secure new funding sources, according to the lawsuit.

Lead plaintiffs choose the course of securities litigation, assign tasks to other parties and usually get the largest share of a settlement or verdict.

Housing Crisis

The securities and accounting firms and the lender misled investors by ``falsely representing that Countrywide had strict and selective underwriting and loan origination practices, ample liquidity'' and ``a conservative approach that set it apart from other mortgage lenders,'' according to the lawsuit.

Mozilo told investors in March 2007 that the deepening housing crisis would ``be great for Countrywide'' adding that ``at the end of the day, all of the irrational competitors will be gone,'' according to the lawsuit.

Countrywide's growth ``resulted from the company's continuing to aggressively originate risky loans without regard to its stated origination policies and in spite of worsening market conditions,'' according to the lawsuit.

The securities and accounting firms took part in Countrywide's capital raising and financial statements without making a ``reasonable investigation'' of the facts and without exercising ``reasonable care,'' according to the lawsuit.

Strict Liability

U.S. securities law allows investment banks, accounting firms and others to be held strictly liable for the wrongdoing of the companies for whom they sell securities. Their only defense is to show that no reasonable person could have discovered a fraud even after performing a diligent investigation.

Mozilo and other company insiders sold $869 million of Countrywide stock from April 7, 2004, to August 9, 2007, according to the lawsuit. On Aug. 22, Bank of America bought $2 billion of preferred stock in Countrywide to help rescue the lender and secured the right to match any buyout offer.

Countrywide fell 9 cents to $6.02 yesterday in New York Stock Exchange composite trading.

To contact the reporters on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net ; Karen Freifeld in New York at kfreifeld@bloomberg.net .

Last Updated: January 26, 2008 00:01 EST

Many US banks are sued.Banks are in trouble