Meanwhile, the Countrywide “Friends of Angelo” scandal in Congress continued to unwind, as a Democratic senator from North Dakota said he will give more than $10,000 to charity because of a discount he got from the lender.
Write-downs wipe out half of Wall Street profit since ’04
The NYT reports on C1 that half of Wall Street’s reported profits from 2004 to the middle of last year have been erased by write-downs. It says seven of the biggest financial companies had $254 billion in earnings during that time but have since taken $107 billion in write-downs.
It says that number is sure to grow this week, as Wall Street earnings season kicks into high gear. And it notes, as have others, that the profit outlook for the firms is bleak—their days of raking in fees from securitizing junk mortgages are over and their goosing of returns with layered-on debt isn’t feasible anymore, especially under the eye of the Federal Reserve, which is directly lending them money for the first time since the Great Depression.
“They are going to have to build a new business model,” Richard X. Bove, a financial services analyst at Punk Ziegel, said of investment banks. “I do not believe those businesses have the ability to generate the kind of profit they did in recent years without all the leverage.”
If you can bet on one thing, your odds are about the same on the sun will rise in the east and Wall Street will figure out new ways to dress up a turd and sell it for huge profits. (See, for instance, the Journal’s C1 report on Wall Street hawking extreme-developing market investments to retail investors).
The Journal says on C1 that analysts expect profit at Goldman Sachs to be down 31 percent in the second quarter from a year ago. They predict a 59 percent drop at Morgan Stanley. The paper wins the Gee, Ya Think? Quote of the Day award for two rather obvious toss-offs:
“Business conditions appear to be among the worst in several years” (from one analyst)…
“When there’s not a lot of activity to generate revenue and you’re absorbing large losses, it can get awfully painful” (from another).
An FT analysis shows that investors who’ve come to the rescue of the U.S. financial industry with new capital have seen their positions eroded by $10 billion, something it says will make it harder and more costly to raise the billions more it surely needs. That represents a 15 percent loss on the total $65 billion investment.
A Journal’s C1 story says the markets are trading near estimates of their fair value, meaning a stock rally probably isn’t in the cards. Increasing inflation and continued negative earnings in the second half could further decrease the market’s value, though.
EU to regulate credit-ratings firms
The European Union is planning to regulate credit-ratings firms, something the Journal on C1 says “adds heft to similar efforts by U.S. officials.” The FT doesn’t mention the U.S. proposal. The Journal:
Among other measures, Mr. McCreevy wants to enforce so-called fire walls between operations of the ratings companies that raise fees from clients issuing bonds and operations that rate the bonds. He wants ratings companies to register in a way similar to that in the U.S.
Policy makers have criticized ratings companies because their ratings of structured products failed to reflect their true risks, particularly under stress. Critics say there is an inherent conflict of interest in the business: an issuer of debt pays the agencies to rate its product and sometimes, in the case of structured credit, to help design the product, too.
“Critics” might say that, but it’s just a fact. Maybe the Journal can just write it as thus without attribution from now on and attribute any opposing view to “fools and lackeys.”
Saudis bend on oil output
The Journal and FT follow the NYT’s weekend report that Saudi Arabia is planning to pump more oil to reduce prices and ease the heat from its trading partners like the U.S. The Journal says on A8 that the kingdom may sell its oil at a discount, as well, to get refiners to take it because it says “the market isn’t hankering for additional oil.”
The fear within Saudi Arabia is that sky-high prices will both rattle the world economy and spur efficiencies and new technologies that could undercut demand for oil in the future. Some other members of the Organization of Petroleum Exporting Countries share that concern, but only Saudi Arabia has played the role as a buffer against excess price jolts. The kingdom remains the only country with sizable excess capacity, though that has shrunk in recent years to slightly less than two million barrels a day.