Stocks rallied after the Standard & Poor’s ratings agency decided not to downgrade monoline bond insurers MBIA and Ambac Financial, saying their efforts to shore up its business had succeeded for now.
Wall Street’s sigh that it won’t have to take tens of billions in write-downs—for now—sent the Dow Jones Industrial Average up 190 points. S&P did downgrade three smaller bond insurers and left the door open to downgrading Ambac, which isn’t as far along as MBIA in shoring up its capital base. The New York Times captures the mood here.
“This is a reprieve. It doesn’t eliminate the problem,” said Russ Koesterich, a strategist at Barclays Global Investors. “It just says, in the near term, this is not imminent.”
MBIA made further moves to cement its standing. It suspended its dividend and its structured-finance insurance business and officially announced it would split into two operations, a municipal-bond business and a structured-finance one. Its new (old) CEO says he has “questions” about the company’s preliminary 2007 results.
The Wall Street Journal says fourth quarter corporate earnings have declined 21 percent, though much of that is on the backs of the financial companies. Take them away and S&P 500 profits are up more than 12 percent.
“There is a debate right now about whether we’ve successfully priced in all the bad news that’s likely to come” regarding the economy and bad credit bets on Wall Street, said Art Hogan, chief market analyst at Jefferies & Co.
The picture at Citigroup continued to to deteriorate yesterday with a trove of information from its annual report.
A prominent analyst slashed her estimates for the company’s earnings by 70 percent, saying the bank’s share price should fall to levels not seen in nearly twenty years. Citi has off-balance-sheet entities totaling $356 billion, which expose it to losses of up to $152 billion.
The bank also said it has about $20 billion in commercial real estate investments that may suffer along with that market this year. The WSJ notes that Citi disclosed that its traders had daily losses of more than $100 million on fifteen separate occasions last year.
Quote of the Day:
“There are just so many things that they’re struggling with,” Mr. Hendler said. “Everybody wants more disclosure, but when they get it, they get more depressed.”
Visa said it would go public in a $19 billion initial public offering—the biggest in history.
The business papers all say the move could be a boon for struggling banks, 13,000 of which own Visa as a cooperative. Depending on whom you believe, J.P. Morgan alone could reap $1.1 billion (NYT), $1.2 billion (Financial Times) from the sale. For some reason, the NYT has a different overall number on the IPO, as well, putting it at $17 billion.
The FT says the banks may have pressured Visa into an IPO as a way to get some much-needed cash at a time when the capital they use to make loans has been hammered by losses from the credit crisis.
Investors will note that MasterCard, which went public less than two years ago, has seen its shares soar nearly 400 percent in that time, though Discover has fallen by half since Morgan Stanley spun it off last year.
A jury convicted five former AIG and General Re insurance executives, including the latter’s ex-CEO, of sixteen counts of fraud and conspiracy for inflating AIG’s reserves by half a billion dollars to artificially boost its share price. Prosecutors said their work was not over and they’ll continue to look “up the ladder.” The NYT and the WSJ say the convictions could prompt prosecutors to turn next to former AIG CEO Maurice “Hank” Greenberg, who was an unindicted co-conspirator.
The WSJ reports on its page one that the convictions could embolden prosecutors who now have evidence that juries can process the complicated evidence involved in cases involving fraudulent accounting of financial reserves.
Federal prosecutors in Manhattan have expressed interest in getting information on a probe by the Securities and Exchange Commission into whether Merrill Lynch & Co. booked inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, according to people familiar with the matter. Prosecutors in Brooklyn, N.Y., have launched a preliminary criminal investigation into whether UBS AG also improperly valued its mortgage-securities holdings, as well as the circumstances surrounding the failure of two hedge funds at Bear Stearns Cos., which collapsed last summer because of losses tied to mortgage-backed securities, according to people familiar with the matter.
The NYT has a good story on its page one on local governments lending money to homeowners in peril—but getting grief from their citizens for it.
Seattle is offering $5,000 loans to homeowners to stave off foreclosures, while Massachusetts is offering refinancing funded by bond issues. The usual suspects in talk radio and the like are up in arms about “bailing out” their fellow citizens.
The goal of these programs is not just to keep people from losing their homes, but also to limit broader economic fallout, including plummeting property tax revenues and widespread declines in home values. Still, they pit what some government officials say are practical economic solutions for the common good against individual ideals of fairness and personal responsibility.
The Times notes that governments have a history of getting involved in home crises, noting the Home Owners’ Loan Corporation refinanced a million loans in the Depression and made a profit doing it.
Bloomberg reports that states are going to Congress to ask for relief from the higher debt prices they’re facing in the credit crisis—especially from the meltdown in the auction-rate securities market.
Washington’s governor, for instance, says Seattle faces an interest tab $80 million higher than it did a few weeks ago.
The WSJ reports on its front page that the U.S. is pushing so-called sovereign-wealth funds to open themselves up to outside scrutiny and promise not to interfere politically.
The talks are part of delicate global negotiations to draft rules to oversee the behavior of such funds, without discouraging them from investing in the U.S., Canada and Europe at a time of global financial turmoil.
Also on its page one, the Journal says states are under fire for trying to get people to buy their own long-term care insurance, rather than use tax revenue to subsidize it.
Critics are sounding alarm bells. They argue that the financial benefits of LTC insurance for many target customers are negligible to nonexistent. Their income and assets are so low that they would quickly qualify for free care under Medicaid.
In economic news, Bloomberg reports that foreclosures soared by 90 percent in January from a year ago as payments on adjustable-rate mortgages reset higher.
The Journal says the Federal Deposit Insurance Corp. is beefing up its staff to prepare for the bank failures it sees as likely to increase. The paper quotes an analyst saying the FDIC is preparing for one hundred bank collapses over the next year or two, up from zero from 2005 to 2007.
In many parts of the country, the housing-market decline has hamstrung banks, and regulators have reported weakening performance of commercial real estate, small business and credit-card loans. Exacerbating the situation is a cash-flow crunch, which makes it harder for banks to obtain funding to originate new loans.
Existing home sales declines moderated in January but were still off 23 percent from a year ago. Median sales prices for existing homes fell 4.6 percent to $201,000.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.