Oppenheimer slashes Citi EPS outlook, sees big asset sales
NEW YORK (MarketWatch) -- Oppenheimer analysts on Monday slashed their earnings estimate for Citigroup Inc's. (C) full year 2008 earnings per share estimate by 70%, to 75 cents from $2.70, and said the bank may have to sell $100 billion of assets to put its balance sheet right. Analyst Meredith Whitney said Monday that Citi shares could fall below $16 a share as they retreat to valuations from the last difficult credit cycle of 1990-1991. "The three largest problems for Citigroup are further writedowns to their carrying values of CDOs related to sub-prime mortgages, further writedowns from leverage lending commitments, and further writedowns associated with on balance sheet consumer loans," Whitney wrote in her report.
Anyone notice!
Ambac and MBIA surged after Standard & Poor’s affirmed Ambac’s triple-A rating and decided not to downgrade rival MBIA.
Who said not to worry too much, it aint gonna be that bad!?: :
http://dailybriefing.blogs.fortune.cnn.com/2008/02/25/ambac-almost-out-of-the-woods/
Woooh... I can feel dhukka coming again. :couch
Whilst the headlines were about the bond insurers, most simply ignored another very important rating confirmation this afternoon... read below:
"S&P confirmed its AAA rating on S. Claus Inc. today, the Delaware Corporation that has provided the US economy with healthy profits from it's multiple SIV's with leading retailers, including Wall Mart and Bed Bath and Beyond. It's business model is to trade directly with that good ole father of christmas, St Nick, and whilst the cash flow statements have so far not yielded anything significant, the P&L is chocked full of warm healthy profits. Concerns were raised when it's bonds were priced at junk equivalents by traders, but VP Jeffrey Skilling claimed their financially model told them that there were still healthy profits to be made this Christmas, regardless of what that pesky Bethany McLean had to say. When queried about why the bond market effectively priced them for bankruptcy, S&P said that the bond market never was particularly sophisticated anyway and that quite clearly their employees had a better grasp of the underlying fundamentals. The Wall Street journal asked a more fundamental question however, asking S&P if they actually believed in Father Christmas. S&P replied that their role was not to provide comment on business models, but rather to assess the businesses credit worthiness based on financials and that it expressed no assurance on the numbers it was relying on to provide the AAA rating"
Anyone else think that the confirmation of AAA ratings for Ambac and MBIA is the biggest crock of you know what??????????
Goldman Estimates Slashed by Merrill's Moszkowski
Goldman Sachs Group Inc.'s first- quarter earnings estimates were cut by Merrill Lynch & Co. partly because of slumping equity markets.
The earnings-per-share forecast was lowered to $2.31 from $3.97, analyst Guy Moszkowski wrote in a research note to investors today. Goldman is expected to earn $3.34 a share in the first quarter, down from $6.67 a year earlier, according to the average of 17 analyst estimates compiled by Bloomberg.
``Based on recent market movements, we are trimming our first- quarter forecast,'' Moszkowski wrote. ``Market action in February has been such that we need to take another look.''
Analysts are slashing estimates for banks amid market declines following the U.S. subprime mortgage crisis. The world's biggest banks and securities firms have reported $163 billion of writedowns and credit losses since the beginning of 2007 amid the worst U.S. housing-market slowdown in a quarter century.
Moszkowski also lowered his first-quarter net revenue estimate for Goldman, the world's biggest securities firm, to $7.5 billion from $9.6 billion. The analyst said he recently met Goldman executives including co-President Jon Winkelried and David Viniar, the chief financial officer.
``Goldman Sachs continues to benefit from relatively better navigation of the troubled environment,'' Moszkowski wrote in the note. ``However, with market problems extending beyond residential mortgages to commercial property, corporate debt, and global equity valuations, Goldman Sachs is not unscathed.''
Goldman, Lehman May Not Have Dodged Credit Crisis
Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.
The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.
The potential for a fire-sale of the assets that would bring another round of charges has ``always been our greatest fear,'' said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.
VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short- term debt backed by securities, some of which are insured against default.
Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.
`Significant Consequences'
Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.
``There's a big number at work here and it will have significant consequences,'' said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. ``The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.''
CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run to $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.
`Lightning Rod'
One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.
Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's yesterday affirmed the AAA ranking of MBIA, the largest ``monoline,'' though it said the outlook is ``negative.'' MBIA yesterday eliminated its quarterly dividend and said it won't write new guarantees on asset-backed securities for six months.
The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.
Ambac Financing
New York-based Ambac may get $3 billion in new capital with the help of Citigroup Inc. and Dresdner Bank AG as early as this week, the Wall Street Journal reported yesterday. MBIA raised money by selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.
``The lightning rod of the monoline fix is so important to so many banks,'' said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.
Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the bank is forced to provide financing.
Goldman, Lehman
Goldman, the most profitable Wall Street firm, and Lehman, the biggest commercial-paper dealer, have avoided much of the pain so far.
Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.
Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $7.5 billion of VIE assets as of Nov. 30, according to a filing also made on Jan. 29.
``We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,'' Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.
Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs,'' according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch & Co., which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.
Merrill spokeswoman Jessica Oppenheim declined to comment, as did Citigroup's Danielle Romero-Apsilos.
`Alphabet Soup'
The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.
Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.
``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''
Case in point: Recent evidence suggests that some of the huge financial writeoffs and writedowns of a variety of credits at our leading financial institutions might have been exaggerated. This could lead to financial writeups over the next one or two years.
If this supposition is correct, there is a fortune just waiting to be made in the financial sector.
On page M14 in this weekend's Barron's, levered loans are trading at about 88 cents on the dollar. By contrast, the market is expecting a 10% to 15% default rate, a level that has never been seen according to KDP Advisors. In fact, says KDP, "The loan market is trading with a higher default rate than the junk bond market, very bizarre given that leveraged loans are secure debt and are senior to bonds in corporate capital structures." So, levered loans are trading well below fundamentals.
The same holds true for high-yield bonds, in which the current default rates stand at 1.5%, implied by spreads are 8% defaults, and expected by ratings agencies (like Moody's) is only 5%.
The same holds true for commercial real estate loans, in which the current default rate is 0.3%, implied by CMBX is 8%, and the expected default rate, according to credit professionals I rely on, is expected at only 2%.
One could conclude from the above that there is a mistaken pricing of debt that is causing larger-than-necessary financial sector writeoffs, similar to when portfolio insurance kicked in and forced investors to sell stocks during the October 1987 market crash.
If my observations are correct, a mistaken pricing of debt is serving to constrain bank lending, slow the economy and has produced artificially low stock prices (especially of a financial sector-kind) as investors could be overreacting to the huge financial writedowns at some of the world's largest financial institutions.
Here is a article I will repeat in near intirety (Not something I normally do but V.interesting) This is from Doug Kass @ thestreet.com. He is a Bear that pre-warned and traded short big time the recent Fin implosion, always a good factual read by someone who runs a dedicated short only hedge fund.
http://www.thestreet.com/story/10404723/1/kass-were-writedowns-exaggerated.html
Moody's, S&P Say MBIA Is AAA; Debt Market Not So Sure
Moody's Investors Service and Standard & Poor's say MBIA Inc. has enough capital to withstand losses and justify its AAA rating. MBIA's debt investors aren't so convinced.
Credit-default swaps indicating the risk that Armonk, New York-based MBIA's bond insurance unit won't be able to meet its obligations are trading at similar levels to companies such as homebuilder Pulte Homes Inc., which is rated 10 steps lower.
The discrepancy illustrates the skepticism debt investors have about the safety of MBIA's rating after the company posted $3.4 billion of losses on subprime mortgages last quarter. Moody's and S&P both said that while at least $4 billion of writedowns lie ahead, MBIA's management has made enough changes to warrant the top rating.
``Pardon me if I find this a little hard to believe,'' said Richard Larkin, director of research at municipal-bond brokerage Herbert J. Sims & Co. in Iselin, New Jersey. ``This is basically the same management that put MBIA into this hole in the first place.''
Moody's yesterday ended a five-week review of MBIA, the world's largest bond insurer, removing the threat of an imminent downgrade. S&P did the same a day earlier and also affirmed the top rating of New York-based Ambac Financial Group Inc., the second-biggest. Ambac is still under review from both S&P and Moody's.
Credit-Default Swaps
Credit-default swaps tied to MBIA's insurance unit rose 3 basis points today to 363 basis points, according to London-based CMA Datavision. The contracts, which rise as investors see increased risk and fall when confidence improves, have dropped 24 basis points the past three days. That's still up from less than 100 as recently as October. The contracts rose above 720 last month as banks, securities firms and investors used them to hedge against the risk that the firm wouldn't be able to make good on its insurance obligations.
Contracts on Bloomfield Hills, Michigan-based Pulte are trading at about 370 basis points, CMA price show. The BB+ rated homebuilder has reported five straight quarterly losses. The company is considered junk, or below investment grade.
Kass is obviously very confused. On Kudlow & Co a month he said the banks had taken most of their write-offs related to subprime exposure and said there would still be some to go but it would be more like $40 billion or so. Then last week he came on and said that he had underestimated further writedowns and that they could be much higher than the $40 billion he estimated just a month ago. Now he's talking about write-ups. Just admit it Dougy, like the rest of us, you haven't got a clue.
"(Update) Jitters return to the banking sectors amid rumours of an emergency Bank of England meeting with one of the clearing banks in trouble and a cautious outlook from mortgage giant HBOS."
Being strenuously denied, but "The City" is abuzz apparently.
Time for Gordon to nationalise the banking system wayne?
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