Monday, December 31, 2007

Aegon completes acquisitions


Dutch insurer Aegon said Monday it completed the acquisition of Merrill Lynch & Co.'s life insurance subsidiaries for $1.25 billion in cash, including excess surplus of about $425 million. Aegon acquired Merrill Lynch Life Insurance Co. and ML Life Insurance Co. of New York from Merrill Lynch. As part of the deal, the pair formed a partnership that will allow Merrill Lynch to offer Aegon insurance products through its financial adviser network. Aegon, through its Transamerica companies will continue to offer insurance and investment services, including Merrill Lynch annuity products. Aegon anticipates the acquisition will boost earnings slightly, while Merrill Lynch will record a net gain from the sale during the fourth quarter.

Friday, December 28, 2007

MBIA, Ambac Fall as Buffett Starts Up Bond Insurer

By Christine Richard and Josh P. Hamilton (Bloomberg)

MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt. MBIA, based in Armonk, New York, fell as much as 17 percent and Ambac dropped 15 percent, the most in two months. Buffett, chairman of Omaha, Nebraska-based Berkshire Hathaway Inc., told the Wall Street Journal his bond insurer opens for business today in New York. New York State Insurance Department Superintendent Eric Dinallo said the agency expedited Buffett's license request.

Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. The rankings of MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages. ``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.'' Buffett, 77, told the newspaper that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. David Neustadt, a spokesman for New York's insurance department, said Berkshire will get a license by Dec. 31.

Shares Drop

Buffett didn't respond to requests for comment through spokeswoman Jackie Wilson. Calls to Liz James, a spokeswoman for MBIA, and Peter Poillon, a spokesman for Ambac, also weren't returned. MBIA, down about 74 percent this year, fell $3.05 to $19.22 at 12:15 p.m. in New York. Ambac, down 72 percent, dropped $3.85 to $25.29. Buffett's decision also indicates he is unlikely to bail out any of the bond insurers. Credit-default swaps on MBIA, which rise as perceptions of credit quality drop, rose 30 basis points to 610 basis points, the highest ever, according to CMA Datavision in London. Ambac increased 10 basis points to 620, the widest in three weeks. Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

`Positive Development'

The bond insurance venture is Buffett's third move in a week as he seeks investments to absorb $45 billion in cash. Buffett said Dec. 25 that he will pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies and Berkshire today agreed to buy a reinsurance unit of ING Groep NV for about 300 million euros ($440 million). ``Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development,'' Dinallo said in a statement today. Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway is the largest investor in Moody's Corp., with a 19 percent stake as of Sept. 30.

`Vintage Warren Buffett'

``If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``It is such vintage Warren Buffett.'' MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody's, Fitch and S&P that they deserve to keep their top ratings. Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees. ''MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``But it hurts them.''

`Mass Destruction'

Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac. The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt. Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs. ``They're not seeing deterioration in the muni book,'' Haines said. ``All the real risk is in the structured book, which Buffett won't have.''

ACA Capital Holdings

New York-based ACA Capital Holdings Inc. is struggling to stave off delinquency proceedings after the value of the CDOs it guaranteed plunged. S&P cut ACA's rating by 12 levels to CCC after the company posted a $1.04 billion third-quarter loss. ACA Financial Guaranty Corp., a unit of ACA Capital, said this week it will seek approval from the Maryland Insurance Administration before pledging or assigning assets or paying dividends. Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses. ``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.''

Ice Cream, Jets

Buffett built Berkshire into a $210 billion holding company by investing premiums from insurance subsidiaries including Geico Corp., the fourth-largest U.S. car insurer, until claims need to be paid. The company's operating businesses include ice cream company International Dairy Queen Inc., business-jet fleet operator NetJets Inc. and carpet maker Shaw Industries. ''What we really hope over time is to more or less break even on underwriting of insurance,'' Buffett said at the company's annual meeting in May. Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged about 27 percent this year. The shares rose $1,900 to $139,700 today. ``Be fearful when others are greedy, and be greedy when others are fearful,'' the billionaire chairman told Berkshire shareholders in his 2006 annual report released in March. ``Appropriate prices don't guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses.''

Thursday, December 27, 2007

Home Prices See Record Drops in October


Home prices in 11 large metro areas posted record declines in October, according to data released Wednesday, more evidence that 2007 was one of the worst real estate markets since the year the United States entered World War II. Reflecting tighter lending standards and a huge number of homes for sale, the S&P/Case-Shiller composite index of home prices in 20 cities slid 6.1% compared with October of last year, led by Miami, Tampa, Detroit and San Diego. Prices in Atlanta and Dallas dipped for the first time during the current downturn. This was the 10th month in a row that the index has shown negative annual price comparisons, and the results are getting worse. The index was down 1.4% from September to October.

"When was the last time we had a bigger drop than this? It looks like 1941," Robert Shiller, economics professor at Yale University and co-developer of the index, said in an interview. Before Pearl Harbor was bombed on Dec. 7, "The U.S. wasn't in the war yet, but it sure looked bad. Hitler was raging in Europe. & You didn't want to be buying a house then." 2Today, the primary force behind the real estate recession is the almost year's supply of homes for sale. Many are being heavily discounted by builders, speculators and lenders who have become owners through foreclosure. Shiller said he expects prices to fall another 5% to 7% next year.

While it's clearly a buyers' market, demand is being constrained by mortgage lenders, who got burned by their own reckless lending of recent years. Now, home shoppers with a poor record for paying bills on time and little saved for a down payment are having serious difficulty getting a loan. "A lot of (buyers) haven't come to the realization that the subprime market no longer exists," said Ritch Workman of Workman Mortgage in Melbourne, Fla. "Mortgage brokers are turning away more and more borrowers." Anyone with a credit score below 620, which is subprime territory, he said, "will pay through the nose" to get a mortgage. In areas where home prices are falling, it's impossible to get a loan for 100% of the purchase price, unless the buyer can qualify for a loan from the Department of Veterans Affairs. Most lenders now require at least a 5% down payment, Workman said.

Home prices rose in just three of the 20 cities in the Case-Shiller index in October: Charlotte; Portland, Ore.; and Seattle. But Patrick Newport, U.S. economist for Global Insight, said he expects prices in Seattle and Portland will turn down by the end of the year. In Miami, where prices fell 12.4%, Ron Shuffield advises sellers to wait if they don't have to sell now. There are a lot of buyers in the market, said Shuffield, president of Esslinger-Wooten-Maxwell Realtors, and with "a little extra research and effort, there are certainly some very, very good deals out there to be had today. You can find deals you could not have found a year ago, or even three months ago."

Monday, December 24, 2007

Harrah's close to largest casino buyout


Harrah's Entertainment Inc. has tentatively cleared the last remaining regulatory hurdle to the largest casino buyout ever. Harrah's said Monday that the National Indian Gaming Commission has approved the company's $17.7 billion purchase by private equity buyers Apollo Management and Texas Pacific Group, pending final commission review. That conditional approval means Harrah's can go forward with the deal, which is expected to close in early 2008. No further regulatory approval is required. Officials with Harrah's in Las Vegas and the Indian gambling commission in Washington did not immediately respond Monday to messages seeking further comment. Harrah's and the buyers received the go-ahead for the deal last week from the Nevada Gaming Commission, capping a 10-week campaign to obtain approvals from state gambling regulators in New Jersey, Pennsylvania, Louisiana, Iowa, Missouri, Illinois, Indiana and Mississippi. Harrah's, which had nearly $10 billion in revenue last year, operates more than 50 casinos including Caesars and the Imperial Palace in Las Vegas and Bally's in Atlantic City. Indian Gaming Commission approval is needed because Harrah's operates several tribal casinos as well. The company's stock was up 51 cents to $88.84 in Monday trading. The buyout deal calls for Apollo and Texas Pacific to pay $90 per share.

Pershing boosts stake in Target to nearly 10 percent

WASHINGTON (Reuters) - Activist hedge fund Pershing Square Capital raised its stake in Target Corp (TGT.N: Quote, Profile, Research) to nearly 10 percent, a U.S. Securities and Exchange Commission filing said on Monday. Pershing, which recently raised a $2 billion fund to exclusively invest in Target, now holds a 9.97 percent stake in the discount retail chain, up from approximately 9.6 percent in July. Pershing said it has also invested in Target swaps and options, which combined with the stock gives the fund an economic exposure equal to a 12.6 percent stake in the retailer. According to the filing, Pershing said it has met with Target's management and may meet them again to discuss the company's strategy, business, assets, operations, capital structure or its financial condition. Pershing said it has engaged financial advisers and may contact other Target shareholders. Target rose 2.2 percent to $51.81 on the New York Stock Exchange.

Ahead of the Bell: Circuit City (AP)

Analysts said Monday that the next few years are likely to be hard for Circuit City Stores Inc., which plunged following a large third-quarter loss. On Friday, the electronics retailer reported a much larger loss than analysts expected, partly due to weak sales of accessories and warranties, and it forecast a small loss in the fourth quarter. Shares dove 28.7 percent on the day, closing at a four-year low of $4.75. Goldman Sachs analyst Matthew Fassler said Circuit City is opening new stores and taking on more debt. He did not approve of the risks involved in that strategy. "The company is betting that its new units will produce before its existing stores deteriorate to untenable levels, and, moreover, that its problems reflect poor real estate, as opposed to being endemic to the core of the organization," he said. "We view this as unwise." Fassler kept a "Neutral" rating on the stock, and cut his price target to $5.50 per share from $9. He now forecasts losses for Circuit City in 2008 and 2009. Analyst Mike Baker of Deutsche Bank differed, saying real estate is a major problem for Circuit City. He said the company suffers from bad floor plans at its 400 oldest stores, many of which are in unattractive locations. "These lead to weak sales per foot, necessitating a lower cost structure, meaning that Circuit City must sacrifice customer service," he said. "This then leads to share loss." Circuit City is moving its stores to better locations, he said, but that will happen slowly because it must wait for leases to expire. Baker cut his price target to $5 per share from $9.

Wednesday, December 19, 2007

Chinese fund takes $5bn Morgan Stanley stake

By Daniel Pimlott (Financial Times)

Morgan Stanley on Wednesday said it had sold a $5bn stake to China's new sovereign wealth fund and revealed that a total of $9.4bn in mortgage-related writedowns had driven it to a fourth-quarter loss, leading its chief executive John Mack to forgo his bonus for 2007. The bank said it had been forced to write off a further $5.7bn, on top of a previously announced $3.7bn charge already taken on its holdings of troubled structured credit products in the quarter. The deepening problems in the credit markets helped drive Morgan Stanley to a net loss of $3.59bn, or $3.61 a share, compared with a profit of $1.54bn a year ago. The company said it had negative revenue of $450m, down from $7.85bn a year earlier. Analysts had expected 39 cents of loss on positive revenues of $4.23bn.

The writedowns came because of "continued deterioration and lack of liquidity in the market for subprime and other mortgage related securities since August 2007", it said. Mr Mack added: "The writedown Morgan Stanley took this quarter is deeply disappointing. Ultimately, accountability for our results rests with me, so I've told our compensation committee that I will not accept a bonus for 2007." Last year Mr Mack was awarded $40m in restricted stock and options. He said the writedown stemmed from "losses by a small trading team in one part of the firm". The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused. In order to "bolster" its capital position, the bank said it would issue about $5bn in new capital with mandatory conversion into stock to China Investment Corporation, a $200bn fund. In return CIC will be able to convert the investment into a stake of up to 9.9 per cent, but will remain a passive investor, with no role in managing the company. CIC's investment is the latest in a series of stake-building moves in Wall Street firms by Chinese groups. In June CIC bought a $3bn stake in Blackstone Group during the private-equity firm's initial public offering, while Bear Stearns in October agreed a deal with Citic Securities, China's largest listed brokerage, that will see the two groups invest $1bn in each other.

Among other significant foreign investments, Citigroup said last month it had taken a $7.5bn capital infusion from a fund owned by the Abu Dhabi government to shore up its capital after $11bn in writedowns on mortgage investments. Morgan Stanley said that $7.8bn of its losses came from subprime trading positions. It also had $1.2bn of writedowns related to European non-conforming loans, commercial mortgage backed securities, alt-A mortgages and other loans. The bank said that at the end of the quarter on November 30 it had $1.8bn in exposure to subprime, down from $10.4bn in August. Losses in its fixed income unit from the bets on the mortgage markets that went wrong were partially offset by stronger revenues from its equity trading segment, and higher fees in its investment banking advisory and wealth management services. Morgan Stanley shares were $1.59 or 3.3 per cent higher at $49.66 in mid-morning New York trading,

In Reversal, Fed Approves Plan to Curb Risky Lending

By EDMUND L. ANDREWS (New York Times)

WASHINGTON — The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit. The new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising. Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation. “Unfair and deceptive acts and practices hurt not just borrowers and their families,” said Ben S. Bernanke, chairman of the Federal Reserve, “but entire communities, and, indeed, the economy as a whole.” The new regulations, expected to be approved in close to their proposed form after a three-month period for public comment, amount to a sharp reversal from the Fed’s longstanding reluctance to rein in dubious lending practices before the subprime market collapsed this summer.

The proposed changes, which do not apply to standard mortgages for borrowers with good credit, stopped short of banning all heavily criticized practices in subprime lending and did not go as far as many consumer groups had sought. But they won praise as worthwhile steps from some industry critics who had long complained that the Federal Reserve under its former chairman, Alan Greenspan, persistently ignored signs of trouble.

“Reading these proposals today is almost painful,” said Dean Baker, co-director of the Center for Economic Policy Research, a liberal research group in Washington. “These are all just simple, common sense regulation. Why couldn’t Greenspan have done this seven years ago?” If the measures had been in place earlier, they would have applied to as many as 30 percent of all mortgages made in 2006. Some advocacy groups that had warned for years about reckless practices said the Fed’s move was too little and too late.

“The Federal Reserve’s proposed guidance is riddled with loopholes and exceptions that will undermine its effectiveness,” said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a nonprofit group in Durham, N.C. “The proposals fall far short of what was needed, and in some ways fall short of where the industry was already headed.” The new rules would do nothing to help the hundreds of thousands of people who are either already defaulting on subprime mortgages or are likely to lose their homes when their introductory teaser rates expire and their monthly payments jump by 30 percent or more. Soaring default rates among subprime borrowers have already caused a crisis on Wall Street, all but shutting down the subprime mortgage market since August because lenders could no longer raise the cash to make new loans. The Bush administration has pushed for voluntary agreements aimed at avoiding some, but far from all, of the foreclosures expected next year.

The American Banking Association praised the Fed’s action as “an important proposal that would make a significant difference in protecting mortgage borrowers.” But the industry group warned that some provisions might go too far. “We worry that replacing important lending flexibility with rigid formulas might also limit lending to some creditworthy borrowers.”

In Congress, leading Democratic lawmakers said the Fed had been too cautious. Representative Barney Frank of Massachusetts, chairman of the House Financial Services Committee, said the central bank showed it was "not a strong advocate for consumers." Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, called the proposal a "step backward." The House recently passed a bill last month that would impose even tougher restrictions on many subprime practices that the Fed addressed on Tuesday. The Senate has not acted on a bill, but Mr. Dodd recently introduced a measure with many of the same goals as the House bill.

Despite their limitations, the central bank’s new proposals would nonetheless cut a wide swath across the nation’s fragmented mortgage system. They would govern practices for all mortgage lenders, regardless of whether they are banks, thrift institutions or independent mortgage companies. And they would apply regardless of whether a lender is supervised by federal or state regulators. The most important indicator that the Fed wanted to throw down the gauntlet is in how it defined the mortgages that would be subject to special consumer protection. Under its existing rules, based on the Home Ownership Equity Protection Act of 1994, the Fed’s extra protections applied to less than 1 percent of all mortgages — those with interest rates at least eight percentage points above prevailing rates on Treasury securities.

The new rules, by contrast, invoked broader legal authority to apply to any mortgage with an interest rate three percentage points or more above Treasury rates. Fed officials said that would cover all subprime loans, which accounted for about 25 percent of all mortgages last year, as well as many exotic mortgages — known in the industry as “Alt-A” loans — made to people with relatively good credit scores. Under the new rules, such borrowers would have to document their incomes, supply tax returns, earnings statements, bank records or other evidence. Lenders would not be allowed to qualify a person based only on their ability to pay the initial teaser rate. The proposal would essentially end the practice of allowing those with poor credit to apply for “stated income” loans, often known as “liar’s loans,” which do not require borrowers to provide evidence of their incomes and assets. And it would restrict mortgages with future monthly payments beyond those that could be justified by a borrower’s projected earnings.

The Fed proposal would still leave some room for flexibility. Lenders would have to provide “reasonably reliable evidence” of a person’s income, a definition that Fed officials said would allow small business owners and others whose income may be erratic or difficult to confirm to arrange a subprime mortgage. The Fed also refused to prohibit the much-criticized subprime lending practice of big prepayment penalties. Prepayment penalties, which can cost thousands of dollars, often block people from switching to a cheaper mortgage for two years or longer. Mortgage lenders argue that prepayment penalties are often essential, because they provide investors with assurance of earning more than just the low teaser rates. But consumer groups have argued that the penalties can trap borrowers in expensive loans and that many home buyers do not properly understand them.

Under the Fed proposal, lenders would still be allowed to demand prepayment penalties, but the penalties would have to expire at least 60 days before a loan’s introductory rate was scheduled to reset at a higher level. The new rules would also make it more difficult for lenders to include hidden sales fees, which are usually paid to the mortgage broker. Many subprime lenders tell borrowers they will not have to pay any fees, or even any costs for services like appraisals, but include those fees in what is called a “yield-spread premium” on the interest rate. The Fed proposal would not prohibit yield-spread premiums but would require that a lender disclose the exact amount of the fees and have the borrower agree to the fees in writing. John Taylor, president of the National Community Reinvestment Coalition, a housing advocacy group, said simply disclosing the fees was not enough because home buyers were already inundated with a blizzard of disclosure forms to sign and can easily miss the significance of what they are approving. Borrowers “shouldn’t need to be a lawyer or financial expert,” Mr. Taylor said, “to protect themselves from unfair and deceptive lending.”

Monday, December 17, 2007

Dollar erases gains after grim home-builders survey

By Lisa Twaronite, MarketWatch

SAN FRANCISCO (MarketWatch) -- The dollar failed to maintain its early gains Monday, as sagging stocks and a weak home-builders index reading offset bullish U.S. fund inflow data and weak data from the euro zone. U.S. home builders remained extremely pessimistic in December, with the home-builders' housing market index at 19 for the third straight month in December, matching the lowest reading ever in the 22-year history of the index released by the National Association of Home Builders and Wells Fargo. The reading was in line with expectations. See Economic Report. "The NAHB housing market index remained at record lows in December, which won't help dollar bulls much," wrote analysts at Action Economics. The dollar started the U.S. session on firm footing, after Treasury International Capital data revealed stronger-than-expected foreign appetite for U.S. funds in October.

The TICS report showed net inflow into U.S. financial assets was $97.8 billion, compared with a revised $32.8 billion outflow in September, and the inflow into long-term assets was $114 billion. But analysts said the data weren't enough to herald a trend reversal. "While today's TICS report is unquestionably U.S. dollar-positive, the real question remains if and when foreign investment returns to U.S. deposits and short-term securities. Continued net outflow will be an ongoing drag on the greenback and limit any corrective upside potential," said Michael Woolfolk, senior currency strategist, the Bank of New York Mellon. Also Monday, data showed that the U.S. current-account deficit narrowed in the third quarter to $178.5 billion, or 5.1% of gross domestic product. See Economic Report. But a separate report from the New York Federal Reserve showed factory growth in the region slowed in December to its lowest reading since May.

The dollar index, which tracks the greenback against a basket of currencies, was at 77.390, down from 77.435 in late U.S. trading Friday.
The British pound was at $2.0200, compared with $2.0156 late Friday.
Against Japan's currency, the dollar was buying 112.93 yen compared with 113.35 yen Friday. The euro was trading at $1.4393, down from $1.4418 in late U.S. trading Friday, but off a session low of $1.4329.

Earlier Monday, a measure of economic output in countries that use the euro as their currency slumped to the lowest seen in more than two years. The RBS/NTC Economics flash euro-zone composite output fell to a reading of 53.3 in December from 54.1 in November, a 28-month low and the fifth drop in six months. See full story.
Stocks slump

On Wall Street Monday, stocks closed sharply lower, after Moody's Investors Services warned it could lower bond-insurer credit ratings because of subprime losses and as Alan Greenspan, the former Federal Reserve chairman, warned of a possible U.S. recession. See Market Snapshot.
Late Friday, Moody's warned that the Triple-A ratings of several leading bond insurers could be downgraded after it reviews the companies' exposure to potential subprime mortgage losses. See full story.
In televised interviews Sunday, Greenspan, the former Fed chairman, warned of the possibility of stagflation, when prices rise at the same time as the economy cools, and said there was a 50-50 chance of a U.S. recession. The U.S. Federal Reserve held its first Term Auction Facility on Monday, with the results scheduled to be released Wednesday. The minimum bid rate for the $20 billion 28-day loan was set at 4.17%, below the Fed's discount rate of 4.75%.
The auction was the first of three as part of a plan unveiled Wednesday last week, to add $40 billion in liquidity to global financial markets in coordinated steps from the European Central Bank, the Bank of England, the Bank of Canada and the Swiss National Bank. Treasurys rallied on Monday, sending yields lower.

Tuesday, December 11, 2007

Mullen reassures Israel on Iran

By Peter Spiegel, Los Angeles Times Staff Writer

TEL AVIV -- The top U.S. military officer attempted to reassure Israeli defense leaders Monday that the United States still views Iran as a serious threat to the Jewish state, even as the Israelis disagree with an American intelligence finding that Tehran ceased its nuclear weapons program in 2003. Adm. Michael G. Mullen, chairman of the Joint Chiefs of Staff, discussed the National Intelligence Estimate of Iran's nuclear program with Defense Minister Ehud Barak and the head of Israel's military in back-to-back meetings here, where the report has provoked widespread debate over American intentions. Participants in the meetings said Israeli officials took issue with the U.S. view that the weapons program had stopped, saying Iran's continued enrichment of uranium was aimed at developing a nuclear bomb. The U.S. assessment, issued last week, says the enrichment program has continued unabated, even as the weapons program was shut down. Iran has insisted that it is producing only low-grade uranium to drive civilian power plants, not highly enriched uranium for bombs. Mullen said after the meetings that both Barak and Lt. Gen. Gabi Ashkenazi, the new head of the Israeli defense staff, expressed a desire to work with the U.S. on analyzing American intelligence on the Iranian program. Mullen said he expressed similar U.S. concerns about the enrichment program, calling it the "center of gravity" of the Iranian program that needs to be stopped with the help of international pressure. He also reiterated American views that Iran continues to mislead nuclear regulators about the extent and intentions of its program.

"I wanted to reassure them that I still consider Iran a threat," Mullen said in an interview with The Times aboard his aircraft. "Their hegemonic views, their regime's rhetoric, still speaking to the elimination of Israel, is all very disturbing to me. I intended to leave the impression with them that I wasn't taking my eye off the mark."

The timing of the intelligence estimate, coming in the midst of Bush administration efforts to garner international support for a third round of U.N. Security Council sanctions, has forced the White House to scramble to reassure allies such as Israel that it has not changed its view of the Iranian government and remains committed to eliminating its enrichment program. Defense Secretary Robert M. Gates, during a weekend stop in Bahrain to address a group of Arab leaders, acknowledged that President Bush and his foreign policy aides felt frustration with the timing and content of the report, but noted that such decisions are made by intelligence professionals, not policymakers. "The estimate clearly has come at an awkward time," Gates said. "It has annoyed a number of our good friends. It has confused a lot of people around the world in terms of what we're trying to accomplish." Sunni Muslim-led states in the region have grown increasingly concerned about Shiite Muslim-dominated Iran's strengthening position in the Persian Gulf, fearing it is using chaos in Iraq to boost its influence.

UBS's Subprime Hit Deepens Credit Worries


UBS AG became one of the biggest casualties of the U.S. subprime-mortgage meltdown yesterday, announcing that it would take a $10 billion write-down and sell a chunk of itself to the government investment arm of Singapore and an unnamed Middle Eastern investor.

The disclosures stoked anxiety about potential losses lurking on the books of other banks. That UBS, long known as a conservative lender, could take such a financial hit suggests that the wave of industry write-downs, which so far total about $50 billion, may be far from over.

In recent weeks, UBS began using a more conservative method for valuing complex debt securities tied to U.S. subprime mortgages. As a result, the bank said it might record a net loss for the year. The "ultimate value of our subprime holdings...remains unknowable," the bank said yesterday.

The news came as other financial institutions announced moves to shore up their balance sheets. Washington Mutual Inc. said it plans to cut its dividend, slash jobs and sell preferred stock to raise $3.7 billion in capital. Bond insurer MBIA Inc. said it will receive up to $1 billion from private-equity firm Warburg Pincus LLC.

Earlier this fall, as banks disclosed a first round of write-downs due to subprime problems, some investors expressed optimism that the worst was over -- that banks had used the third quarter as an opportunity to clean up their balance sheets. But the continuing erosion of the value of the mortgage securities now appears to be bringing another round of pain.

UBS, which had already taken a $4.4 billion third-quarter write-down, said that as mortgage data worsened, it changed the way it fed data into its model for valuing mortgage securities. Among other things, it began factoring in higher projections of homeowner defaults and comparing its loss projections with indexes that track the value of mortgage securities. It concluded that it needed to assign a lower value to its holdings.

UBS's decision to sell as much as 12.4% of the company to Singapore and the Middle Eastern investor for $11.5 billion is the latest in a string of deals in which state funds or banks in Asia and the Middle East have taken stakes in Western financial firms. Government "sovereign-wealth funds" have invested about $46.8 billion in European and U.S. financial firms since January 2006, according to Morgan Stanley estimates. The UBS deal comes just a few weeks after Citigroup Inc., also hobbled by subprime problems, received a $7.5 billion investment from the Abu Dhabi Investment Authority, which will ultimately own a 4.9% Citigroup stake.

"It is a further sign of how the balance of the world economy is changing," says Gerard Lyons, chief economist at Standard Chartered PLC in London. "Also it is a reflection of the current fragile state of the financial sector in the West."

At the heart of UBS's problems are collateralized debt obligations, or CDOs. These complex securities are created when pools of debt, some of it tied to subprime mortgages, are sliced into pieces carrying different levels of risk and return, then sold to investors. UBS's exposure is through a combination of internal, or proprietary, trading positions, as well as its underwriting business.

Like other banks, including Citigroup and Merrill Lynch & Co., UBS ended up with CDO slices considered the safest. But in recent weeks, banks have had to write down even those senior slices. Merrill Lynch and Morgan Stanley also took write-downs on such securities.

Using computer models to figure out how much such securities are worth is an inexact science. November mortgage data showed that mortgage delinquencies and defaults were increasing, which contributed to UBS's decision to take a large write-down.

Merrill, which has $15.2 billion in CDO exposure remaining, could also need to take a further write-down, as could Morgan Stanley, according to analysts. Merrill already disclosed a third-quarter write-down of $7.9 billion, and it has $20.9 billion in remaining exposures to CDO assets and subprime mortgages. Morgan Stanley has already taken a hit of $3.7 billion in the first two months of the fourth quarter, which could grow based on its $6 billion in remaining subprime and CDO exposure.

In a speech to Morgan Stanley employees last Monday, Chief Executive John J. Mack said the firm is still trying to clarify the extent of the subprime losses. The subprime losses, he said, aren't easy to quantify because the markets keep changing. He said the firm expects to have a better read in the next week and a half.
[From East to West]

Merrill Lynch and Morgan Stanley declined to comment.

As U.S. homeowner-default data worsened in recent weeks, it became clear that UBS might need to mark down its subprime assets further, which could in turn put pressure on its capital base. Starting about two weeks ago, it approached a handful of potential investors, says one person familiar with the situation. The Middle East was an obvious place to look, because many Gulf states and their ruling families have money at the Swiss bank. Asia also made sense because UBS's investment bank is active there.

UBS Chairman Marcel Ospel called Singapore government officials he knows, according to another person familiar with the matter. The Asian city-state is an increasingly important market for UBS's core business of private banking for wealthy individuals. It took only about a week to put together the deal. The Government of Singapore Investment Corp. agreed to invest 11 billion Swiss francs ($9.75 billion) for a stake that could range from 7.3% to 10.5%, depending on the terms of the convertible-stock purchase. The deal makes Singapore UBS's largest shareholder.

UBS didn't disclose the name of the second investor, which it said will invest two billion Swiss francs for a stake of between 1.3% and 1.9%. One person familiar with the deal identified the second investor as one based in Saudi Arabia.

The bank is continuing to talk with other investors around the globe in an effort to raise additional funds, Mr. Ospel said yesterday.

For sovereign-investment funds, investing in banks and financial institutions is attractive because of their depressed stock prices. UBS shares, for example, are down 24% this year. Such deals also are opportunities to link with firms offering expertise in financial services such as private banking.

UBS joins a growing list of Western banks, including Barclays PLC and HSBC Holdings PLC, that have received capital injections from Asia and the Middle East this year. The sovereign funds "are really smart and are getting to see a huge number of opportunities around the globe at the moment," says Guy Cornelius, a managing director in Lehman Brothers Holding Inc.'s fixed-income department. "They see so many opportunities because they have the best growth in capital right now, are highly sophisticated and know that they can be in the driving seat."

Such deals, however, could spark more governmental inquiries in the U.S. and Europe. Last month, the U.S. Senate Committee on Banking, Housing and Urban Affairs held a hearing on sovereign-wealth funds. In addition, the Group of Seven leading industrial nations is taking steps to address the increasing influence of sovereign-wealth funds. G7 officials are concerned the funds may become a source of volatility in financial markets or cause national-security problems if they seek stakes in companies that are sensitive from a national-security standpoint.

Zurich-based UBS, formed from the 1998 merger of SBC Corp. and Union Bank of Switzerland, has about 83,000 employees and is one of the largest wealth managers in the world. Last year, it reported a net profit of 12.26 billion Swiss francs. But it has struggled with its identity in recent years. It pushed aggressively into investment banking, but at times its investment bankers chafed at the Swiss bankers' historically conservative culture. It reached a boiling point earlier this year when several high-level investment bankers left.

Soon after, losses began to mount at UBS's internal hedge fund, Dillon Read Capital Management. Chief Executive Marcel Rohner is now pulling back in some areas of investment banking, cutting bankers in fixed income and toughening its lending requirements to hedge funds and leveraged-buyout houses.

UBS has never posted a full-year loss, mainly due to the strength of its wealth-management operations, which in 2006 accounted for about 40% of the company's profits.

UBS's holdings tied to subprime mortgages eroded its core "tier 1" capital to about 10.6% at the end of September and came close to falling below a UBS internal target of keeping capital in double-digit figures. Traditionally, the bank has tried to maintain a high level of capital relative to peers because some of its wealth-management clients tend to be sensitive about its financial health, the bank said. The capital-raising measures announced yesterday will raise the bank's tier 1 capital to 12%, the company said in a statement.

In recent weeks, as the mortgage data deteriorated, the bank made changes to the way it crunched the numbers, including lowering the time it assumed it would take for a loan to default.

Mr. Ospel said UBS decided to "calibrate our models to an extreme distressed scenario." That ultimately led to the write-down.

"This is a very bleak outlook" for the U.S. housing market, Mr. Rohner said.

Washington Mutual Will Take $1.6 Billion Writedown

By Elizabeth Hester(Bloomberg)

Washington Mutual Inc., the biggest U.S. savings and loan, will write down the value of its home- lending unit by $1.6 billion in the fourth quarter and cut about 6 percent of its workforce as mortgage-market losses increase.

Washington Mutual, led by Chief Executive Officer Kerry Killinger, also slashed its quarterly dividend to 15 cents a share from 56 cents and forecast a loss for the quarter, according to a statement yesterday from the Seattle-based bank. Provisions for bad loans will be $1.5 billion to $1.6 billion, more than the $1.3 billion the company previously predicted. It plans to shutter 190 of 336 home-loan centers.

Fitch Ratings and Moody's Investors Service Inc. lowered Washington Mutual's credit rating, citing the firm's deteriorating mortgage assets. The bank has lost 56 percent of its market value this year, the worst performance in the 24- member KBW Bank index, amid declining U.S. housing prices and record home loan delinquencies. Washington Mutual said it plans to sell $2.5 billion of convertible stock to shore up capital.

``They're clearly concerned the industry will stay in a negative mode for an extended period,'' said Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida. ``The fact they're laying off so many people indicates they're concerned this is not just a one-time event.'' He rates the stock ``market perform.''

Washington Mutual fell 10 percent to $17.90 as of 11:40 a.m. today in Frankfurt trading. The stock rose 4.5 percent to $19.88 in New York yesterday before the announcement.

2010 Recovery

Fitch downgraded the firm's rating to A- from A, because of ``worsening asset quality,'' and ``extremely challenging conditions in the U.S. residential mortgage market.'' Moody's cut its rating two levels to Baa2 from A3. ``Credit losses from WaMu's mortgage operations will be noticeably higher than previously estimated,'' and the company's profitability won't ``begin to recover'' until 2010, Moody's said in a statement. Washington Mutual offered a bleak assessment of the mortgage market, estimating that industrywide home loan originations will probably shrink 40 percent in 2008 to $1.5 trillion, down from about $2.4 trillion this year. The company said it plans to cease lending through its subprime mortgage channel, and predicted that its provision for bad loans in the first quarter of next year will be $1.8 billion to $2 billion.

UBS, Citigroup

Mortgage losses have driven some of the world's biggest lenders to seek cash infusions. UBS AG, Europe's largest bank by assets, said yesterday that it would write down its subprime investments by $10 billion and raise 13 billion Swiss francs ($11.5 billion) by selling stakes to investors in Singapore and the Middle East. Citigroup Inc., the largest U.S. bank by assets, said last month that it would get $7.5 billion from the emirate of Abu Dhabi. Countrywide Financial Corp., the biggest U.S. mortgage lender, sold $2 billion of preferred stock to Bank of America Corp. in August. Washington Mutual said it would eliminate 2,600 jobs in its home-loans unit, or about 22 percent of that division. The remaining job cuts will come from corporate and support staff. The reductions will cost the bank about $140 million in the fourth quarter, according to the company's statement. The restructuring is expected to be completed by March 31, the bank said in a separate regulatory filing yesterday. Washington Mutual also plans to close WaMu Capital Corp., its broker-dealer business, as well as its mortgage banker warehouse lending unit. Lehman Brothers Holdings Inc., Morgan Stanley, Credit Suisse Group and Goldman Sachs Group Inc. are managing the convertible stock sale, Washington Mutual said.

Black Given Prison Term Over Fraud


CHICAGO, Dec. 10 — In the months since his convictions in July on fraud and obstruction of justice charges, Conrad M. Black, the fallen press baron who once presided over the world’s third-largest newspaper empire, was not above poking fun at himself as he waited to see how long he would spend in prison.

He received his answer Monday as Judge Amy J. St. Eve of United States District Court sentenced Mr. Black to 6 1/2 years in prison on three fraud charges and one charge of obstruction of justice for removing 13 boxes of documents from the Toronto offices of his media company, Hollinger International, an infraction caught on videotape.

“Mr. Black, you have violated your duty to Hollinger International and its shareholders,” Judge St. Eve told Mr. Black. “I frankly cannot understand how someone of your stature could engage in the conduct you did.”

While the sentence means Mr. Black could be nearly 70 when he is released, the amount of time he received was much less than hoped for by prosecutors, who at one time sought a sentence of 24 to 30 years.

Mr. Black, who will most likely serve his sentence at a federal prison camp at Eglin Air Force Base about 500 miles from his home in Palm Beach, Fla., was allowed to remain free on bail until March 3.

On the sidewalk outside the courthouse, he told the throng of reporters, “I think the fact we’re appealing speaks for itself.”

In some ways, Mr. Black is just another in a long line of white-collar criminals sentenced for corporate fraud. In other ways, he was — as he himself might say in casual conversation — sui generis.

Instead of keeping a low profile after his conviction, Mr. Black became even more public, if possible, in the last few months. He managed to publish and publicize a 1,152-page biography, “Richard M. Nixon: A Life in Full,” that contained at least one error: the brief author’s biography says that Mr. Black divides his time between London and Toronto. By the time the book was published, he had already turned over his passport and spent most of his time holed up his mansion in Palm Beach.

Still, that did not prevent Mr. Black from doing television interviews or from participating in a Toronto book signing, thanks to a high-tech device called the LongPen, which allowed him to sign books remotely. During the signing, one questioner even suggested a parallel between that video that sank Mr. Black and the recordings that doomed the Nixon presidency.

In a segment for the satirical Canadian television show “The Rick Mercer Report,” Mr. Black did his best Martha Stewart impression, teaching viewers how to properly wax a maple leaf for decorating. Pressing a maple leaf between two of the hefty biographies he has written, Mr. Black said, “Here we have a perfectly waxed maple leaf, a great solace to everyone and especially to those who, for complicated reasons, can’t at first hand observe the changing of the seasons this autumn in Canada.” (The segment has a second life on YouTube.)

But those fun and games are now largely over. It will now be almost seven years until Mr. Black, who was barred from leaving the United States after his conviction, can return to his native Canada.

In July, nearly four years after the case began, Mr. Black was convicted on four charges — three fraud charges stemming from taking improper noncompete fees and an obstruction of justice charge for removing boxes of documents from his Toronto office, an infraction that was caught on videotape. Mr. Black will have to pay a fine of $125,000.

Mr. Black’s downfall began in November 2003 when the board found that he and other executives had improperly taken about $32 million in payments. The jury, however, found that Black improperly gained $6.1 million, a figure he must now forfeit. Much of the case was centered on noncompete payments from selling newspapers that should have gone to shareholders but instead lined the pockets of Mr. Black and several other executives, who were to be sentenced later in the afternoon.

Mr. Black, who once declared he would “not re-enact the French Revolutionary renunciation of the rights of the nobility” when criticized for using shareholder money to pay for a vacation to Bora Bora, and charged a lavish birthday party for his wife at La Grenouille restaurant in New York to his company, was acquitted of charges stemming from those incidents.

The sentencing hearing lasted for more than two hours, as Mr. Black’s defense team cited letters testifying to Mr. Black’s character from friends like Elton John (whose AIDS foundation received a donation from Mr. Black), and the political columnist George F. Will, a longtime friend who wrote of Mr. Black, “He loves this country with a deeply informed passion.”

Mr. Black’s sentencing consultant, Jeffrey Steinbach, even mentioned a letter from a man, not famous, who was once drunk at a party and got a ride home from Mr. Black.

When Eric Sussman, the prosecutor, responded, he noted that the donation to Mr. John’s foundation came from the coffers of The Daily Telegraph.

“Does Elton John really know Conrad Black?” Mr. Sussman said. “The fact of the matter remains that when Mr. Black was asked to go in to his pocket he said no.”

Mr. Black, often described as a millionaire who lived like a billionaire, built a single newspaper in Sherbooke, Quebec, which he bought in 1976, into what was at one time the third-largest newspaper company in the world. Its flagship properties were The Daily Telegraph and The Chicago Sun-Times.

Friday, December 7, 2007

Bush's Bad Mortgage Medicine

By Liz Moyer (Forbes)

The Bush Administration's plan to rescue the housing market and keep the economy from slipping into recession took flak yesterday for freezing interest rate hikes for a mere fraction of subprime, adjustable-rate borrowers. But there's a bigger risk: It could deepen and lengthen the credit crisis.

According to analysis by Barclays Capital, the "freezer-teaser" plan applies to just 240,000 subprime loans. The Mortgage Bankers Association reports the number of subprime adjustable rate mortgages at 2.9 million.

It also won't help the 16% of subprime borrowers who are already delinquent or in default, and it won't help millions of other homeowners who either will be deemed able to pay the higher rates when they adjust, starting in January, or who have the unhappy circumstance of having a house worth less than their mortgage or a loan that has already reset to the higher rates.

President Bush, along with Treasury Secretary Henry Paulson and Housing and Urban Development Secretary Alphonso Jackson, outlined other proposals Thursday that are meant to help the 2 million borrowers facing sharply rising rates on their adjustable-rate mortgages beginning next month. The plan includes refinancing some of the borrowers into private, fixed-rate mortgages, or putting them into Federal Housing Administration loans.

The loan modification, or rate freeze, would apply to a limited subset of subprime borrowers who meet a series of criteria, not least of which is that they must have paid their loans on time. Also, the freeze applies to loans taken between January 2005 and July 2007, excluding other adjustable loans that have already reset to higher rates.

The expected backlash to the plan started immediately after the Administration announced it. Housing advocates said it leaves millions of struggling borrowers at risk of foreclosure. Others decried it as a shameful bailout of irresponsible lenders and borrowers.

"President Bush's plan may make good politics, but it is terrible economics," said Edward Ketz, an accounting professor at Penn State University. "It punishes those who have acted prudently and rewards bad decisions by homeowners who bought what they could not afford. It gives incentives for future homebuyers to act rashly, because they may believe Washington will rescue them from error and greed."

Perhaps more significantly, Ketz and others warn the plan could further choke off the credit markets and result in higher mortgage rates in the long run.

Declining values in mortgage securities have plagued banks and investors since the summer, with banks writing off some $70 billion in mortgage and credit securities in the last three months. Modifying the terms of the underlying mortgages for some of these securities will mean payments even lower than the amounts investors had counted on when they bought the mortgage pools in the first place.

Mortgage servicers either originate their own loans or buy loan-servicing rights to them. The loans are sold to banks, which then chop them up and repackage them in securities, complete with ratings and tranches to appeal to different types of investors. These investors buy the securities expecting certain performance characteristics, including payment flows from the borrowers of the underlying loans.

If an investor can't count on the terms of a mortgage security at the time he buys it, he has less incentive to continue investing in them in the future. That would reduce demand for mortgage paper, in addition to embedding a risk premium in the rate for those investors still willing to take the gamble.

Investor demand for mortgage-backed securities--and banks' eagerness to buy loans, package and sell them to this hungry crowd--helped create the incredible run-up in the mortgage market over the last three years. Paulson's plan does not protect the investors of these securities--increasingly, as it turns out, public pensions and other public funds.

In a report Thursday, Standard & Poor's said freezing rates without assuring against further defaults "would have a negative impact on the ratings of certain U.S. first-lien subprime" mortgage securities. "Declining investor participation means reduced capital and liquidity, which may affect homeownership and borrowing opportunities," the company said.

In other words, this plan could make the whole situation worse, not better.

Secretary Paulson has been eager to show he is trying to alleviate the crisis, though many say he and the rest of the Administration have been slow to make a move. Mortgage payment delinquencies hit a 20-year high in the third quarter, according to the Mortgage Bankers Association, as borrowers were unable to refinance or sell their homes to get out of a credit pinch. The percentage of loans with payments more than 30 days late, including prime mortgages, rose to 5.59%, its highest level since 1986.

"Politicians want to look like they are doing something while not doing something," says Joseph Mason, a professor at Drexel University who studies banking regulation and capital markets. "This plan fits that perfectly."

What it also does is pass the problem on to the next president, who will be elected next fall, well before the freeze on those mortgages lifts--and possibly before the markets turn around. Despite a strong showing in many financial stocks Thursday after the plan was announced, analysts forecast slower growth for banks as they come to terms with rising credit costs and a slowdown in their bond divisions.

University of Maryland business professor Peter Morici puts is this way: "The Treasury seems obsessed with what investment bankers do best in a pinch--short-term workouts that punt difficulties into the high grass."

Wednesday, December 5, 2007

Subprime Rate Five-Year Fix Agreed by U.S. Regulators

By Alison Vekshin (Bloomberg)

Federal regulators and U.S. lenders agreed to freeze interest rates on subprime mortgages for five years to stem rising foreclosures, said a person familiar with the measure.

President George W. Bush will announce the accord tomorrow, which was negotiated by officials including Treasury Secretary Henry Paulson. Paulson will hold a press conference tomorrow at 1:45 p.m. in Washington to discuss the plan, Treasury said in a statement.

``Fixing the reset period is an important action, and it's good that everyone now seems to be pushing in the same direction,'' said Michael Barr, a professor at the University of Michigan Law School and a former aide to Robert Rubin, who was President Bill Clinton's Treasury secretary from 1995 to 1999. ``Now the question is what additional steps are required to keep people in their homes and avoid foreclosures.''

Paulson finalized the deal as the housing recession entered a third year, threatening the economic expansion.

More than 30 percent of borrowers with subprime adjustable- rate mortgages are behind on their payments before their loans reset higher and 775,000 homes with $143 billion of mortgage debt will go into foreclosure over the next two years, according to estimates from analysts at Credit Suisse Group.

Dates, Scores

The freeze may apply to mortgages issued between January 2005 and July 2007 that are currently scheduled to reset between January 2008 and July 2010, said a person who has seen a draft proposal. Borrowers whose credit scores are below 660 out of a possible 850 and haven't risen by 10 percent since the loan was issued will be given priority.

Those with scores above 660 will be more closely scrutinized to determine whether they are eligible or must continue making payments under existing terms, said the person.

Officials and company executives spent much of the past week negotiating over how long to extend starter rates on subprime mortgages, which are usually given to people with poor or incomplete credit histories.

Most U.S. banks use FICO credit scores, a product of Minneapolis-based Fair Isaac Corp., to judge a borrower's ability to repay loans. Scores are correlated to interest rates banks are willing to charge.

Republican Briefing

Paulson briefed House Republicans today on the plan in a meeting in Washington.

Representative Adam Putnam of Florida, the chairman of the House Republican Conference, said yesterday his interest in Paulson's efforts rose since he got calls from Florida officials about a state investment pool for local governments hit by debt downgrades. The state board froze withdrawals Nov. 29 to stem a run on assets. Rising mortgage defaults spurred billions of dollars in losses on securities backed by the loans.

``Florida in general increases my thinking that we need to look at the reasons to help mitigate the subprime meltdown,'' Putnam said.

Other Republicans expressed skepticism today.

``My biggest concern is that there are a lot of Americans who are making their mortgage payments, they are current, and the benefit won't go to them,'' Representative Spencer Bachus, the top Republican on the House Financial Services Committee, told reporters after the meeting with Paulson today.

Democratic Senator Hillary Clinton of New York, a candidate for her party's presidential nomination, reiterated today her support for a five-year freeze. Speaking at New York's Nasdaq stock exchange, she said ``Wall Street helped create the foreclosure crisis, and Wall Street needs to help us solve it.''

Litigation Threat

One challenge will be to craft a deal minimizing lawsuits from investors in bonds backed by the mortgages being rewritten, analysts said. The longer that lower rates are extended, the more risk posed to the bonds' values. Republican Representative Mike Castle of Delaware has proposed legislation offering a ``safe harbor from legal liability'' to mortgage servicers.

``Within the contracts, there is room for the servicers to work with borrowers to minimize the loss for the investor,'' said Wayne Abernathy, executive director of financial-institutions policy at the American Bankers Association in Washington and a former Treasury assistant secretary.

About 100,000 subprime loans will jump from their discounted initial rates every month for the next two years, UBS AG estimates. American home foreclosures almost doubled in October from a year earlier as subprime borrowers failed to make higher payments on adjustable-rate mortgages, Irvine, California-based RealtyTrac Inc. said on Nov. 29.

Extending Starter Rates

These mortgages usually begin with a rate of 7 percent to 9 percent and then reset to between 11 percent and 13 percent. ``What we are talking about is having these loans modified, so they continue for a longer period of time at the starter rate,'' John Reich, director of the Office of Thrift Supervision, said in an interview in Washington Dec. 3.

Treasury spokeswoman Jennifer Zuccarelli declined to comment on specifics of the proposal.

Paulson and Fed Chairman Ben S. Bernanke are concerned that falling home values will choke consumer spending, which has driven economic growth since the last recession ended in 2001. By heading off further deterioration in the $11.5 trillion mortgage market, officials are also aiming to stem losses on securities backed by subprime loans.

The Bush administration's efforts to forge an agreement have become more urgent as the economy falters after a third-quarter spurt. Growth may cool to an annual rate of less than 1 percent in October to December, economists say, following an expansion of 4.9 percent in the prior three months.

No `Silver Bullet'

``The number of subprime-mortgage resets is going to increase dramatically next year, and we need to make sure the capacity is there to handle it,'' Paulson said in a speech at a Dec. 3 housing conference in Washington. While no ``silver bullet,'' rewriting a set of subprime loans would ``clearly'' ease the risks from the housing slump, he said in an interview.

Sheila Bair, chairman of the Federal Deposit Insurance Corp., has been working with Paulson and said she favors extending introductory rates for between five and seven years.

Fannie Mae Chief Executive Officer Daniel Mudd told reporters at the OTS event that a cap of at least two or three years ``seems to make sense.''

Paulson said in his speech that the government is focused on helping subprime borrowers who can afford the introductory mortgage rate but not the adjusted one. The plan ``does not, and will not, include spending taxpayer money on funding or subsidies for industry participants or homeowners,'' he said.

Monday, December 3, 2007

AT&T to leave pay phone business (Bloomberg News, Reuters, The Associated Press)

SAN ANTONIO, Texas: AT&T said Monday that it would leave the rapidly shrinking pay phone business by the end of next year, getting out before it becomes unprofitable. AT&T will sell 65,000 pay phones, located in prisons and in public places, within its original 13-state area before the end of 2008, a spokesman, Michael Coe, said. AT&T decided to leave pay phones, a tiny segment for the telecommunications company that has 67.3 million wireless subscribers, before they reach the point of being unprofitable, he said. Company executives said they expected the pay phones to be purchased by independent operators.

"This business has been shrinking rapidly," said Coe, who said AT&T had already begun phasing out its operations by not renewing contracts as they expired. "We've known for a while that we would exit." The pool of U.S. pay phones has decreased in the past decade to one million from 2.6 million, the company said. BellSouth, which AT&T acquired at the end of 2006, already has left the business, as has Qwest Communications International.

The first pay phone, which had an attendant who took callers' money, was installed in 1878, and the first coin-operated phone was placed in a bank in Hartford, Connecticut in 1889. Both devices were operated by companies that were predecessors to AT&T, Coe said The number of wireless subscribers has quadrupled in the past decade and about 80 percent of people in the United States have mobile phones, according to CTIA-The Wireless Association, an industry group. AT&T itself added two million mobile subscribers in the third quarter to reach its current total and help make it the largest American phone company. Coe would not disclose how much AT&T expected to save by dropping pay phone operations, saying only that it represented "a very small part of our overall business."

Verizon Communications, the second-biggest U.S. carrier, still operates pay phones, a spokesman for the company, Robert Varettoni, said. The use of pay phones has been declining in much of the developed world because of the popularity of mobile phones. But some complain that ending pay phone service restricts access of low-income, low-credit consumers to communications.

Friday, November 30, 2007

Bernanke Adds to Rate-Cut Hints

By SUDEEP REDDY (Wall Street Journal)

Federal Reserve Chairman Ben Bernanke, in a signal he is open to cutting interest rates, said the latest bout of turbulence in financial markets may put more strain on the economy. The housing downturn and related mortgage turmoil are adding "greater than usual" uncertainty to the economic outlook, Mr. Bernanke said, in prepared remarks last night in Charlotte, N.C. "These developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors."

Fed officials are increasingly paving the way for a rate cut at their Dec. 11 meeting, barring a significant improvement in either market conditions or economic data. To determine their next move, Mr. Bernanke said Fed policy makers would be closely watching a stream of data arriving in the next two weeks -- including readings due out today on personal income and spending and next week's report on the November job market.

"I expect household income and spending to continue to grow, but the combination of higher gas prices, the weak housing market, tighter credit conditions, and declines in stock prices seem likely to create some head winds for the consumer in the months ahead," he said. He also reiterated worries that surging costs of food and energy, along with the weak dollar, could raise the public's inflation expectations and erode price stability. Inflation has remained relatively tame in recent months.

Mr. Bernanke's comments echoed remarks by Fed Vice Chairman Donald Kohn on Wednesday that led markets to conclude the Fed would cut interest rates to offset the risks posed by mortgage-related troubles in the credit market. Investors expect the Fed to cut interest rates by at least a quarter percentage point next month from the current 4.5%, and markets are putting the odds of a half-point cut at 50%. Further easing, especially putting a larger cut on the table, could draw opposition from some policy makers. But Fed officials are grappling with an economy struggling under the weight of tighter lending standards and a depressed housing market.

The Commerce Department said yesterday that new-home sales rose 1.7% in October, but the median price of a new home in October was down 13% from a year earlier, to $217,800. Many economists expect economic growth this quarter to come in below 1%, and some are forecasting a slight contraction. Underscoring the spreading weakness, new claims for unemployment insurance last week rose a seasonally adjusted 23,000, to 352,000 -- their highest level since February -- an indication the labor market is beginning to deteriorate. The four-week average of new claims, a more accurate gauge of the underlying trend, increased 5,750, to 335,250, the highest level since March, the Labor Department said.

Yesterday, the government raised its estimate of the economy's growth pace in the third quarter to an annualized 4.9%, a full percentage point above its previous estimate. But that did nothing to change assessments that growth is grinding nearly to a halt this quarter. The revision of the third quarter's gross-domestic-product growth, which was widely anticipated, reflects upward revisions in the tally of exports and inventories, which could portend production cutbacks. The third-quarter economy was "helped by the fact that the credit crunch was barely under way when the majority of this growth data was collected," said economist Rob Carnell of ING Bank. He said more-timely data "indicate a much broader weakening of the economy and also few signs of inflation outside food and energy."

The Commerce Department also reported a decline in a measure of corporate profits in the third quarter, with cash flow falling for the third quarter in a row. The Fed's favored inflation gauge -- the price index for personal-consumption expenditures other than food and energy -- was up an unrevised 1.8% in the third quarter from last year, higher than the second quarter's 1.4%, but within the comfort zone of some Fed officials.

Tuesday, November 27, 2007

Fannie, Freddie loan limits kept at current level

by Neil Adler Contributor (Baltimore Business Journal)

The regulator for Fannie Mae and Freddie Mac said Tuesday that the maximum conforming loan limit in 2008 for single-family mortgages purchased by the two mortgage-finance companies will remain at this year's level of $417,000 for one-unit properties in most of the U.S.

Higher limits apply to Alaska, Hawaii, Guam and the U.S. Virgin Islands, as well as to properties with more than one unit.

The conforming loan limit determines the maximum size of a mortgage that Washington, D.C.-based Fannie Mae or McLean, Va.-based Freddie Mac may buy or guarantee. Both companies purchase residential mortgages and also package loans into mortgage-backed securities for sale to other investors.

By law the maximum conforming loan limit is based on the October-to-October change in the average house price in the Monthly Interest Rate Survey of the Federal Housing Finance Board. This board reported the decline in the average price was $10,685, or 3.49 percent, from $306,258 in October 2006 to $295,573 in October 2007. The combined two-year decline is now 3.65 percent.

"While the house price survey data used in determining the conforming loan limit show a decline over the past year, as previously announced and consistent with the proposed new conforming loan limit guidance, the level will remain at $417,000 for the third straight year," James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), said in a statement.

U.S. lawmakers have sought to increase the conforming loan limit for the two mortgage finance giants, with the hope that Fannie Mae and Freddie Mac could provide some liquidity to the mortgage market, which continues to struggle from the fallout in the subprime sector.

Citigroup to sell $7.5 billion stake to Abu Dhabi

By Dan Wilchins and James Cordahi

NEW YORK/DUBAI (Reuters) - Citigroup Inc is selling up to 4.9 percent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and the resignation of its chief executive.

The capital injection will shore up Citi's balance sheet, which has been hurt by some $6.8 billion of writedowns and losses in the third quarter, and the potential for another $11 billion in the fourth quarter. Citi is paying a high price for the capital injection by selling mandatory convertible securities to Abu Dhabi which pay a fixed coupon of 11 percent. That is above the average yield on U.S. junk bonds, which is 9.4 percent according to Merrill Lynch data. Analysts at Royal Bank of Scotland said in a note that Citigroup was paying a "high price," but that the convertible notes would help boost the bank's core capital.

The sale to the $650 billion Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, may also signal the freefall in U.S financial stocks is close to ending, analysts said. "Citi is big, it's widely followed, and when people see confidence in it, it should mean something," said Bo Brownstein, an analyst covering financial stocks at Cambiar Investors in Denver, Colorado. The dollar rose against the yen on the news, and Japanese bank stocks also rallied. In Tokyo trading, Citi shares fell 4.2 percent for the day, but had been trading even lower before news of the Abu Dhabi deal.

Family ruled Abu Dhabi -- whose citizens number no more than 400,000 -- will be Citi's largest shareholder. The investment reflects the increasing financial might of oil-producing countries, which have benefited from a five-fold increase in the price of crude oil during the last six years.

Gulf investors have announced more than $70 billion of foreign acquisitions this year, more than in the previous two years combined.

Dubai International Capital, a private equity firm owned by the ruler of Dubai, said on Monday it made a "substantial investment" in Sony Corp (Tokyo:6758.T - News), while a separate Abu Dhabi entity earlier this month bought a $622 million stake in U.S.-based chip maker Advanced Micro Devices Inc.

Gulf investors such as the state-owned Investment Corporation of Dubai have expressed interest in taking advantage of plummeting U.S. financial stock prices to buy. Shares of Citigroup have plunged 42.5 percent during the last five months. Merrill Lynch & Co, which wrote down $8.4 billion of assets in the third quarter, is down 40.6 percent during the same period. Abu Dhabi Investment Authority manages the surplus revenues of the government of Abu Dhabi, the world's sixth-largest oil exporter. Standard Chartered estimated in September its assets were worth $650 billion. Both Dubai and Abu Dhabi are members of the United Arab Emirates federation. Sir Win Bischoff, Citi's interim chief executive said in a statement on Monday: "This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business."

State-run funds are keen for stakes in global banks, which can benefit from the development of emerging markets, a person familiar with the funds said. Citi operates in over 100 countries, and has boosted its investments in emerging markets over the last 12 months.


Acquisitions in general have taken up some $25 billion of Citi capital over the last year, according to CIBC World Markets analyst Meredith Whitney. Combined with writedowns in the third quarter and expected future writedowns, Citi may have to cut its dividend to replenish its capital, Whitney wrote on October 31. She estimated that Citi would need another $30 billion of capital. Citi said on November 4 it does not plan to cut its dividend. On the same day, Citi said it may take $8 billion to $11 billion of additional writedowns in the fourth quarter, and that its chief executive Charles Prince was resigning. Citi is also taking early steps to cut staff and reduce costs, according to press reports. Citi said earlier this year it was cutting about 5 percent of its staff, or 17,000 jobs.

On Monday, Citi shares closed at $29.80 on the New York Stock Exchange, falling below $30 for the first time in more than five years amid mounting concerns of further losses and writedowns. Citi's market value has fallen by more than $100 billion this year. U.S. Senator Charles Schumer, who opposed Dubai Ports World's plan to purchase assets at six U.S. ports and raised questions about Borse Dubai's plans to swap stakes with Nasdaq, said the Citi transaction will bolster the bank's competitiveness and "help preserve New York's status as the world's financial center."

After conversion, Abu Dhabi's stake would be larger than the current holding of Saudi Prince Alwaleed bin Talal, who is one of Citi's largest shareholders. Prince Alwaleed acquired his Citi stake in 1991 when the bank struggled with Latin American loan losses and the U.S. real estate market collapse, and his shares in the banks were worth some $6 billion earlier this month. Last month, Bear Stearns Cos Inc and China's CITIC Securities Co agreed to swap stakes and form a broad alliance. Bear Stearns had also been battered by the subprime mortgage crisis, and many investors had hoped its tie-up with a foreign bank would include a cash infusion.


The Abu Dhabi Investment Authority will have no special rights of ownership or control over Citi and no role in the management or governance of the bank, including no right to name board members. The investment group is buying mandatory convertible securities that can be converted into Citi stock in 2010 and 2011 at prices ranging from $31.83 to $37.24 per share. The number of shares it receives will adjust based on Citi's share price, with a higher share price giving the investor fewer shares. The securities will also pay a fixed coupon of 11 percent per year, payable quarterly. That may seem steep, but after accounting for the fact that 60 percent of that coupon is tax-deductible, the coupon rate is similar to the dividend rate on Citi's shares, a person familiar with the matter said. The investment is expected to close within the next few days, Citi said. Saeed al-Hajeri, executive director the Abu Dhabi Investment Authority, could not immediately be reached for comment.

Sunday, November 25, 2007

Fannie and Freddie pullback would devastate economy

By Patrick Rucker - Analysis

WASHINGTON (Reuters) - If anyone thinks the current U.S. housing downturn is bad now, things would get far worse if Fannie Mae or Freddie Mac to suddenly stop buying mortgages, a move that would drive up the costs of home loans and devastate the economy. Fannie Mae and Freddie Mac, the nation's two largest sources of mortgage finance respectively, recently reported combined losses of $3.5 billion. Borrowing costs have skyrocketed and investors have erased billions of dollars in each company's equity market capitalizations. Few think the two companies are likely to pull out of the housing market, even temporarily. However, if the stream of home loan failures were to force the companies to suspend new mortgage investments, the market for mortgage bonds would "freeze up," said Tom Sowanick, chief investment officer of Clearbrook Financial LLC in Princeton, New Jersey.

Already, the housing slowdown has subtracted about 1 percentage point from growth in inflation-adjusted gross domestic product so far this year. Taking Fannie Mae and Freddie Mac out of the home loan business would flatten the already listless real estate market, said Robert MacIntosh, chief economist with Eaton Vance Management in Boston. "It would be devastating," he said. "Why would anyone consider buying a house if the two biggest ultimate credit givers and lenders to the housing industry shut down?"

While Fannie Mae and Freddie Mac do not offer credit directly to borrowers, they do buy home loans and repackage them as investments for Wall Street. The companies also buy mortgages to hold in their money-making investment portfolios. Both steps make the market more liquid by taking long-term investments off a lender's books.

Fannie Mae and Freddie Mac own or guarantee a combined $4.8 trillion of U.S. home mortgage loans of more than 40 percent of the total outstanding. That size, in part, explains why Fannie Mae and Freddie Mac are likely to survive the current housing and credit downturns. Another factor is that these companies were relatively cautious during the recent housing boom and did not make big bets on the risky subprime market, which involves borrowers with damaged credit. While Fannie Mae and Freddie Mac expect the number of failing mortgages on their books to double, that still represents less than 0.12 percent of the home loans they guarantee for investors. And maybe most importantly, the companies benefit from their status as government-sponsored enterprises, which many investors treat as a guarantee of a federal bailout if either were to stumble.

Fannie and Freddie also have credit lines to the Treasury Department, which have never been tapped, fostering the perception that they are wards of Uncle Sam. The companies are simply so large and risk-averse that they set a standard for the industry that would be hard to replicate if they were to step away from the market, said Jim Vogel, who tracks the companies for FTN Financial in Memphis, Tennessee. "They are like the U.S. Treasury of the mortgage market," said Jim Vogel, who tracks the companies for FTN Financial in Memphis, Tennessee. "The general mortgage-backed security trades on the spread set in the Fannie and Freddie market."

If Fannie Mae and Freddie Mac were to step away from the mortgage investments, it would not only send the mortgage market into a devastating tailspin, but the broader market as well, which is why many observers say it simply will not happen.

"It would aggravate the liquidity crunch. The psychological impact would be huge. The GSEs have been seen as the backstop buyers for all types of mortgage paper," said Wan-Chong Kung, senior portfolio manager at FAF Advisors at Minneapolis. But most agree with MacIntosh when he says: "It would be devastating -- but I don't think that would happen at all, there is no chance of that." And any move away from the mortgage market would destroy their stock prices -- both of which are already trading at around 10-year lows. "Fannie Mae and Freddie stocks would collapse because there would be no growth prospects," for the companies, Sowanick added.

Dan Fuss, vice-chairman of Loomis Sayles, which manages $100 billion in fixed-income assets, said he doesn't believe Fannie and Freddie will stop buying mortgages. And he points out: "You need a public policy response to the housing crisis."

Tuesday, November 20, 2007

Feds Urge Vigilance on Toy Safety


Despite a record number of recalls this year, potentially dangerous toys remain on store shelves days before the start of the busy holiday shopping season, consumer groups warned Tuesday. Federal regulators, under fire for lax enforcement, urged shoppers to be vigilant.

The Consumer Product Safety Commission has worked closely with Mattel Inc and other manufacturers on recalls of millions of toys tainted with lead and other products, yet two consumer investigations released Tuesday cited possible violations, including sales of toys with small parts that could pose a choking hazard.

"Why is it we are the ones that are getting this information out to parents, and not the government and not the toy companies?" asked Charles Margulis, of the Center for Environmental Health.

In CPSC's annual toy safety message, Nancy Nord, acting head of the CPSC, sought to reassure parents that the agency was doing all it can to remove unsafe toys. She noted the Chinese government recently had signed agreements to help prevent lead-painted toys from reaching the U.S.

"Toys today are undergoing more inspection and more intense scrutiny than ever before," said Nord, citing CPSC's "daily commitment to keeping consumers safe 365 days a year."

Vallese left the door open to the possibility of several more CPSC recalls before year's end, declining to say if most dangerous toys had already been removed from store shelves given the recent spate of toy recalls. "When we find violations, we will announce them," she told The Associated Press.

Joan Lawrence, a vice president of the Toy Industry Association, said more recalls were probable given recent manufacturer retesting of products. "That's why it's so important for consumers to pay attention to recall notices," Lawrence said.

Among the biggest toy hazards cited by CPSC:

_Riding toys, skateboards and inline skates that could cause dangerous falls for children.

_Toys with small parts that can cause choking hazards, particularly for children under age 3.

_Toys with small magnets, particularly for children under age 6, that can cause serious injury or death if the magnets are swallowed.

_Projectile toys such as air rockets, darts and sling slots for older children that can cause eye injuries.

_Chargers and adapters that can pose burn hazards to children.

The series of announcements Tuesday, coming three days before the start of the busy shopping season, helped cap a year of harsh congressional criticism of CPSC enforcement following a number of recalls involving millions of lead-tainted toys and other products - the highest number of recalls ever due to product defects. The agency's staff has dropped from almost 800 employees in 1974 to an all-time low of about 400 employees now.

Both the House and Senate are now considering legislation to overhaul the product safety system by substantially increasing CPSC's budget, raising the cap on civil penalties for violations and giving the CPSC authority to provide quicker notice to the public of potentially dangerous products.

The measures also seek to ban officials at federal regulating agencies from taking trips financed by industries they oversee. Both Nord and her predecessor as chairman, Hal Stratton, accepted free trips worth thousands of dollars at industry expense.

In its 57-page annual survey released Tuesday, U.S. PIRG agreed that toys with small magnets as well as small parts that pose choking hazards create significant risks.

Between 1990 and 2005, at least 166 children choked to death on children's products, accounting for more than half of all toy-related deaths at a rate of about 10 deaths per year, the group said. Several times this year potentially dangerous toys were sold without the required warning labels of possible choking risks while the CPSC also has been slow to issue public warnings, U.S. PIRG said.

"The Consumer Product Safety Commission is a little agency with a big job it simply cannot do," said Ed Mierzwinski, the group's consumer program director. "Congress must give it the tools it needs to do that big job better."

In a four-day investigation of toys it purchased at stores such as Target Corp, Wal-Mart Stores Inc and The Disney Store, the Center for Environmental Health found that 9 out of the 100 toys it purchased had high lead levels of 900 parts per million or more.

Another six toys had levels higher than 100 parts per million, the approximate trace level that some consumer groups would like to see as the limit whether in paint, coatings or any toys, jewelry or other products used by children under 12.

On Monday, California Attorney General Jerry Brown sued 20 companies in state court, including Mattel Inc. and Toys "R" Us, claiming they sold toys containing "unlawful quantities of lead." The move follows major recalls of toys, lunch boxes, children's jewelry and other goods during the last year by CPSC.

Freddie Mac Posts a $2 Billion Loss


Turmoil in the housing sector continued to reverberate today across several parts of the industry, reinforcing the mood among investors that the downturn has not yet reached its bottom.

Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments. The company has been battered by a rising wave of foreclosures tied to subprime mortgage defaults and is now “seriously considering” cutting its stock dividend.

Freddie’s misfortune is particularly rattling because the company is considered to be protected by an implied government guarantee. There was no mention in this morning’s earnings release about an infusion of federal capital, though the company said it would seek counsel from Goldman Sachs and Lehman Brothers for its short-term efforts to shore up its reserves.

Shares of the company plummeted 29 percent, to $26.50, its lowest level in 11 years. Shares of its sister firm, Fannie Mae, dropped 25 percent.

“Without doubt, 2007 has been an extremely difficult year for the country’s housing and credit markets,” Richard F. Syron, the chairman and chief executive of Freddie Mac, wrote in a statement.

Mr. Syron was not alone in his lament. D. R. Horton, the nation’s largest home builder, reported a $50.1 million loss in its fiscal fourth quarter as the housing downturn pummeled its inventory, goodwill and land-use contracts. Lower demand and tighter lending standards have cut back the company’s business and caused many clients to cancel contracts.

“We expect the housing environment to remain challenging,” Donald R. Horton, the company’s chairman, said in a statement.

The subprime debacle also claimed another high-profile casualty: H&R Block’s chairman and chief executive, Mark Ernst, who said today he would resign amid the company’s difficulties with subprime exposure. Mr. Ernst had come under fire for the bungled sale of the Option One Mortgage Corporation, a company subsidiary that took heavy losses on risky loans.

His replacement as chairman will be Richard C. Breeden, the former chairman of the Securities and Exchange Commission, who was recently elected to H&R Block’s board after sharply criticizing Mr. Ernst. The chief executive slot will be temporarily filled by Alan M. Bennett, a former top executive at Aetna, the insurance company.

Home building data released today suggested that housing troubles will only worsen. Groundbreaking permits fell 6.6 percent in October to their lowest level in over 14 years, a sign that builders are cutting back on residential home projects. Permits have dipped nearly 25 percent since last October, to a seasonally adjusted 1.18 million annual rate, the Commerce Department said.

New residential construction grew slightly last month, rising 3 percent, to a 1.23 million annual pace. It was the first increase in four months, but the increase came mostly from a 44 percent leap in multifamily homes, like condominiums.

Construction of single-family homes dropped again last month, and over all, housing starts remain near the lowest level since the recession of the early 1990s. “With mortgage financing further constrained and inventories of unsold homes quite high, the near to medium term outlook for housing starts is not good,” Joshua Shapiro, chief United States economist for MFR, wrote in a research note.

That would be unfortunate for Freddie Mac, whose mortgage-related securities rapidly lost their value as the subprime market began to collapse. The company was forced to write down about $2.7 billion in assets related to credit guarantees and derivatives. Freddie lost $3.29 a share in the third quarter, compared with a loss of $1.17 a share a year earlier. The company also said it did not expect earnings to improve in the fourth quarter.

“We’re not happy about this,” Mr. Syron told investors and shareholders on a conference call today. “We don’t expect you to be happy about it.”