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Massive Losses, Legal Actions & 1 Done

Recent earnings and corporate activity

August 8, 2008


Around $8.8 billion in mortgage-related losses were reported by U.S. firms this week. Other recent corporate activity included the issuing of several orders against banks, the disclosure of a major securities investigation, the filing of another investor class action and a warning about liquidity from Residential Capital LLC.

Fannie Mae today reported a $2.3 billion second-quarter loss, up slightly from the $2.2 billion loss in the prior quarter but far worse than the $1.9 billion profit a year earlier. Credit-related expenses were $5.3 billion and net investment losses were $0.9 billion.

"Our second quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008," Daniel H. Mudd, chief executive officer of the Washington, D.C.-based company, said in the report. "Volatility and disruptions in the capital markets became even more pronounced in July. In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves."

In an effort to conserve capital, Fannie said its common stock dividend will be cut to $0.05 per share from $0.35 per share, operating costs will be slashed by 10 percent and portfolio purchases will be slowed. The secondary lender already announced an increase in its adverse market delivery charge to 0.50 percent from 0.25 percent.

On Wednesday, Freddie Mac reported an $0.8 billion loss in the second quarter, climbing from a $0.2 billion loss in the first quarter and way worse than the $0.7 billion profit a year earlier. Credit-related expenses were $2.8 billion. Freddie reiterated its commitment to raise $5.5 billion in capital given appropriate market conditions and said it expects to cut its dividend to $0.05 from $0.25 per common share.

American International Group Inc. reported Wednesday a $5.4 billion second-quarter loss, noting that continued weakness in the housing market and ailing credit markets substantially impacted results. In the second quarter 2007, the company has a $4.3 billion profit. The latest results included a $5.56 billion pre-tax charge for a net unrealized market loss tied to a super senior credit default swap portfolio.

Irwin Financial Corp. announced yesterday that it had a loss of $107 million during the second quarter, compared to a $22 million loss in the prior quarter and a $5 million profit a year earlier. Results reflected restructuring charges as it moves its focus to small business lending and banking services in its local communities. The Columbus, Ind.-based company said its agreement to $1 billion in home-equity loans announced in July marks its total exit from that business.

FirstFed Financial Corp. said Wednesday it had a $36 million second-quarter loss, better than the $70 million first-quarter loss. The latest loss was attributed to a $90 million provision for loan losses as a result of ongoing charge-offs and modifications of single family loans as well as higher levels of non-accrual single family loans. Negative-amortization adjustable-rate mortgages that have reached the maximum principal balance and are recasting drove the loan losses.

The PMI Group Inc. reported Thursday a loss of $246 million in the second quarter. The earnings reflect a $226 loss from U.S. mortgage insurance operations due to increases in paid claims and loss adjustment expenses as well as additions to the reserve for losses.

ResCap said in a Securities and Exchange Commission filing today that despite a massive overhaul of its debt recently, it may be required to execute asset sales or other capital generating actions over and above normal mortgage finance activities to provide additional working capital. This might include selling interests in mortgage securitizations, unloading loan portfolios and selling business platforms that are not related to its core mortgage finance business.

"Moreover, the amount of liquidity we need may be greater than currently anticipated as a result of additional factors and events (such as interest rate fluctuations and margin calls) that increase our cash needs causing us to be unable to independently satisfy our near-term liquidity requirements," ResCap said. "We remain highly leveraged relative to our cash flow. There continues to be a risk that we will not meet our debt service obligations and be in a negative liquidity position in 2008."

The SEC is conducting a formal investigation into Countrywide Financial Corp., parent Bank of America Corp. disclosed in an SEC filing Thursday. The Calabasas, Calif.-based company has responded to SEC subpoenas. The filing also mentioned that since March, media reports emerged that Countywide was among numerous industry participants being investigated by the Federal Bureau of Investigation in connection with mortgage business practices.

The Federal Deposit Insurance Corporation reported last week that a final order for restitution was issued against Columbus Bank and Trust Company, Columbus, Ga. In addition, cease-and-desist orders were issued against MetroPacific Bank in Irvine, Calif.; Columbus Bank and Trust Company, Columbus, Ga.; BankHaven in Haven, Kan.; Clarkston State Bank, Clarkston, Mich.; and Hastings State Bank in Hasting, Neb.

FDIC said removal-and-prohibition orders were issued against Mercantile-Safe Deposit and Trust Company, Baltimore, Md.; Farmers State Bank, S/B, Schell City, Mo.; Greene County Bank, Greeneville, Tenn.; and Timberwood Bank, Tomah, Wis.

Civil money penalties were issued against The Heights Bank, Peoria Heights, Ill.; Jackson County Bank, Seymour, Ind.; Sloan State Bank, Sloan, Iowa; Columbus Bank and Trust Company, Columbus, Ga.; Premier Bank, Jefferson City, Mo.; The Bank of Madison, Madison, Neb.; SussexBank, Franklin, N.J.; The Union Bank, Beulah, N.D.; Greene County Bank, Greenville, Tenn.; Sanderson State Bank, Sanderson, Texas; Rural American Bank - Luck, Luck, Wis.; and Farmers & Merchants Bank, Tomah, Wis.

A voluntary termination of insurance was issued against Fifth Street Bank, Las Vegas, and Universal Savings Bank FA, Milwaukee, Wis., while a prompt corrective action was issued against First Priority Bank in Bradenton, Fla. Finally, an order terminating a cease-and-desist order was issued for Mission Bank in Kingman, Ariz.

An investor class-action has been filed against IndyMac Bancorp Inc., its former CEO Michael W. Perry and its former chief financial officer, A. Scott Keys on behalf of purchasers of stock between April 26, 2007 and May 12, 2008, an announcement yesterday said. The case, filed in U.S. District Court for the Central District of California by the law firm of Susman Godfrey LLP, is the sixth investor lawsuit reported by against the bankrupt company since June.

Daniels v. Perry and Keys
No. CV08-05073 (U.S. District Court for the Central District of California)

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of

e-mail: [email protected]

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