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Losses Driving Downgrades to Debt Ratings

Losses Driving Downgrades to Debt RatingsRecent earnings, ratings and merger activity

March 3, 2008


As reports of massive mortgage-related losses continue to pour in, ratings agencies are busy downgrading the debt of financial services companies.

Fannie Mae saw its financial strength rating placed on review for downgrade by Moody’s Investors Service as a result of its $3.6 billion fourth quarter loss.

“This loss exceeded our expectations and represents a significant deterioration of surplus regulatory capital,” Moody’s stated. “Additionally, Moody’s expects the company to record sizable losses in the first half of 2008 and possibly a net loss for the year due to the continued deterioration in the residential mortgage sector.

Fitch Ratings downgraded Residential Capital LLC’s long-term issuer default rating to BB- from BB+ following the company’s 2007 performance and uncertain prospects for 2008. Approximately $18 billion of debt is affected.

The ratings agency noted ResCap has been forced to move into low-margin conforming originations, which banks have an advantage in. In addition, the international mortgage lending operations at the company are beginning to struggle.

“The company’s return to even a modicum of sustainable profitability in 2008 would be difficult if mortgage market dislocation continues,” Fitch said. “In addition, while Fitch acknowledges the company’s recent debt repurchases, ResCap does have $4.4 billion of debt maturing in 2008.”

Moody’s announced negative ratings actions taken on a number of primarily regional and community banks as a result of their exposure to commercial real estate.

Among the impacted companies were Associated Banc-Corp., Colonial BancGroup Inc., First Horizon National Corp.Flagstar Bancorp Inc., Fulton Financial Corp., Independent Bank Corp., Integra Bank Corp., Marshall & Ilsley Corp., National City Corp., and RBC Centura Banks. Also impacted were Regions Financial Corp., South Financial Group Inc., Sovereign Bancorp Inc., Susquehanna Bancshares, Synovus Financial Corp., Trustmark Corp., Western Alliance Bancorporation and Zions Bancorporation.

Fitch revised its rating outlook for the long-term issuer default rating of SunTrust Banks Inc. and subsidiary SunTrust Bank to negative.

Fitch said SunTrust’s asset quality metrics have deteriorated as its potential loss exposure to its residential mortgage portfolio is “considerable” and its commercial portfolio will come under more stress. Further deterioration is expected, and with problem loans expected to increase, reserves will need to be bolstered.

Standard & Poor’s Ratings Services lowered the counterparty credit and financial strength ratings on Radian Insurance Inc., the mortgage insurer announced. Radian noted the action was the result of its exit from the NIMS and second-lien businesses last year and that it doesn’t affect ratings of its principle mortgage insurance subsidiary, Radian Guaranty.

American International Group Inc. reported a fourth quarter loss of $5.3 billion. The massive loss reflected an $11.5 billion net unrealized market valuation loss on its credit default swap portfolio. AIG said it actually expects credit impairment losses realized over not to be material.

The company noted the $10.3 billion operating loss in its financial services division was impacted by “an other-than-temporary impairment charge on AIGFP’s available for sale investment securities and the effect of economically effective hedging activities that did not qualify for hedge accounting treatment under FAS 133.”

“This was a challenging year in which the deterioration of both the U.S. residential mortgage and credit markets significantly affected several of our operations and investments,” AIG President and Chief Executive Officer Martin J. Sullivan said in the statement. “AIG experienced deteriorating results in its Mortgage Guaranty and Consumer Finance businesses, unrealized market valuation losses related to the AIGFP super senior credit default swap portfolio, and increased markdowns and impairments in our investment portfolios in the second half of the year, primarily in the fourth quarter.”

Freddie Mac announced a $2.5 billion fourth quarter loss, bringing full-year earnings to a $3.1 billion loss. Included in fourth quarter results were mark-to-market losses of $0.8 billion on the value of its credit guarantee asset and approximately $2.3 billion on the value of its derivatives portfolio, both due to the impact of declining long-term interest rates. Credit-related expenses, consisting of provision for credit losses and real estate owned operations expense, were $912 million.

Freddie said it revised its 2008 and 2009 credit losses estimate to $2.2 billion and $2.9 billion, respectively, as a result of the continuing deterioration in the housing market.

Swiss Re reported “modest” fourth quarter earnings of $162 million (U.S. dollars), which the company said was impacted by mark-to-market losses of $1.1 billion from credit underwriting activities in residential and commercial mortgage-backed securities. Another $0.2 billion in mark-to-market charges is anticipated in the first quarter.

DZ Bank said it wrote down $2.1 billion (U.S. dollars) on its securities portfolio, including $0.8 billion on its asset-backed securities portfolio.

Independent Bank Corp. said Friday the completion its acquisition of Slade’s Ferry Bancorp. The two companies originally agreed on Oct. 11, 2007, to the merger, which calls for Slade’s shareholders to receive 0.818 shares of Independent common stock for each share of Slade’s common stock,

Slade’s will bill be integrated into Rockland, Mass.-based Independent subsidiary Rockland Trust Co., the statement said. Nine Slade’s branches will operate under the Rockland brand.

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


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