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Firms Struggle With Volatile Environment

Firms Struggle With Volatile EnvironmentRecent mergers and other corporate activity

March 14, 2008

By SAM GARCIA

Delayed financials, executive exits, margin call defaults and debt ratings downgrades are among the latest issues facing U.S. financial institutions. Meanwhile, as one subprime analysis says the worst is behind us, mergers appear to be the only way to sound footing for at least two firms.

The chief investment officer and the chief operating officer of Impac Mortgage Holdings Inc. have resigned, according to an 8-K filing with the Securities and Exchange Commission today. Impac also warned it won’t make to the March 17 deadline for filing its 2007 financials because has yet to settle a significant portion of its repurchase liabilities and refinance its remaining warehouse borrowings, which it says will result in an improvement to its financial condition.

Standard & Poor’s raised its estimate of subprime asset-backed securities losses to $285 billion from $265 billion in late January, according to a report yesterday. So far, financial institutions have reported $150 in write-downs globally. Losses will be concentrated in collateralized-debt obligations and residential mortgage-backed securities.

Most of the write-downs of subprime securities may be behind the banks and brokers that have already announced full-year 2007 results, S&P said. Citigroup Inc. and Merrill Lynch & Co. Inc. were cited as companies that have taken a more conservative view and projected higher losses.

While ABS losses have passed the halfway mark, the New York-based ratings agency said problems are expected worsen for the broader U.S. real estate and credit markets. And continued widening of ABS spreads could prompt a new round of write-downs. In addition, losses from monoline insurers that see downgrades could lead to further write-downs.

S&P noted it rated more than $1.2 trillion in subprime RMBS issued from 2005 to 2007, with about $900 billion still outstanding. An additional $100 to $200 billion is outstanding that wasn’t securitized or rated by S&P. Loss projections for just the 2006 vintage are currently at 19 percent. Losses on Alternative-A loans will be over and above the estimated subprime losses.

The National Association of Home Builders blasted Freddie Mac’s plans not to seek additional capital — which would enhance its ability to boost mortgage market liquidity, an announcement Thursday said.

“Freddie Mac CEO Richard Syron said yesterday that his chief interest is making money for his shareholders,” NAHB stated. “It is now painfully obvious that the company has strayed light years away from its other vitally important congressionally mandated mission of ensuring an adequate flow of credit for housing and home buyers.”

Fitch Ratings announced downgrades to the long-term issuer default rating of Countrywide Financial Corp. and related subsidiaries to BBB- from BBB+ as a result of rapidly increasing deterioration within home equity portfolios and continued pressure on home prices — particularly in California and Florida. Fitch noted that of Bank of America Corp.’s planned acquisition falls through, Countrywide’s ratings would likely slip below investment grade and the company could face a liquidity crisis.

Moody’s Investors Service announced today it downgraded the senior unsecured rating of Washington Mutual Inc. to Baa3 from Baa2, reflecting and expected increase in provisioning needs on its residential mortgage portfolio as a result of the rapid deterioration in the residential housing sector so far this year.

“WaMu’s required provisioning is likely to be greater than $12 billion and that full year 2008 net losses could eliminate the company’s approximately $6 billion capital cushion above regulatory well capitalized minimums,” Moody’s stated.

Moody’s lowered its outlook for commercial mortgage lender Capmark Financial Group Inc. The company has shifted originations to bank subsidiaries, which is expected to diminish support to its unsecured debt. In addition, earnings are expected to deteriorate as a result of lower originations.

Morgan Stanley & Co. Inc. issued a notice of default to struggling Thornburg Mortgage Inc., an 8-K SEC filing Thursday said. The notice was the result of Thornburg’s inability to meet a $9 million margin call on a $49 million repurchase agreement. Morgan Stanley has, or likely will, liquidate securities.

National City Corp., stung by losses from subprime mortgages originated by former subsidiary First Franklin Financial Corp., is looking to be bought by another company, the Wall Street Journal reported.

Shareholders of Pavilion Bancorp Inc. approved for the company to be acquired by First Defiance Financial Corp. The $48 million deal, expected to close today, will give Pavilion stockholders 1.4209 common shares of First Defiance for each share they own.

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