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Companies Manage Losses, Capital

Companies Manage Losses, CapitalRecent earnings, acquisitions and other corporate activity

April 21, 2008


Merrill Lynch’s quarterly losses improved nearly $8 billion over the fourth quarter, National City Corp. has raised $7 billion, and a default at a subsidiary of Thornburg Mortgage Inc. won’t leave the parent company liable. Meanwhile, a federal regulator warned banks to acknowledge and deal with losses sooner than later.

Merrill Lynch reported a $2.0 billion first quarter loss — about $4.0 billion worse than a year earlier but $7.8 billion better than the first quarter. Write-downs related to U.S. ABS CDOs totaled $1.5 billion, and a credit valuation adjustments of negative $3.0 billion was taken in connection with hedges with financial guarantors, most of which related to U.S. super-senior ABS CDOs.

Comptroller of the Currency John C. Dugan warned that banks with management who are “in denial” about recognizing losses will see less latitude from OCC than banks with realistic management who take tough steps to deal with problems. He noted too many community banks today are reluctant to acknowledge problems in commercial real estate loan portfolios, charge off troubled loans and report trouble to examiners.

“There is a natural tendency for banks experiencing difficulties to regard examiners with trepidation and to say as little as possible,” Dugan stated. “I would encourage banks … to engage their examiners even more than they might have in good times. Why? Because when problems arise, our examiners need more information, not less, to understand the true dimensions of the bank’s problems — rather than assuming the worst.”

The Federal Reserve Board on Thursday announced the termination of a 2004 enforcement action against Traders Bank in Spencer, W.V.

Hanover Capital Mortgage Holdings Inc. announced last week that the American Stock Exchange notified the Edison, N.J.-based company has become subject to delisting because stockholder equity has dropped below $2 million and it has had a loss in two out of the past three years.

“The company has sustained losses which are so substantial in relation to overall operations or its existing financial resources, or its financial condition has become so impaired, that it appears questionable, in the opinion of the exchange, as to whether the company will be able to continue operations and/or meet its obligations as they mature,” the Amex reportedly said in its notification.

Hanover, a real estate investment trust, said it plans to submit a turnaround plan by a May 8 deadline.

Thornburg Mortgage Inc. subsidiary Thornburg Mortgage Capital Resources LLC has defaulted on $300 million in short-term notes due under its commercial paper program, according to a filing with the Securities and Exchange Commission Friday. The default prompted the collateral agent to begin liquidating the AAA-rated mortgage-backed securities backing the commercial paper.

“To the extent there are insufficient funds available from the liquidation of the mortgage-backed securities, pursuant to the program documents Thornburg Mortgage Capital Resources LLC will be liable for any balance due on the notes,” the Santa Fe, N.M.-based company stated. “The commercial paper program was structured to make Thornburg Mortgage Capital Resources, LLC bankruptcy remote from Thornburg Mortgage Inc.”

National City announced today it will raise $7 billion in additional equity capital. About $1 billion is a private equity investment from Corsair Capital and another unnamed investor. The remaining $6 billion will be acquired as equity investments by other investors, including several of the Cleveland-based company’s current institutional stockholders.

National City, which also cut its dividend to $0.01 from $0.21, reported an $0.2 billion first quarter loss, down from the $0.3 billion fourth quarter loss but worse than the $0.3 billion net profit a year earlier. Loan loss provisions jumped to $1.4 billion from $0.7 billion the prior quarter and $0.1 billion the prior year. Net charge-offs increased to $0.5 billion from $0.3 billion in the fourth quarter and $0.1 billion a year earlier.

GE Capital has agreed to purchase most of CitiCapital, a commercial lending and leasing business, a press release said. CitiCapital has approximately 1,400 North American employees.

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