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Financial Sector Struggling With Financials

Financial Sector Struggling With FinancialsRecent mergers, earnings and corporate activity

May 23, 2008


Two banks are facing litigation over their financial reporting, while the sale of nonprime residential mortgage-backed securities at a Swiss bank was done at a $7 billion discount. Other corporate activity includes a mortgage insurer that is struggling to regain its approval to insure conforming loans.

A class-action complaint has been filed in the U.S. District Court for the Southern District of Ohio against Huntington Bancshares Inc., Marty E. Adams and Kevin T. Thompson on behalf of former shareholders of Waterfield Mortgage Company Inc., Susman Godfrey L.L.P. and Murphy Murphy Moul + Basil L.L.P. announced Thursday. In October 2006, Waterfield was acquired by Sky Financial Group Inc. — which itself merged with Huntington in July 2007.

The defendants are accused of filing registration statements and prospectuses on behalf of Sky that contained false and misleading statements and failed to disclose Sky’s lending relationship with a subprime lender Franklin Credit Management Corp. — which saw a rapid deterioration in its operations last year.

In an unrelated case, Franklin Bank Corp. — which disclosed earlier this week that it improperly accounted for loan modifications on single-family loans, did not charge off its un-collectable second liens and failed to record or write-down real estate owned — is being investigated by the law firm of Eric J. O’Bell LLC, a press release Wednesday said. O’Bell said it is determining whether Franklin, which was founded by MBS creator Louis Ranieri, violated the Securities Act by issuing materially false and misleading statements to shareholders.

Franklin Bank said Tuesday that its failure to file its first quarter Form 10Q with the Securities and Exchange Commission has prompted letters from both the NASDAQ and AMEX indicating its continued listing on those stock exchanges is in jeopardy.

Freddie Mac has suspended the insurance subsidiary of Triad Guaranty Inc. as an approved mortgage insurer, Triad said in a filing with theSEC. An appeal is currently in process, and Freddie will continue to purchase loans insured by Triad during the process.

“Triad intends to vigorously pursue this appeal with Freddie Mac, which must be made in writing by May 29, 2008,” the Winston-Salem, N.C.-based company said. “Triad believes this action by Freddie Mac should not have any immediate adverse impact on Triad’s ability to write new mortgage insurance, which Triad is continuing to do with the support of the Illinois Division of Insurance.”

Triad said it is currently negotiating the launch of a new monoline mortgage insurance company with Lightyear Capital LLC, a New York-based private equity firm. A number of obstacles must be overcome before that deal can be completed.

First Banks Inc. announced it will restate earnings downward for 2005, 2006 and 2007 by a total of more than $11 million. The restatement is the result of the understatement of a repurchase agreement obligation and the overstatement of mortgage banking revenues “due to the circumvention of established internal controls.”

First Banks launched FB Holdings LLC on May 14, one day after management identified the accounting discrepancies. The new unit was created to hold, manage and liquidate nonperforming loans and other real estate owned. First Bank affiliate, First Capital America Inc., has committed to a $40 million investment in FB.

Flagstar Bancorp Inc. said Tuesday it completed a previously announced $100 million private offering. The deal was done with seven institutional investors, Chairman Thomas J. Hammond and President and CEO Mark T. Hammond.

Swiss banking giant UBS, which has been stung by losses tied to U.S. subprime securities, reported on Wednesday that it unloaded $15 billion (U.S.) of primarily subprime and Alt-A U.S. residential mortgage-backed securities. UBS sold the securities at a $7 billion discount to a distressed asset fund that will be managed by BlackRock.

UBS announced Thursday it will sell 760,295,181 new shares in a public offering. Proceeds are expected to be around CHF 15.97 billion (U.S. $15.8 billion). The transaction is expected to be done by June 17.

Residential Capital LLC announced Wednesday that around $9.5 billion in notes had been tendered from its recent offering. The offers expire on June 3.

A group of private investors focused on businesses that serve community banks and credit unions has acquired an ownership interest in Greystone Residential Funding, an announcement Thursday said. Following the completion of state registrations, Greystone will be renamed QR Lending.

The new entity will be headquartered in Middleton, Wis., and handle all aspects of originating, processing, underwriting, closing and servicing mortgage loans, Greystone said.

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