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Fannie, Freddie Fallout is Broad

A year ago, financial institutions were focused on revealing their exposure to subprime securities. Today, the focus is on revealing exposure to securities of Fannie Mae and Freddie Mac. Amid the mess, a Japanese bank took a controlling interest in a U.S. servicer, and an investment bank is searching high and low for another firm to rescue it.

Lehman Brothers Holding Inc. reported Wednesday that it will have an estimated third-quarter loss of $3.9 billion, including $5.3 billion in mark-to-market adjustments in its residential mortgage-related positions and $1.7 billion in its commercial real estate positions. The poor performance has shattered investor confidence in the firm and left it scrambling to find another firm to take it over.

Lehman Brothers’s limited inability to raise capital has prompted Fitch Ratings to place the servicer rating of subsidiary Aurora Loan Services on Rating Watch Negative, an announcement Thursday said. Fitch’s move indicates Aurora’s servicing rating could be downgraded depending upon the stability of its servicing portfolio, operational capabilities and financial condition.

U.S. Bancorp told attendees at a Lehman Brothers investor conference in New York that its net charge-offs will jump by around one-quarter in the third quarter from the second quarter, while nonperforming assets are expected to increase by as much as one-third, according to an investor presentation.

Newnan Coweta Bancshares Inc. and subsidiary Neighborhood Community Bank have entered into an agreement with the Federal Reserve Bank to conserve capital. The bank has agreed to take steps to improve its operations and management and report back to the fed.

Since the government takeover of Fannie and Freddie on Sunday, Fannie has seen its common shares spiral to 74 cents from nearly $70 last October. Shares of Freddie, which had traded at more than $65 in October, now trade at 58 cents.

The dramatic decline has led a growing number of institutions to warn about their investments in the government sponsored enterprises. Among them was Citigroup, which said in a Securities and Exchange Commission filing Wednesday that its exposure stood at $1 billion as of June 30. The New York-based banking giant said the quarter-to-date pre-tax impact on revenues from trading losses and write-downs is approximately $450 million.

U.S. Bancorp said at the Lehman conference that it could take a third-quarter impairment of up to 100 percent on its $97 million in GSE perpetual preferred stock.

Gateway Financial Holdings reported yesterday that its perpetual preferred investments in the GSEs was more than $40 million and currently trades at 5 to 10 percent of par value.

“The company has retained an investment banker and believes it has access to the capital markets,” Gateway said. “The company anticipates that it will raise new capital in an amount sufficient to remain ‘well-capitalized’ under regulatory standards by the end of the third quarter.”

Five Star Bank parent Financial Institutions Inc. said Wednesday its GSE auction rate securities holdings were $33 million as of June 30. But even if it takes a total loss on the investments, its “capital levels would still exceed the levels required to be considered well-capitalized.”

Wilmington Trust Corp. reported in an SEC filing Wednesday that it held $21 million in perpetual preferred GSE stock, which it will write down by $20 million this quarter. The move won’t affect client funds, its ability to pay dividends or its standing as a well-capitalized institution.

Cascade Financial Corp. revealed in a Sept. 9 SEC filing that its roughly $19 million in preferred GSE shares as of June 30 had declined to $2 million in value as of Sept. 8. But even a total loss on the securities will leave it “well capitalized.”

Central Virginia Bank announced it holds $18 million in perpetual preferred GSE stock on which it expects to take an unrealized third-quarter loss of $17 million.

Webster Financial Corp. had already taken more than $2 million in losses from the sale of common and preferred shares of Fannie and Freddie prior to the takeover, according to its Lehman presentation. Its unrealized losses since the government action are $17 million.

First Advantage Bancorp reported today that its perpetual callable preferred securities of Fannie and Freddie had a $14 million book value on June 30. But even it takes a total loss on the investments, subsidiary First Federal Savings Bank will remain “well capitalized.”

Cooperative Bankshares Inc. announced yesterday that its GSE preferred stock holdings, which it paid $10 million for, had declined in value to $1 million as of Wednesday. The anticipated loss will leave it only “adequately capitalized,” prompting it to suspend its dividend and consider other actions to address the decline in capital.

River Bank parent LSB Corp. said yesterday that it had previously disclosed that its holdings of GSE preferred securities had declined from a cost of $10 million to $6 million. In addition to losing dividend payments, the value of that stock has now fallen to $1 million. While its capital level is impacted, it “will continue to be ‘well capitalized’ at Sept. 30, 2008.”

An after-tax loss of $5 million on the sale of $9 million in Fannie’s preferred stock by Pulaski Financial Corp. will not impair its “well-capitalized” status, a press release Tuesday said.

A statement Wednesday from Jeffersonville Bancorp indicated the company held $5 million in Freddie’s series Z preferred shares. The market value of the holding has fallen to less than 10 percent of the carrying value. The bank said it management believes it will continue to meet “well-capitalized” thresholds.

One firm that has no exposure to GSE securities is still racing to reassure investors. Sterling Financial Corp. issued a statement today indicting it has no exposure to any common or preferred equity securities of Fannie or Freddie.

Wachovia Corp. said in its Lehman investor presentation that it sold $509 million in GSE preferred securities on July 21 at a pre-tax loss of $171 million — a move that may have saved it from significantly more losses. The loss will be taken in the third quarter.

The Law Offices of Aronberg & Aronberg announced today a class action lawsuit was filed yesterday on behalf of shareholders in U.S. District Court, for the Southern District of Florida, against Fannie’s entire board of directors and several former officers. The defendants allegedly violated the Securities Exchange Act of 1934 and the Florida Deceptive Trade Practices Act by making false statements, failing to disclose adverse conditions of the company and artificially inflating the price of the stock.

Shapiro Haber & Urmy LLP announced Wednesday that it is investigating former Fannie officers and directors for potential violations of the Employee Retirement Income Security Act of 1974. The law firm is attempting to determine whether the Washinton, D.C.-based company’s present and former directors and officers failed to prudently manage the assets of Fannie’s employee stock ownership plan.

The U.S. Treasury issued a statement Thursday clarifying that the U.S. Congress cannot change the terms of the GSE’s preferred stock purchase agreements it has negotiated.

“Some may speculate that a future Congress could pass a law that would abrogate the agreement,” the statement said. “But any such law would be inconsistent with the U.S. government’s longstanding history of honoring its obligations.”

In other news, Lexia LLC, a subsidiary of Tokyo-based Shinsei Bank LTD, acquired an 82 percent equity interest in Specialized Loan Servicing, a press release yesterday said. Highlands Ranch, Colo.-based Specialized reports a residential servicing portfolio in excess of $9 billion as of June.

“Shinsei Bank is a leading Japanese financial institution with a strong track record in the distressed debt space,” Specialized Chief Executive Officer John Beggins said in the release.

Written Agreement by and among Newnan Coweta Bancshares Inc., Newnan Georgia, Neighborhood Community Bank, Newnan, Georgia, Federal Reserve Bank of Atlanta, Atlanta Georgia, and Banking Commissioner of the State of Georgia, Atlanta, Georgia
Docket Nos. 08-018-WA/RB-HC, 08-018-WA/RB-SM, Sept. 2, 2008

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