Financial life in a big town

Moody’s Corp (MCO.N: Quote, Profile, Research, Stock Buzz), the parent of Moody’s Investors Service, said quarterly profit fell 48 percent, as the global credit crisis caused demand to shrink for mortgage bonds and collateralized debt obligations.

Though results topped forecasts, Moody’s shares gave up some early gains after Connecticut Attorney General Richard Blumenthal said he plans to sue Moody’s and its main rivals, McGraw-Hill Cos (MHP.N: Quote, Profile, Research, Stock Buzz) Standard & Poor’s, and Fimalac SA’s (LBCP.PA: Quote, Profile, Research, Stock Buzz) Fitch Ratings, for alleged “deceptive and unfair practices costing taxpayers millions of dollars.”

Second-quarter net income for New York-based Moody’s, whose largest investor is Warren Buffett’s Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz) (BRKb.N: Quote, Profile, Research, Stock Buzz), fell to $135.2 million, or 54 cents per share, from $261.9 million, or 95 cents, a year earlier.

Moody’s said profit excluding items was 51 cents per share. On that basis, analysts on average expected 47 cents per share, according to Reuters Estimates. Revenue fell 25 percent to $487.6 million, topping the average $465.7 million forecast.

“They beat the numbers in pretty much all categories,” said Edward Atorino, an analyst at Benchmark Co in New York. “I think we’re bouncing along the bottom. The third quarter is starting pretty slow, but we’re at the bottom of a trough.”

Results were weakened by a 56 percent plunge in revenue from CDOs and other structured products, including such asset classes as residential mortgage-backed securities, commercial real estate finance and credit derivatives. In the United States alone, structured finance revenue fell 67 percent.

Expenses declined 10 percent as Moody’s cut jobs and reduced incentives and stock-based compensation.

CRITICISM 

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Washington Mutual reported a $3.3 billion quarterly loss Tuesday — far worse than Wall Street was anticipating — as it set aside more money for bad loans.

The Seattle-based thrift reported a net loss of $6.58 a share, which included a charge related to a $7 billion capital raise the company announced in April.

Excluding the charge, WaMu reported a loss of $3.34 a share. Analysts polled by Thomson Reuters were expecting the nation’s largest savings and loan to report a loss of $1.05 a share on this basis.

Just a year ago, the company reported a profit of $830 million, or 92 cents a share.

Washington Mutual (WM, Fortune 500) shares initially climbed in after-hours trading, before turning lower after the credit rating agency Moody’s put WaMu under review for possible downgrade. WaMu shares finished Tuesday’s regular session more than 6% higher.

When quizzed about the report from Moody’s by an analyst, WaMu management said it didn’t see much impact from the announcement, saying there wasn’t any need to raise debt at this time.

Driving this quarter’s loss was a sharp increase in WaMu’s loan loss reserves, which grew $3.74 billion during the quarter to $8.46 billion.

WaMu warned that the company would need to continue to reserve against loan losses over the next couple years, but said that 2008 would represent the peak of loan loss provisioning.

"I still think there is more to come in the way of provisions because of the increasing rate of non-performing loans in the home loan, home equity, and subprime categories," said Stephanie Hall, a senior analyst with the Scottsdale, Ariz.-based research firm Gradient Analytics. "But they have taken a step in the right direction by increasing the loan loss accrual."

Yet, the company offered some signs of encouragement as delinquencies in its troubled subprime and home equity portfolios showed "early signs of stabilization" during the quarter, according to the company.

"We believe this portfolio may be starting to burn out," said John McMurray, WaMu’s chief enterprise risk officer during the conference call.

The company also announced that top management, including Killinger, the company’s chief operating officer and finance chief, would not receive bonuses this year in light of the company’s financial performance to date.

Including Tuesday’s results, WaMu has reported three consecutive quarterly losses. Scrambling for cash, the firm has cut its dividend twice, shut down some of its key business units and trimmed its payroll.

Killinger stressed that the company remained well capitalized even as the housing market and the broader economy has deteriorated further since April when it announced a plans to raise $7 billion by selling an equity stake to an investment group led by the private-equity firm TPG.

WaMu also said its Tier 1 capital ratio, a measure of a bank’s ability to absorb losses, stood at 8.44% at the end of the quarter. A ratio above 8% is generally considered a good sign for financial institutions.

"We remain confident that we have sufficient capital to successfully manage our way through this challenging period," Killinger said.

Concerns about WaMu’s fate surfaced last week after Lehman Brothers analyst Bruce Harting wrote in a research note he suggested the company would report $26 billion in cumulative losses when the company delivered its quarterly results, and would have to "substantially" raise its loan loss reserves as a result.

Those concerns were compounded by comments from Ladenburg Thalmann analyst Richard Bove, who warned that WaMu is on the edge of the "danger zone."

That spooked WaMu investors, who were already fearing further bank failures following the high-profile collapse of the California-based mortgage lender IndyMac just days earlier.

WaMu issued a statement later that day stressing it was well capitalized with more than $40 billion in excess liquidity.

Shares of WaMu have nearly doubled in the past week after hitting a new 52-week low. But WaMu’s stock, currently hovering around $6, still trades well below its 52-week high of $41 50.

The latest figures from WaMu come just hours after the Charlotte-N.C.-based Wachovia (WB, Fortune 500) booked a nearly $9 billion loss.

WaMu’s results also come at the tail end of what has been a tumultuous round of second-quarter earnings reports for the nation’s banks.

A number of large financial institutions, most notably Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500) and Wells Fargo (WFC, Fortune 500), reported quarterly figures that, while not good, still managed to beat analysts’ expectations. Bank stocks have rallied sharply in the past few days on the news.  

Sourse

Mervyns LLC, the low-end department store chain that has been languishing for several years, could be the latest casualty of the fiercely competitive retail climate.

The privately held company, which operates about 175 stores in seven states but primarily in California, is facing bare shelves and a cash crunch as vendors are delaying shipments and key lenders that provide finance and credit to apparel makers have stopped approving orders.

"We are advising clients to hold off shipments primarily due to lack of communications from management," said Bob Carbonell, chief credit officer at Bernard Sands LLC, a credit monitoring company.

Carbonell, who said he’s working with several dozen clients that sell to the chain, noted that Mervyns had been consistently providing financial updates until about a week ago.

A person close to the company who spoke on condition of anonymity because of the sensitivity of the issue said GMAC Commercial Finance stopped approving orders of merchandise last week.

Squeezed by high-end department stores at the top and large discounters like Wal-Mart Stores Inc. (WMT, Fortune 500) at the bottom, the 59-year-old Mervyns has been shuttering stores and leaving states such as Oregon and Washington since 2005, after a consortium of private equity players including Sun Capital Partners Inc. bought Mervyns from Target Corp (TGT, Fortune 500). for $1.2 billion.

Mervyns, Sun Capital and GMAC did not immediately return calls for comment.

The chain’s heavy concentration in California, which is among the states hardest hit by the housing crisis, has made a turnaround harder.

Consumers in those hard-hit regions are being forced to make hard choices, Carbonell said: "Do you go shopping at Mervyns or do you pay for gas and food?" He added, "Everybody is fighting for the same piece of the pie."

In April, Mervyns appointed John Goodman, who had been president and general manager of the Dockers brand — a key supplier to Mervyns — as president and chief executive. The company announced the next month that it had hired a real estate advisory firm to sell five to 10 underperforming stores that also had high real estate value. Mervyns said then that the move was expected to generate $25 million to $50 million in cash to fund operations and new growth.

The financial struggles of Hayward, Calif.-based Mervyns are another worry for the nation’s malls, which have seen more and more vacancies amid store bankruptcies and closings. On July 9, Steve & Barry’s LLC, once a growing force in low-priced fashion, filed for Chapter 11 bankruptcy protection. At the time, company officials said no decision had been made about possible store closures.

It joins home furnishings chain Linen ‘n Things Inc., catalog retailer Lillian Vernon Corp. and specialty retailer Sharper Image Corp (SHRPQ). in filing for bankruptcy protection this year. Sharper Image, which is now being liquidated, is selling its remaining assets to an investment group for $49 million. 

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An emergency move by U.S. securities regulators this week aimed at curbing manipulative short-selling in some major financial firms should be expanded to all publicly traded banks, or it could erode confidence in the banking industry, a top trade group said.

A letter from the American Bankers Association to the Securities and Exchange Commission this week stressed that banks could be vulnerable as they are suffering from the financial turmoil stemming from the downturn in the U.S housing market.

“The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country’s banking industry,” ABA President Ed Yingling said in a Thursday letter to the SEC.

“As the commission is aware, it would be an understatement to say that short interest in financial services companies has greatly increased over the year,” Yingling said.

On Friday the SEC, the U.S. markets watchdog, amended its action from earlier in the week but limited the protection to 19 firms including U.S. housing finance giants Fannie Mae and Freddie Mac whose shares plunged on concerns they were undercapitalized.

The rule also applies to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve’s discount window, such as Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

Short selling is a legitimate strategy where the investor arranges to borrow shares they consider overvalued and sell them in hopes of profiting when the price drops. A naked short occurs when an investor sells stock that has not yet been borrowed.

Wall Street, which was thrown off guard when the SEC announced the emergency rule on Tuesday, and U.S. stock exchanges applauded the rule modifications and guidance. But the ABA wanted the SEC protection expanded to all banks and their holding companies that are publicly traded. 

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If this weekend’s news about Fannie Mae and Freddie Mac and Friday’s IndyMac failure weren’t scary enough, now Wall Street will have to contend with what is likely to be dismal quarterly results from many top financial firms.

Merrill Lynch (MER, Fortune 500) and Citigroup (C, Fortune 500) are each expected to report another quarterly loss. Merrill’s results are due out Thursday afternoon while Citigroup will report its results Friday morning.

Analysts expect profits at other big banks, such as Wells Fargo (WFC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), to fall sharply from a year ago. Wells Fargo’s second-quarter results are due out Wednesday morning and JPMorgan Chase will report its numbers Thursday.

The bad news is likely to be repeated next week as well. Profits for Bank of America (BAC, Fortune 500), due out on July 21, are expected to be less than half of what they were just a year ago. And Wachovia (WB, Fortune 500), which will report its results on July 22, warned last week that it expected to lose anywhere between $2.6 billion and $2.8 billion during the second quarter.

"It is difficult in this environment for anybody to be too optimistic," said Tom Kersting, financial services analyst at Edward Jones.

The familiar, yet nagging, problem of credit remains the biggest problem for most banks.

Analysts and portfolio managers that keep close tabs on the banking sector expect most financial institutions to report further deterioration across their mortgage portfolios.

As a result, banks will most likely have to set aside more cash to compensate for bad loans. Washington Mutual (WM, Fortune 500) and Bank of America did that in the first quarter.

There’s also the grim reality of writedowns. Several major financial institutions will once again have to go through the painful process of witting down the value of their assets, particularly those related to mortgage-backed securities, leveraged loan portfolios and bond insurers Ambac and MBIA.

Earlier this month, Oppenheimer & Co. analyst Meredith Whitney warned that she expects Merrill Lynch to take $5.8 billion in writedowns and Citigroup to mark down its balance sheet by $12.2 billion.

Analysts will also be paying particularly close attention to banks’ credit card and auto loan portfolios for any signs of rising delinquencies.

However, financial institutions tend to report an improvement in credit conditions during the second quarter, helped by tax refunds, Citigroup analyst Keith Horowitz pointed out in a note published Friday.

And given this year’s economic stimulus package, that could bode well for banks’ loan portfolios as consumers try to keep from falling behind on payments. Horowitz wrote that there could be a "reprieve from the rapid pace of delinquency."

Analysts say that banks may also see some benefit from the Federal Reserve’s drastic rate-cutting campaign since last September. Lower interest rates have driven down the short-term borrowing costs for banks. That should boost their net interest margins, or the profits they make from taking in deposits and lending them back out.

During the first quarter, the country’s nearly 8,500 domestic insured depository institutions reported a 9.6% jump in net interest income from a year ago, to nearly $95 billion, according to the Federal Deposit Insurance Corp.’s most recent quarterly banking report.

But what little in the way of good news banks have to report may be overshadowed by some major announcements about raising more capital.

Several banks raised cash earlier this year by selling stakes to private-equity firms and sovereign wealth funds. Analysts think there could be similar announcements during earnings reports….and maybe even some asset sales.

There has been plenty of speculation, for example, that Merrill Lynch will unveil a major capital raising initiative, including plans to sell all, or part, of its stakes in asset manager BlackRock or the media outlet Bloomberg LP.

Facing pressure from regulators to shore up their books by raising capital, other financial institutions could follow suit, said Chris Hagedorn, a portfolio manager at Fifth Third Asset Management, which owns shares of Bank of America, JPMorgan and Wells Fargo among other banks.

"I think it is a distinct possibility depending on how big the writedowns are and how much deterioration companies are seeing in their capital ratios," he said.

Finally, banks face a lot of uncertainty about the fates of Fannie Mae and Freddie Mac.

On the one hand, the proposal from the Treasury Department and the Federal Reserve over the weekend to prop up the two mortgage finance giants should be good news.

The two government-sponsored enterprises provide a crucial source of funding for banks and other lenders by purchasing mortgages they originate.

But at the same time, banks and other financial institutions own more than $1 trillion of the mortgage-backed securities that Fannie and Freddie sell to investors all over the world.

Were Fannie and Freddie to enter into default, banks would then find themselves on the hook for those home loans they first originated and would most likely have to raise billion of dollars in additional capital.

"That would probably put more pressure on many of the banks," said Frank Barkocy, director of research with Mendon Capital Advisors, a firm that invests primarily in financial stocks. "You have to have the capital to backstop those loans." 

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Plane maker Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz) has seen a string of order deferrals in the United States this year as the airline industry battles challenges such as high fuel costs, a senior executive said on Wednesday.

Randy Tinseth, Boeing Commercial Airplanes Vice President for Marketing, said the delays also featured one total cancellation, but the issue was limited to the U.S market — which accounts for 10-11 percent of its sales.

“We have seen deferrals in the U.S. market as the airlines look to make significant capacity reductions, but we are pleased to have regional diversity .. We have not seen deferrals in other regions,” he told reporters.

Boeing shares were up 0.5 percent at $66.45 at 12:08 p.m. EDT.

Airline fuel costs have soared this year alongside record oil prices above $140 a barrel, forcing several airlines to cut capacity and hike fuel charges protect margins.

But Tinseth said Boeing did not expect the tough climate to last — predicting the value of the new plane market to grow in the long term.

Bowing said the group now valued the market for new commercial planes at $3.2 trillion to 2027. That is up from a $2.8 trillion 20-year forecast provided last year.

“The forecast takes into account the industry’s near term challenges, including a slowing worldwide economy (and) surging fuel prices .. This year’s forecast is rooted in today’s realities, but also recognizes the nature of a long term outlook,” Tinseth said. 

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Fugitive hedge-fund swindler Samuel Israel turned himself to federal authorities in Massachusetts after nearly a month on the lam, the U.S. attorney’s office said Wednesday.

Israel turned himself into Southwick, Mass., police between 9:15 and 9:30 a.m. Wednesday, said Suzanne Anderson, police Chief Mark Krynicki’s assistant. She said he was being processed at Southwick Police headquarters and referred all further questions to federal authorities.

Southwick is 95 miles away from the federal prison in Ayer, Mass., where Israel was to report last month to serve his sentence.

Israel disappeared June 9 on the day he was supposed to report to prison. His car was found on a bridge over the Hudson River with the words "Suicide is Painless" - the theme song for the "MASH" television show - scrawled in dust on the hood.

Because no body was found beneath the 150-foot-high bridge where his car was abandoned, authorities believed from the start that he faked his disappearance.

The 48-year-old Israel, a co-founder and chief executive of the now-collapsed Bayou hedge funds, was sentenced in April to 20 years in federal prison for conspiracy and fraud. He was also ordered to pay $300 million to his victims.

Prosecutors said he and two other men persuaded investors to put $450 million into the Stamford, Conn.-based company by announcing nonexistent profits and providing fake audits.

Meanwhile, they made millions in commissions on trades that lost money for investors. The fund’s collapse prompted calls for stricter oversight.

Officials said that after Israel abandoned his car, he took off in a white recreational vehicle carrying a motor scooter and his belongings. He was believed to be staying at RV parks, campgrounds or highway rest areas.

Southwick, where Israel turned himself in, is near the Connecticut line about 100 miles southwest of Boston.

Israel’s girlfriend, Debra Ryan of Armonk, was arrested 10 days after his disappearance and charged with aiding and abetting his escape.

Authorities say Ryan confessed that on the day Israel was to surrender, she drove her car and he drove the RV to a rest area about 55 miles north of New York City. Israel parked the RV there, and the two drove back to their home.

Ryan could face as many as 10 years in prison if convicted in the scheme. 

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The clown trying to win your mother’s heart has a new rival and this guy’s royalty.

After watching its bigger rival McDonald’s Corp (MCD, Fortune 500). try to woo mothers and grab a share of the family budget, Burger King Corp. (BKC) — known for its edgy ads featuring a man with an oversize plastic king mask — is launching a new marketing and promotional campaign Monday targeted to moms.

"A large part of our customer base is parents with children," said Russ Klein, president of global strategy, marketing and innovation. "As a parent, the challenge is always trying to get the kinds of things you want to but have some dimension of fun."

The centerpiece of the effort, Klein said, is a new kids’ meal featuring a four-ounce serving of Kraft macaroni and cheese, lowfat milk and the company’s "Fresh Apple Fries", which are uncooked apple slices shaped like french fries and served with low-fat caramel dipping sauce. The meal will go on sale Monday for $3.49 and will be a permanent fixture on Burger King’s menu.

The launch will be followed by an in-restaurant merchandising and television ad campaign, with the first commercial airing July 7. That spot will introduce "Little King" meant to be the masked king’s young son.

The company will be offering free samples of its apple fries through July in New York, Los Angeles, Chicago, Miami and Houston. Burger King will also give away samples at Jonas Brothers concert tour sites. Burger King is an official sponsor of the group’s "Burning Up Tour" and will be offering some free tickets to the concerts.

Klein declined to specify the value of the advertising and marketing effort, saying only that the company will spend millions "supporting this vehicle."

Burger King certainly isn’t the first fast food restaurant to try to convince moms to listen to the pleas in the backseat for fast food. McDonald’s launched a public relations campaign targeted to mothers last year in a bid to neutralize criticism that the company’s food is a contributor to childhood obesity.

The McDonald’s approach included adding a bevy of healthier menu items to its menu meant to entice both kids and parents, including "Apple Dippers" — pre-cut slices of apples similar to the new Burger King version. The chain also started a "mom’s quality correspondence" campaign in which six mothers got a behind-the-scenes look at how the chain operates. The moms write about their experience on the company’s Web site.

Zack’s Investment Research senior analyst Anne Northrup said McDonald’s has been "a trailblazer" in changing the perception that fast food is an indulgence that will likely lead to gaining a few extra pounds.

But convincing parents to correlate healthy eating with the home of the Whopper may not so be easy, particularly since Burger King has been lambasted by critics for not switching to trans-fat free oil as fast as some of its competitors. The chain has committed to making the switch in all of its restaurants by the end of the year. Wendy’s International Inc (WEN)., meanwhile, cut out trans fat oil in August 2006.

Northrup said getting parents to take their families to Burger King may also be dependent on the pace of the chain’s remodeling campaign. Burger King has been attempting to turn around its sales partly by renovating its restaurants.

Northrup said a large number of the chain’s unit are still more than 30 years old.

"That’s a key driver of earnings growth in the next few years," she said. 

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A lawsuit filed by a Wisconsin couple against their mortgage lender could have major implications for banks should a U.S. appeals court agree that borrowers can cancel their loans en masse when their lenders violate a federal lending disclosure law.

The case began like hundreds of others filed since the U.S. housing boom spawned a rise in sales of adjustable rate loans. Susan and Bryan Andrews of Cedarburg, Wisconsin, claimed that lender Chevy Chase Bank FSB (CCX_pc.N: Quote, Profile, Research, Stock Buzz) had hidden the true terms of what they believed was a good deal on a low-interest loan.

In their 2005 lawsuit, the couple said the loan’s interest rate had more than doubled by their second monthly payment from the 1.95 percent rate they thought was locked in for five years. The interest rate rose well above the 5.75 percent fixed-rate loan they had refinanced to pay their children’s college tuition.

The Andrews filed the case seeking class action status; and in early 2007, U.S. District Judge Lynn Adelman ruled that the bank had violated the Truth in Lending Act, or TILA, and that thousands of other Chevy Chase borrowers could join them as plaintiffs.

The judge transformed the case from a run-of-the-mill class action to a potential nightmare for the U.S. banking industry by also finding that the borrowers could force the bank to cancel, or rescind, their loans. That decision was stayed pending an appeal to the 7th U.S. Circuit Court of Appeals, which is expected to rule any day.

The idea of canceling tainted loans to stem a tide of foreclosures has caught hold in other quarters; a lawsuit filed last week by the Illinois attorney general asks a court to rescind or reform Countrywide Financial Corp (CFC.N: Quote, Profile, Research, Stock Buzz) mortgages originated under “unfair or deceptive practices.”

‘MASSIVE CLASS SUITS’

The mortgage banking industry already faces pressure from state and federal regulators, who have accused banks of lowering underwriting standards and forcing some borrowers, through fraud, into costly adjustable loans that the banks later bundled and sold as high-interest investment vehicles. 

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