Financial life in a big town

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 online payday loan.

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.  

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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 500 fast cash. 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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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 free credit report and score. 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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The U.S. Federal Reserve began a two-day policy meeting on Tuesday that was expected to end with benchmark interest rates on hold and little evidence the central bank is going to raise borrowing costs soon.

The Fed began its policy-setting meeting at around 2 p.m. EDT as scheduled, an official said. A decision on rates is expected to be announced about 2:15 p.m. EDT on Wednesday.

Fed Chairman Ben Bernanke and his colleagues confront a deepening housing market slump that looks set to be a drag on growth for months to come, and surging oil and commodity prices that threaten to ignite broader inflation.

While inflation risks have edged up and the economy has seemingly steered clear of the risk of a deep recession, policy-makers at the central bank have not fully set aside concerns about economic weakness.

The U.S. central bank lowered the interbank federal funds target rate to 2 percent at its last meeting on April 29-30, and has indicated it hopes rate reductions of 3.25 percentage points since mid-September will suffice to help the economy recover from the housing collapse and credit crunch.

“For now, policy seems well positioned to promote moderate growth and price stability,” Bernanke said on June 3.

Fed officials are in a bind bad credit payday advance. Raising interest rates to quell inflation would put a further brake on an already weak economy, while more rate reductions to buffer against a further stumble in output could add to price pressures.

Recent data highlights that dilemma. U.S. consumer sentiment slid to a 16-year low in June, while house prices continued their downward slide, reports showed on Tuesday. 

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Time Warner Inc (TWX.N: Quote, Profile, Research) will completely split with Time Warner Cable Inc (TWC.N: Quote, Profile, Research) by the end of the year, and receive a $9.25 billion payout, to separate its media content and distribution businesses.

The plan will break up a two-decade marriage of traditional distribution and content, a strategic combination of assets that has fallen out of favor on Wall Street as big media corporations compete with faster-moving Internet companies.

Left unanswered is how Time Warner Inc’s 85 percent ownership of Time Warner Cable will be distributed to Time Warner Inc shareholders. Details will be decided closer to the closing of the deal in the fourth quarter, executives said.

The long-expected move lifted Time Warner Inc shares 2 percent in morning trading on the New York Stock Exchange, while Time Warner Cable shares rose 3.5 percent.

Wall Street has clamored for the once top media company to streamline its focus as a pure media content company — with the Warner Bros movie studios, Time Inc magazines and Turner cable networks — and stem a stock-price decline.

It will also leave Time Warner Inc more time to determine what to do with its AOL Internet division, whose growth has been eclipsed by Web leaders like Google Inc (GOOG.O: Quote, Profile, Research) and Yahoo Inc (YHOO.O: Quote, Profile, Research) us fast cash. Time Warner Inc has continued to discuss with Yahoo and Microsoft (MSFT.O: Quote, Profile, Research) a transaction to sell, spin off or merge its AOL division, sources have said.

“Two independent companies will have better long-term strategic, financial and operational flexibility, something we believe is of growing importance,” Time Warner Inc Chief Executive Jeffrey Bewkes told analysts on a conference call.

Investors will be eager to hear how Time Warner plans to invest the payout for the media company. 

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VIENNA, Austria – Oil prices spiked a new trading high Tuesday, sweeping past $129 (all figures U.S.) a barrel as supply concerns intensified the momentum buying that has lifted crude deeper into record territory.

The June contract for light, sweet crude traded as high as $129.31 in electronic pre-opening trading on the New York Mercantile Exchange before settling back to $128.75, up $1.70.

Prices are currently being driven higher by supply concerns. This latest surge comes after OPEC's president was quoted as saying his organization won't increase its output before its next meeting in September.

The imminent expiration of the June contract is adding to the volatility. The contract will end at the close of trading Tuesday.

The contract reached a new closing high of $127.05 Monday after Algerian Energy Minister Chakib Khelil, the current president of the Organization of Petroleum Exporting Countries, was quoted by a government newspaper as saying OPEC won't increase its output during the U.S. summer driving season, which begins this weekend. OPEC's next meeting is scheduled for Sept. 9.

Concern about supply has recently become the primary driver of the market, replacing earlier worries about a weakening dollar, and not even Saudi Arabia's promise last week of an additional 300,000 barrels of crude a day could alleviate those new concerns.

Despite that pledge from the world's leading oil producer and the U.S. move to temporarily stop filling government stockpiles, prices have shown no indication of stopping their record run.

Through Monday's close, the front-month contract has hit nine trading or closing records in 11 sessions pay day loans. Analysts have said speculative buying has also contributed to oil's record high run.

In other news lifting prices, independent refiner Holly Corp. said a key unit at its New Mexico refinery was shut down for repairs, cutting estimated May gasoline production by as much as 756,000 gallons per day. The shutdown occurred while the fluid catalytic cracking unit was being brought back online from a previous shutdown May 7.

The refinery in Artesia, New Mexico, is Holly's largest.

As oil prices reach new heights, so have gasoline and diesel costs.

"Average gasoline prices in the U.S. rose for an eighth straight week and for the 15th time this year, up 1.8 percent or 6.9 cents to a record $3.791 a gallon," noted Stephen Schork in his Schork Report. "Gasoline at the pump is averaging 28.5 percent above last year's pace.''

Drivers in some parts of the U.S. are paying considerably more, however. Gas pump prices in parts of California have been stuck above $4 a gallon for weeks now.

In other Nymex trading, heating oil futures rose 0.14 cent to $3.7665 a gallon while gasoline prices rose 4.89 cents to $3.2855 a gallon. Natural gas futures rose 17.9 cents to $11.133 per 1,000 cubic feet.

Associated Press Writer Thomas Hogue contributed to this report from Bangkok, Thailand.

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Stephen O’Hara, Angelica Corp.’s president and chief executive, was paid $461,966 in 2007, according to Post-Dispatch calculations.

O’Hara’s base salary was $425,000, and he received $36,966 in other compensation, such as 401(k) matching contributions and restricted stock, the Chesterfield-based company said in a regulatory filing.

Angelica provides linen management services to health care institutions. No executive received a performance-based incentive award, even though Angelica has an incentive compensation plan based on "the achievement of financial and strategic" performance goals for each officer and overall financial goals for the company.

Angelica put itself up for sale in 2007 payday loan. If the company had been sold and O’Hara remained under a new owner, he would have received about $1.1 million. If he were fired after a change in control, he would have received more than $3.8 million.
Ronald Kruszewski, who replaced O’Hara as chairman of the board in September, earned $19,000, plus stock awards and dividend payments.

The Post-Dispatch excludes unvested stock awards and unexercised option grants so actual money received, not potential earnings, is reported.

— ANGELA TABLAC

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In a recent performance review, my sister was rated "below expectations." Her boss said she took too long to complete a project. However, this really wasn’t her fault.

During that time, she had a lot of computer problems. Also, management changes created some confusion and her co-workers weren’t very cooperative. But she still got a bad review.

Now she’s on three-month probation with a warning that her current project must be completed on time. It’s not clear what will happen if she doesn’t meet the deadline.

I don’t think this is fair, because many things are out of her control. And the rules seem to be different for her. For example, her boss has positioned her monitor so that he can see what she’s doing.
My sister tries hard, despite getting little cooperation from others. I feel that "below expectations" should be for people who goof off all day. What do you think?

I think you only have one side of the story. When someone receives a reprimand, the automatic response is to point out other reasons for the problem. That’s just human nature.

But here’s the catch: people who never see their own flaws continue to repeat the same ineffective behaviors. So your sister needs to take a long, hard look in the mirror.

Your sister received a low rating because her project was late. Other factors may have contributed, but her boss believes she was responsible. She needs to stop fretting about "fairness" and concentrate on self-improvement.

To get off probation, she must focus like a laser on her upcoming project deadline cash advance flexible payments. If unavoidable obstacles arise, she needs to tell her boss immediately. And nothing but work should appear on her computer monitor.

If you continue to encourage your sister’s search for scapegoats, you will only perpetuate the problem. Instead of collaborating in her denial, try to help her save her job.

I am 24 years old with a job that bores me to death. Now that I’m in graduate school, I’ve realized that I truly hate this field. However, I am clueless about what I might prefer.

My parents say I should stick with this profession because the pay and benefits are good. What’s your opinion?

Somewhere along the line, you wandered down an inappropriate career path. But that doesn’t mean you have to stay there.

If you do, a lack of interest and commitment will limit your success. And no salary or benefit package is worth a lifetime of unhappiness and boredom.

Although your Mom and Dad undoubtedly have your best interests at heart, parents often make lousy career counselors. You need to seek out professional advice.

As a graduate student, you should have access to career counseling through your school’s placement office. Explore different occupations until you find one that energizes and excites you.

Marie G. McIntyre is a workplace coach. Send questions and get tips at www.yourofficecoach.com.

2008, McClatchy-Tribune Information Services

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With a 25-year history in the music business, Cliff Hunt was quick to spot an opportunity when the concept of downloading digital music files over the Internet began to take off.

Eight years ago, he and a partner acquired the rights to a Vancouver firm’s keystroke recognition technology – the software uses biometric identifiers to determine who is typing in a password on a computer – and set about figuring out a way to apply the feature to music sales.

Then file-sharing site Napster came along and turned the recording industry on its head.

"Music files were everywhere and rights didn’t matter anymore," says Hunt, 59, the chief operating officer of Toronto-based Yangaroo Inc. "We had to rethink our whole strategy."

He ultimately decided to focus on the longstanding relationship between record labels and radio stations – an area with which he was intimately familiar. A trumpet player who played his last gig in 1973 at St. Lawrence Market, Hunt has also worked as a band manager, with a record production company and as a music publisher.

Hunt saw a way to streamline the way labels promoted and distributed their product to radio stations, which has traditionally required printing thousands of CDs, packaging them with promotional material and ferrying them across the country.

In addition to being expensive and wasteful – most promos end up in the garbage can – the approach made it easy for highly anticipated releases to be leaked on to file-sharing websites well before they were played on the radio, let alone available for purchase in stores.

Says Hunt: "The kid that delivered the tape from the recording studio to the record company would be burning it in his car on the way. The next thing you know it’s up on Napster or Grokster or whatever the file-sharing system of the day was."

Enter Yangaroo. Co-founded in 1999 by Hunt, the company gives the labels a way to distribute their music securely over the Internet using the firm’s encryption technology and digital watermarks, which allow the file to be tracked if it ends up being leaked.

The firm, which completed an initial public offering in 2003, already has Canadian distribution agreements with EMI, BMG Canada, Universal Music Canada and Warner Music Canada and has signed exclusive deals with Canadian radio heavyweights, Astral Media Inc., Corus Entertainment Inc. and Rogers Communications Inc.

"Virtual every single that goes to radio in Canada today goes through DMDS," says Hunt, referring to Yangaroo’s Digital Media Distribution System.

But the key U.S. market has so far been more difficult to crack. While Yangaroo did 1.3 million deliveries in the U.S pay day loans. last year and has deals representing 1,900 individual radio stations, the company continues to rack up losses as it tries to establish itself in the industry. In 2006, Yangaroo posted a loss of $2.1 million, or 7 cents a share, on revenues of just over $430,000 – most of which came from the Canadian market, according to Hunt.

"What you’re doing is changing a culture of people that have been used to handling discs for the past 50 years," Hunt explains.

He says the strategy is to initially offer its services for free and then gradually introduce pay-per-use charges.

Investors, however, appear to be running out of patience. Shares of Yangaroo, meanwhile, have fallen from a high of $1.40 in mid-2003 to around 25 cents.

Inside the company’s development centre, located in Toronto’s Liberty Village neighbourhood, about 20 employees work at desks scattered beneath the exposed beams and ductwork of a converted industrial space. Music posters cover the walls, toys cluster around computer monitors and the sounds of indie rock filter through the air. The look is jeans, hooded sweatshirts and pierced ears.

Almost as if on cue, a shaggy-haired employee with a beard picks up the telephone to field a call from a curious radio station that wants to be added to the distribution list. Hunt smiles.

In some ways, the file-sharing phenomenon that’s decimated the recording industry has created a unique opportunity for Yangaroo. Big labels are desperate to cut costs and protect what little control they have left over the music they distribute. Small independent labels, meanwhile, are a promising growth area as more artists seek to take control of how their work is distributed in a rapidly changing industry.

Hunt is also keen on pushing the company as a more environmental solution since its technology not only eliminates the need for CDs and their jewel cases, but also the myriad of promotional material that gets shipped along with them.

But an even more lucrative opportunity may come from exclusive ownership of the DMDS technology. Yangaroo is currently waiting for a U.S. patent approval (it owns the patent in Canada, although it is being challenged by another company) that Hunt says would be a "ground-breaking" development for the company.

"It’s a barrier to entry by any competitors," he says, adding the technology also has potentially lucrative applications in other fields such as medicine and law, where the security of data transfers is paramount.

"It would make us an acquisition target by larger companies that want to own that space."

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General Motors Corp. says it will stop output at its truck plant in Oshawa on Monday if a strike at a parts maker in the United States doesn’t end soon.

The auto giant said yesterday one U.S. truck assembly operation is already down and three similar operations, including one in Oshawa, would be idle after a shift last night because of the strike at American Axle & Manufacturing south of the border. The strike has stopped production of critical axle parts. Most GM assembly plants have only small inventories to maintain vehicle output.

A senior union official said the walkout at the parts maker wouldn’t affect production of Chevrolet Silverado and GMC Sierra pickups in Oshawa until early Monday because the Oshawa truck plant doesn’t operate during weekends. The plant employs about 2,300 workers.

"It wouldn’t really have an effect until then here," said Keith Osborne, plant chair for the Canadian Auto Workers in Oshawa.

GM said the other affected truck plants would be in Flint, Mich., and Fort Wayne, Ind. They employ several thousand workers.

Earlier this week, GM idled its truck plant in Pontiac, Mich., because it had run out of parts.

Other GM assembly plants at risk due to their reliance on American Axle parts include operations in Arlington, Tex.; Janesville, Wisc.; and Silao, Mexico faxless payday advances. They make sport-utility vehicles.

GM’s moves follow the temporary closing of the big Chrysler minivan plant in Windsor because of a shortage of parts from TRW Automotive Holdings Corp.

Members of the Canadian Auto Workers walked off the job at TRW in a contract dispute earlier.

Analysts have said a short work stoppage could allow GM to reduce high inventories of trucks and sport-utility vehicles, but have cautioned that a longer disruption could be costly.

About 3,600 members of the United Auto Workers union in Michigan and New York walked off the job on Tuesday against American Axle in a dispute over wages. Talks between the two sides had not resumed yesterday.

American Axle had stockpiled parts for GM in advance of the strike, and most analysts had projected that it would take a week or so before shortages began to slow GM down.

With files from the Star’s wire services

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