Mortgage Meltdown: Bank Earnings Down and Out

 

Bank earnings falling off, failures still a threat on the horizon.

 

Even with the phoney accounting rules allowed by the SEC and the FASB, the reported earnings of most banks are taking major hits. Hidden below the surface of this bad news is more bad news as the rate of delinquencies, foreclosures, evictions, and repossessions continue to skyrocket. 

 

We have said it before and it bears repeating: AMNESTY FOR ALL is the only approach that will defuse this bomb. By changing the rules of civil procedure and substantive law, stopping the foreclosures, stopping the evictions, and mediating payments terms that are within the means of the borrowers, the mortgages can remain on the books, balance sheets can be restored and claims for improper sales of CMO and CDO securities can be staunched. EVERYONE must benefit from the solution. Any effort aimed at only one segment of the marketplace will fail.

FROM FORBES:

Earnings Preview

Banking’s Mean Season

Liz Moyer, 04.14.08, 2:55 PM ET

Wachovia set the tone Monday for what is expected to be an especially bloody first-quarter earnings season, which starts this week. 

Posting a surprise 20 cent a share loss, the Charlotte, N.C., bank announced it would slash more jobs in its investment banking division, dramatically increase reserves for loan losses and return to the markets for the second time this year to raise new capital. Oh, and it’s cutting its dividend.

Across the banking industry, profits are slumping or swinging to losses as the credit crisis spreads from big Wall Street firms to the regional banks that depend more on traditional lending for their revenues. Especially hard hit: banks concentrated in areas of the country most sharply feeling the housing downturn.

Video: Citi And Banks

Washington Mutual, the largest U.S. thrift, already announced its greater than expected disappointment, saying last week it would lose $1.1 billion after setting aside billions for anticipated loan losses. It cut its dividend to 1 cent and went hat in hand to Texas Pacific Group, which agreed to give it a $7 billion investment.

The pressure on regional lenders will inevitably lead to another round of bank consolidation. National City, based in Cleveland, is seen having a 38% drop in earnings per share in the quarter. It already cut its dividend nearly in half and acknowledged it was looking for a buyer or other strategic alternatives. Two other Cleveland banking companies are also feeling the pressure, even though each is viewed as a potential bidder for National City. KeyCorp‘s profits per share are expected to fall 48%, and Fifth Third Bancorp‘s by 25%.

Elsewhere, analysts expect a 33% decline in profits per share at Dallas-based Comerica; a 30% drop at Birmingham, Ala.-based Regions Financial; and a 13% drop at San Francisco’s Wells Fargo.

Wall Street’s pain is also enduring for another quarter. Merrill Lynch and Citigroup are expected to post losses per share of $1.90 and 95 cents, respectively, and both are expected to have billions more in write-downs of mortgage securities and loan holdings. JPMorgan Chase, which rescued Bear Stearns last month, is expected to report a 50% drop in earnings per share.

Wachovia’s undoing was its ill-timed foray into mortgage banking in California. The bank bought San Francisco-based Golden West Financial in 2006 in what was then seen as a shrewd entry into a red-hot mortgage market. Golden West specializes in adjustable-rate mortgages and had a long track record of surviving real estate booms and busts because of its conservative lending philosophy.

But this is no ordinary bust. California’s real estate crisis is weighing on banks with a big lending presence there, including Wachovia, Bank of America, Citi and Wells Fargo.

Analysts had expected Wachovia to say it had profits of 40 cents a share for the period, and they expected that announcement to come several days from now. But Wachovia moved up its earnings report after a weekend negotiating a new way to shore up its sagging capital.

Non-performing assets of $8.3 billion rose 56% from the fourth quarter and were eight times the level of just a year ago. Wachovia said troubled loans in the Golden West portfolio deteriorated more quickly than expected.

“I’m deeply disappointed with our first-quarter results,” said G. Kennedy Thompson, Wachovia’s chief executive, on a conference call Monday. “I know these actions aren’t without cost. I wish they weren’t necessary, but they are.”

Wachovia cut its dividend by 41%, saving $2 billion in order “to build capital ratios and provide more operational flexibility.” It is also selling $7 billion in new shares, its second share offering of the year.

The company is bracing for continued loan losses into next year, saying it would set aside up to $1 billion in anticipation.

As recently as last fall, Wachovia was seen as a potential savior, particularly for Merrill Lynch, which is said to have approached it about a merger as the losses mounted on its exposure to credit derivatives. Now, Wachovia, the fourth-largest U.S. bank, is seen as a target.

If mortgage losses go beyond already gloomy predictions, “they could succumb to more capital pressure, and their independent-company days may be numbered,” says David Hendler, an analyst at CreditSights.

 

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