Market Woes Return; Lehman, WaMu Hit Hard
In a press briefing this morning, White House press secretary Dana Perino told reporters that the stock market's surge on Monday in response to a move by regulators and the U.S. Treasury to take control of Fannie Mae (FNM) and Freddie Mac (FRE) proved that "it was the right move at the right time." No word on her take on Tuesday's trading activity, however, which saw the Dow Jones Industrial Average fall to 11,328.27, a 182.47 point drop, as investor unease returned to the financial sector just one business day after the historic move to place the twin GSEs into conservatorship. No two companies were hit harder, however, than Lehman Brothers Holdings Inc. (LEH) and Washington Mutual (WM). For Lehman, shares fell to $8.09, off more than 42 percent, as Dow Jones reported earlier on Tuesday that the chairman of South Korea's top securities regulator, Jun Kwang-woo, had said talks between Lehman and the Korea Development Bank had fallen apart. Standard & Poor's Ratings Services said it may downgrade Lehman after the share price declines observed Tuesday, suggesting that the Wall Street firm's options for fresh capital are quickly narrowing. "The CreditWatch listing stems from heightened uncertainty about Lehman's ability to raise additional capital, based on the precipitous decline in its share price in recent days," said S&P credit analyst Scott Sprinzen. The agency said that it expected Lehman to incur "a substantial net loss in the third quarter because of persisting difficult conditions in the investment-banking trading markets and write-downs from deteriorating market valuations of its mortgages and mortgage-related securities." Beyond the write-downs, S&P also noted that Lehman faces the spectre of needing immediate capital should it spin off assets in a good bank/bad bank scenario, as previous media reports have suggested. Read prior HW coverage on Spinco. Sanford Bernstein analyst Brad Hintz, however, suggested that the fall in prices had little to do with credit or counterparty risk. Investors noticed that the bank had stopped issuing bonds off a shelf registration, adding to uncertainty surrounding the bank, according to a Reuters report. "We believe this move is a sign that the company has some material nonpublic information that the firm doesn't want to disclose in a bond prospectus," Hintz said in a report, Reuters reported. WaMu gets walloped Fears resurfaced Tuesday as well that Washington Mutual may not survive the ongoing housing mess, sending shares down nearly 21 percent to $3.26. Credit default spreads on WaMu widened by 70 basis points to 1,513, according to a Down Jones report citing Tim Backshall, chief credit derivatives strategist at New York-based Credit Derivatives Research. WaMu's slide has less to do with specific new news surrounding the company than it did with investors' realization that a Treasury move to bail out ailing GSEs will do little to stanch further losses in housing going forward, various analysts told HW on Tuesday. The bank in particular disclosed earlier this week that it had entered into a Memorandum of Understanding with its chief regulator, the Office of Thrift Supervision, over its risk management and capital management practices. WaMu also kicked long-time CEO Kerry Killinger to the curb, naming Alan Fishman, chairman of New York-based Meridian Capital Group, to the head post at the firm. Fishman also was president and chief operating officer of Philadelphia-based Sovereign Bancorp Inc. (SOV), the nation’s second-largest thrift. WaMu lost $3.33 billion in the second quarter, as it significantly hiked its loan loss reserves by $3.74 billion to $8.46 billion. The bank has remained steadfast in its assertion that it will not seek to raise additional capital. Out of WaMu’s $231.1 billion loan portfolio, it’s $52.9 billion in option ARMs and another $62.5 billion in home equity loans and lines of credit that are drawing the most attention from analysts and investors. Total nonperforming assets at the Seattle-based bank jumped to $11.2 billion at the end of the second quarter, up 22 percent from the first quarter and nearly three times the NPAs recorded one year earlier. Disclosure: The author held no relevant positions when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.