Citi Revenue $25b in Quarter
Citgroup announced earnings this morning with earnings per share of 15 cents versus a $0 expected. Revenue was $25 billion versus $21 billion anticipated. Like BofA’s, and Chase’s, these are solid results, but unfortunately overshadowed.
FDIC’s Bank Failure Update
The FDIC closed down several more banks on Friday. Tamalpais Bank (CA) is now under Union Bank (CA). TD Bank (FL) acquired the banking operations, including all the deposits, of three Florida-based institutions: AmericanFirst Bank, First Federal Bank, and Riverside National Bank. Butler Bank (MA) has new signs on its branches saying People’s United Bank (CT). Lakeside Community Bank (MI) is now part of First Michigan Bank. Innovative Bank (CA) was maybe too innovative, and was taken over by the FDIC and a purchase and assumption agreement was signed with Center Bank (CA). City Bank (WA) is now part of Whidbey Island Bank (WA).
Feds Investigating Countrywide
The Wall Street Journal reported that federal authorities are picking up the pace in a criminal investigation of Countrywide Financial Corp. and its role in the meltdown in 2007 and 2008 of the U.S. housing and finance industries. The paper didn’t offer details on what charges could emerge, but said a grand jury began hearing testimony about Countrywide last year. No criminal charges have been filed against corporate leaders in the larger federal probe.
.25% Fed Funds Through August?
The Goldman news was enough to shake up the markets, and fixed-rate securities improved in price and dropped in rate. The 10-yr Treasury yield dropped to 3.78% although mortgage spreads widened out slightly, so did not improve quite as much. The futures market is pricing in an 83% chance that the Fed keeps rates at .25% through August – so don’t look for a change.
Economic Preview For Week
The press is certainly consumed with the Goldman Sachs news, but that doesn’t mean that scheduled news comes to a halt. Things are pretty slow this week for the first few days, although we do have Leading Economic Indicators later this morning (expected to be up 1.3% for March, which would be the largest increase in nine months). On Thursday we have the Producer Price Index (PPI), Existing Home Sales, and Initial Jobless Claims. Friday we have Durable Goods, an important indicator of economic activity, and New Home Sales. Currently the yield on the 10-yr is at 3.78% and the 5-yr & mortgage prices are unchanged, maybe worse a tad.
Financials Down On SEC’s Goldman Suit
Numbers can play tricks. Just ask Goldman Sachs. The SEC claims that Goldman Sachs had marketed a packages of mortgages put together by a hedge fund that would profit if the mortgages fell in value. The mortgages did indeed fall in value with the bulk defaulting, and the SEC claims that Goldman neglected to fully disclose the role of the hedge fund in putting together the package of mortgages. So on Friday, for example, in spite of companies like Bank of America (and today Citi) having great earnings, financial stocks, and the stock market in general, fell, and rates dropped due to the flight to quality. Goldman Sachs misstated and omitted key facts about a financial product tied to subprime mortgages as the U.S. housing market was starting to falter, per the SEC. Was it one of the last deals done by a struggling industry? Let’s hope so.
Recap of Goldman Issues
The issue is Goldman’s lack of disclosure, and once again where the rating agencies were in all of this. Analysts during the dot-com bubble recommended stocks of banking clients they actually believed were highly overvalued, and the same thing happened. Financial companies should not be allowed to mislead investors or take on leverage that can jeopardize everyone else. From 2004 through 2007 Goldman Sachs created 23 financial transactions called “Abacus”, with critics saying that the bank used the deals to off-load the risk of mostly subprime home loans and commercial mortgages to investors. There were $7.8 billion of Abacus notes but the risk passed to investors was multiples higher since the Abacus transactions were synthetic collateralized debt obligations and credit default swaps. These swaps are used to transfer the risk of losses on debt, and securitization, used to slice the risk in a pool of assets into various new securities, and Goldman’s deals were filled with default swaps that offered payouts to Goldman Sachs if certain mortgage bonds didn’t pay as promised, in return for regular premiums from the bank.
Hedge fund Paulson & Co. (John Paulson, not Henry Paulson, and is not accused of any wrongdoing) helped pick the underlying securities and also bet the CDO would default. Paulson was proved correct, and his hedge fund eventually turned a $1 billion profit and CDO investors lost a similar amount, according to the SEC. It is the first big case, but probably not the last, that examines investment banker’s role in the subprime mortgage mess, and of course other issuers of mortgage securities, such as Deutsche Bank, Credit Suisse, etc., are caught up in the news and its implications. No matter what happens, don’t expect less financial regulation as a result.
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