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Big banks warn of fallout

Bank of America and Wachovia predict a world of woes from the mortgage crisis.

By Times wires
Published November 10, 2007

CHARLOTTE, N.C. - Florida's two biggest banks warned Friday that ongoing home mortgage problems will wreak havoc on their own finances.

Bank of America Corp. said that continued "market dislocations," including those related to the value of securities it owns that are backed by loans, will hurt its fourth-quarter results. The nation's second-largest bank did not provide an estimate of how large the impact will be.

Rival Wachovia Corp. said the value of securities it owns that are backed by loans sank by about $1.1-billion in October. The nation's fourth-largest bank also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in certain regions of the nation's housing. The provision is pegged at $500-million to $600-million in excess of charge-offs in the quarter.

Bank of America and Wachovia, both based in Charlotte, N.C., together control almost 40 percent of Florida's deposits.

In a regulatory filing with the Securities and Exchange Commission, Bank of America said it has some exposure to collateralized debt obligations, or CDOs - complex financial instruments that combine slices of different kinds of risk. CDOs are often partly backed by subprime mortgages, or loans given to customers with poor credit history.

The bank, based in Charlotte, does not directly offer subprime loans, but the value of the CDOs has plummeted as an increasing number of subprime borrowers have defaulted on their home loans.

"We expect these significant dislocations in the CDO market to continue, and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions," the filing said.

Bank of America shares rose 48 cents, or 1.1 percent, to $43.98 on Friday.

Last month, the bank reported $607-million in trading losses and recorded $247-million in loan markdowns, helping reduce third-quarter profit by 32 percent, to $3.7-billion.

Bank of America said it had provided more than $15-billion of liquidity support for commercial paper sold by CDOs, of which a net $9.8-billion is mainly backed by subprime residential mortgage securities.

The bank said it also has more than $3-billion of exposure to CDOs through its structuring, warehousing and trading activities.

Mortgage-related writedowns across the banking industry eclipsed $40-billion during the third quarter, and the fourth quarter is shaping up to be just as bad, if not worse.

Wachovia's news heightened fears that the fallout from the subprime turmoil is spreading deeper into credit markets.

Its shares rose 35 cents, or 0.87 percent, to $40.65 on Friday after falling to a new 52-week low of $38.05.

The announcement also raised questions about the bank's October 2006 acquisition of adjustable-rate mortgage lender Golden West Financial Corp. of Oakland, Calif.

"We believe the company is trying to get ahead of likely higher future mortgage losses in California," Deutsche Bank Securities analyst Mike Mayo wrote in a client note.

"Per Golden West, it now becomes even more obvious that Wachovia purchased the thrift at the wrong time of the cycle."

The weakening markets - which Wachovia estimates could get worse over the last two months of the quarter - cut the value of the bank's so-called collateralized debt obligations by more than 60 percent.

As of Sept. 30, Wachovia had $1.8-billion in CDO exposure; after the latest writedowns, the exposure is now $676-million.

Wachovia has an additional $2.1-billion of exposure to more traditional subprime mortgage-backed bonds. The value of those holdings remained steady in October as hedging strategies offset losses.

Wachovia was the third national financial institution to announce fourth-quarter writedowns eclipsing $1-billion.

Citigroup Inc. said it will likely take between $8-billion and $11-billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6-billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.

Also on Friday, JPMorgan Chase & Co. warned of possible fourth-quarter writedowns, but did not give any specific potential figures in a quarterly filing with the SEC.

Financial services provider E.Trade Financial also said Friday it expects the value of its asset-backed securities to continue to drop in value, while credit card leader Capital One Financial Corp. reported an increase in October loan charge-offs and delinquencies.

A consumer jolt
WASHINGTON  - Consumer confidence plunged in early November to the lowest level since Hurricane Katrina battered the Gulf Coast and sent oil prices soaring in 2005. The RBC Cash Index showed consumer confidence fell to a reading of 64 this month, down sharply from an early October reading of 80.6, when consumer sentiment was on the upswing as the stock market stabilized temporarily following a turbulent August. Renewed market turbulence, oil prices threatening to hit $100 a barrel and a continued steep slump in housing combined to jolt consumer confidence in the latest survey done by the international polling firm Ipsos. The 64 reading was the lowest point for the monthly survey since it hit 61.5 in September 2005, a month when energy prices soared, reflecting the shutdown of Gulf Coast refineries after Katrina struck.

[Last modified November 9, 2007, 23:05:21]