JPM Warns on Earnings and Revenues Due to US Recession, IndyBancorp Halts Payments on CDO's Putting AFN's Dividend in Question

File these under "the bottom is in for financials - NOT"

JPMorgan Expects Banking, Cards to Post Lower Profit
By Elizabeth Hester

May 12 (Bloomberg) -- JPMorgan Chase & Co., the third- biggest U.S. bank, will post lower earnings from investment banking and credit cards this quarter as the U.S. recession gets under way,Chief Executive Officer Jamie Dimon said.

JPMorgan is seeing lower revenue growth in its credit-card business and will probably have to set aside more money to cover bad loans in that unit, as well as in retail and investment banking, Dimon said today at a conference in New York sponsored by UBS AG.

``The recession is just starting,'' Dimon said. ``I don't know if it will be mild or severe.'' The chances of it being ``pretty bad'' are about one in three, the 52-year-old CEO said.

JPMorgan has posted about $10 billion of writedowns and losses since the beginning of last year, compared with more than $40 billion at bigger rival Citigroup Inc. Dimon said the capital markets crisis sparked by last year's collapse of the subprime mortgage market is about 75 percent over.

In home lending, New York-based JPMorgan expects to lose $200 million to $250 million in the second quarter related to subprime mortgages. Losses in prime mortgages, those made to people with the highest credit rating, could increase to about $100 million for the quarter, the bank said....

IndyMac Bancorp (IMB) Deferral Impact on Alesco Financial Inc.

PHILADELPHIA, May 12 /PRNewswire-FirstCall/ -- Alesco Financial Inc. , a specialty finance real estate investment trust, announced today that IndyMac Bancorp disclosed this morning that it will defer making the interest payments on IMB's trust preferred securities, including those in AFN's portfolio.

AFN holds a portion of the equity interests in eight collateralized debt obligation, or "CDO," transactions which include trust preferred securities issued by IMB. As previously disclosed, IMB's securities represent an aggregate of 2.43% of the total pool of collateral in those eight CDOs. This collateral represents approximately $2.1 million in aggregate interest payments per quarter to the eight CDOs, of which AFN's proportionate share is approximately $1.5 million or about $0.02 per diluted AFN common share per quarter.

AFN is in the process of reviewing the impact of the IMB deferral on its portfolio. AFN currently expects that IMB's deferral will trigger the over-collateralization tests in five of the eight CDOs for a period of time. Once an over-collateralization test is triggered in a CDO, AFN will no longer receive current distributions of cash in respect of its equity interests in the CDO until sufficient cash flow is paid to senior debt holders in the CDOs to cure the over-collateralization tests.

IMB did not disclose how long it expects to defer its payments. AFN currently expects that, even if IMB does not resume making payment, and assuming no additional deferrals, the five affected CDOs will recommence making equity distributions within three to eight quarters. For the year ended December 31, 2007, and the quarter ended March 31, 2008, the five CDOs which AFN expects to trigger over-collateralization tests contributed $30.1 million, or 36%, and $8.2 million, or 41%, respectively, of AFN's adjusted earnings for such periods. AFN's adjusted earnings will continue to include this income even though AFN will not receive corresponding cash distributions until the over-collateralization tests have been cured. (uh, what if they are NEVER cured? Is this GAAP in action? No reserves, not even a caution in the footnotes on income from CDOs that are taking dives in the market daily? What is this called, Marked-to-Maybe? - Jesse)

At April 30, 2008, AFN had available unrestricted cash of $120 million, including cash generated by previously-disclosed gains on credit default swaps. This cash would be sufficient to allow AFN to maintain its first quarter 2008 dividend rate for the remainder of 2008, even after giving effect to the trigger of the over-collateralization tests described above. The payment of future dividends is, however, subject to the review and approval of AFN's board of directors, and there can be no assurance that AFN's board will determine to maintain the first quarter dividend rate.

As discussed on AFN's earnings call last week, AFN is reviewing a number of strategies for the company, including whether to continue to maintain its REIT qualification. Any change in strategy could impact the level of future dividend payments.

Techs Rally on Rumours of a Takeover of EDS by Hewlett-Packard

After the close today Hewlett-Packard confirmed that it is in conversations with EDS regarding a 'pact' of some sort. As to the details, and if it is a serious acquisition for the amount of 13 billion, is something we will have to wait to see.

H-P Nears Deal to Buy EDS
By Matthew Karnitschnig
Wall Street Journal Online

Hewlett-Packard Co. was close to a deal to acquire Electronic Data Systems Corp. for between $12 billion and $13 billion, according to people familiar with the situation.

The terms of the deal were not immediately clear but an announcement was expected soon, the people said. EDS, which provides consulting and technology outsourcing services, had a market value of about $9.5 billion, based on Friday's closing price of $18.86 on the New ...

Hewlett-Packard Near Deal To Buy EDS for $13 Billion
By CNBC
12 May 2008
03:20 PM ET

Hewlett-Packard, the world's largest personal-computer maker, is close to a deal to acquire Electronic Data Systems for between $12 billion and $13 billion, the Wall Street Journal reported, citing people familiar with the matter.

An announcement was expected as early as Tuesday, the Journal said.

The report sent EDS shares soaring, while HP shares plunged.

The move is aimed at boosting Hewlett-Packard's competitive position against rival International Business Machines as a provider of services such as tech consulting and customer support, the Journal said.

The transaction could spark further large deals in the technology sector as cash-rich mature companies such as Hewlett-Packard look to acquisitions for growth, the paper said.

Neither HP nor EDS had immediate comment.

Story at CNBC

Citigroup is "Beyond Repair" and Dividend Cut "Foregone Conclusion" Says Meredith Whitney

Meredith Whitney was not pulling punches in the 'exclusive interview' which she gave on Bloomberg television this morning.

Here is a video excerpt of her interview on BloombergTV today: Meredith Whitney on Bloomberg TV

Here is a story based on the interview which we watched with some delight at a Wall Street analyst 'telling it like it is.'

Citi's Pandit Faces `Impossible Feat,' Whitney Says
By Margaret Popper and Josh Fineman

May 12 (Bloomberg) -- Citigroup Inc. Chief Executive Officer Vikram Pandit faces an ``impossible feat'' in turning around the biggest U.S. bank as it faces ``seismic'' costs to restructure, Oppenheimer & Co. analyst Meredith Whitney said.

Citigroup will be forced to announce the sale of major businesses toward the end of this year or in early 2009, Whitney, who recommends investors sell the shares, said in a Bloomberg TV interview today. One of the units could be Banamex, the company's Mexican branch, she said.

Whitney, 38, correctly predicted on Oct. 31 that New York- based Citigroup would cut its dividend to shore up capital after mortgage-related writedowns. Pandit on May 9 outlined plans to sell $400 billion in assets at the bank, which has booked more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year.

``I think it's an impossible feat,'' Whitney said. ``They don't have the revenue power, they don't have the earnings power in so many of their businesses. Even Stephen Hawking could not pull this off,'' she said, referring to the British physicist.


Whitney said she expects Citigroup, which lost a record $10 billion in the fourth quarter, to post ``de minimis'' profits during the next three to five years. ("de minimis" is Latin for "jackshit"). She repeated her prediction that Pandit would be forced to lower the dividend again, and didn't give an estimate for restructuring costs. She estimated a loss this year of 45 cents a share.

Citigroup spokeswoman Christina Pretto declined to comment.

Share Performance

Shares of the company rose 3 cents to $23.66 at 11:41 a.m. in New York Stock Exchange composite trading. Citigroup had lost 20 percent this year before today.

Pandit's plan, which he presented at a Citigroup analyst and investor meeting, includes shedding $400 billion of assets during the next three years and cutting $15 billion in costs. He also forecast annual revenue growth of 9 percent.

``The presentation was glaringly light on actual mechanics, and run-rate earnings figures seemed to cherry pick revenue and credit scenarios from recent years,'' Whitney wrote in a note today. Pandit ``set no delivery date as far as execution,'' she wrote.

Citigroup's ``single greatest challenge'' is the company's ``antiquated and disparate systems and technology,'' Whitney wrote in the note. ``We think that not only will restructuring be almost prohibitively expensive for (Citigroup), but that this expense will come during a time when revenues will be under significant pressure.''

Pandit will spend at least three years trying to get Citigroup's systems to work together, Whitney said, pointing to integration efforts in recent years at Wells Fargo & Co. and JPMorgan Chase & Co.

``The credit outlooks and the loss assumptions for banks across the board are way too low,'' Whitney said in the interview. ``The outlook for earnings across the board is going to be much worse than people expect.''

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Margaret Popper in New York at mpopper1@bloomberg.net.

Last Updated: May 12, 2008 11:58 EDT

MBIA Loses Big, Shares Rally, Retail Traders Confused

MBIA announced this morning that it lost 13.03 per share. It is currently priced at 10.25, and the stock is rallying. The pundits on Bloomberg said this is because the results were 'better than expected,' with the whispered expectations being 'catastrophic.' They have recently added the spin that MBIA said they now have 'ample liquidity' and will not have to raise any more capital. This triggered 'optimism' in US financials.

"Coincidentally" this is also stock option expiration week for May, and the specs had been piling on the financials which are almost certainly going lower in the longer term, but can anywhere in the short term.

"Perhaps the worst is behind us."

This is a great example of the frustration that the casual or novice investor/trader will feel when playing the markets. When a company loses MORE than their share worth in a single quarter, it could be called counter-intuitive that the stock will rally that morning to say the least.

In the short term fundamentals have little or nothing to do with market performance in the type of market which we are in now, which is a speculator's market awash with desperate hedge funds and big trading banks loaded with hot money.

If you are in this market you are playing a no-limit poker game with a group of high rollers, paid shills, and desperate punters who can see your cards at least in the aggregate if not individually.

If a large group of small speculators took short positions, particularly with options ahead of today's announcement, and the company remained solvent, they are going to get squeezed in the short term, pure and simple.

That's it. In a nutshell. It may not seem fair to you, but that is the game in which you are playing if you are sitting at the table.

How do you fight this? The best and most appropriate measure for most 'traders' is to lengthen your timeframes and shorten your leverage. Play options for the longer term and lightly. NEVER go in heavily before any event. Toss your predictive models out the window.

You will hear from a lot of daytraders who claim to just go with the flow, and make money scalping the direction short term without regard to the fundamentals, the up and down. Most of them have short trading lives, and exaggerate their gains and hide their losses, going bust in less than twelve months. They get consumed by commissions and mistakes. Those are the facts. They may have a lucky streak, but they always give it all back, and more.

How did we handle this? We came in heavy in cash and hedged positions where we are short one thing and long another, so the net result is neutral. Now we are starting to add selective short positions on this rally in financials based on close look at the charts, and not getting married to any of them. We did add some longer dated puts on MBIA for example a few minutes ago when it was up 1.00 and we will do more if it goes higher up to our stop out.

Don't feed the sharks. This is not quite a 'wild west' market but its close. They like to throw a cat among the pigeons and see who panics out of their overleveraged and undercapitalized positions for a quick buck. There are plenty of talking heads and guys talking their books to help you lose money in a panic squeeze or rally.

Protect your capital, lengthen your timeframes, don't overweight any one directional positions, and remember that you cannot predict the future, and nothing has to make sense to you in the short term because you are playing the game on a level perhaps appropriate to you, but not to the real insiders and professionals.



AP
MBIA slides to huge 1Q loss on hefty charges
Monday May 12, 9:34 am ET
By Stephen Bernard, AP Business Writer

MBIA falls to $2.41 billion loss in 1st quarter, writes down $3.58B derivative liabilities

NEW YORK (AP) -- MBIA Inc. swung to a $2.41 billion loss during the first quarter as the bond insurer faced ongoing deterioration in the credit markets and recorded billions in write-downs.

The loss equated to $13.03 per share during the quarter ending March 31, compared with year-ago profits of $198.6 million, or $1.46 per share.

MBIA was forced to reduce the value of its insured derivatives holdings by $3.58 billion, leading to $2.96 billion in total lost revenue, compared with revenue of $729.9 million a year ago. Net premiums written tumbled to $97.3 million from $171.3 million last year.

Unlike traditional insurance on corporate or municipal bonds, the value of derivatives holdings -- called credit default swaps -- must be priced at the end of each quarter at current market value. Because the value of such products has tumbled in recent months, MBIA was forced to cut the value of its holdings, thus recording what in accounting terms is called an unrealized loss. Actual losses would only occur if MBIA sold the derivatives at less than the original cost.

MBIA does not project actual losses on those holdings to ever reach the amount equal to the write-downs it took during the quarter, it said in a statement.

Shares rose more than 4 percent, or 41 cents, to $9.84 at the open of trade.

The derivatives losses were not the only problems plaguing bond insurers in recent months. They have also been hit hard by the deterioration in the mortgage markets that began in late 2007.

Initially, bond insurers only provided insurance to municipalities. But in recent years business was expanded to insure other debt, such as bonds backed by mortgages and consumer loans. As the mortgage market soured and mortgage defaults spiked in 2007, investors and ratings agencies began to worry bonds backed by those troubled loans would default as well. That in turn would lead to a spike in claims payments.

Both investors and credit ratings agencies worried the insurers would not have enough spare cash to both handle a potential increase in claims and maintain reserves warranting top-notch "AAA" financial strength ratings.

The "AAA" rating is essential to ensure bond insurers can book new business. Worries that insurers like MBIA could face ratings cuts cost the company some new business -- one reason why written premiums declined during the first quarter.

Downgrades to bond insurers can make it more expensive for municipalities and other institutions to borrow money for an array of projects ranging from the construction of new schools to sewer systems. Bond insurers essentially back a bond by agreeing to pay principal and interest if the bond issuer misses payments. In return for the insurance, a municipality typically will be able to use the insurer's "AAA" rating to get a lower interest rate and thus save money.

Without that "AAA" rating on a bond pledged by the insurer, investors will charge municipalities more to borrow money. Those higher costs are often passed down to taxpayers in the form of higher taxes.

Throughout the quarter, MBIA raised about $2.6 billion in new capital through the issuance of common stock and other investments. That included investments by private equity firm Warburg Pincus in an effort to maintain MBIA's "AAA" ratings and demonstrate it would have enough cash to cover a spike in claims.

Despite the capital raising efforts, Fitch Ratings cut MBIA's financial strength rating to "AA" from "AAA" in early April. MBIA's reserves range between $3.4 billion and $3.8 billion short of what is needed for Fitch to consider the bond insurer worthy of being rated "AAA," Fitch said then.

Both Moody's Investors Service and Standard & Poor's affirmed MBIA's "AAA" rating in late February, but all three ratings agencies have a long-term negative outlook on the bond insurer.

Prior to those ratings affirmations in February by Moody's and S&P, MBIA had booked very little new business, the company said in a statement.

AP Business Writer Jennifer Malloy in New York contributed to this report.