US Lawmakers Pressure FASB to Slow Down Disclosure Reforms

Yet another good reason to sweep the Congress clean in the fall elections.

FASB may delay off-balance sheet accounting change
By Emily Chasan

NEW YORK, July 28 (Reuters) - The Financial Accounting Standards Board, under pressure from lawmakers, will reconsider its timeline for a controversial rule change that may force banks to bring trillions of dollars in off-balance sheet assets onto their books at its Wednesday meeting.

FASB, which sets U.S. accounting rules, will reconsider the rule's effective date and transition provisions, according to a schedule posted on its website.

"Additionally, the Board will consider transitional disclosures and the timing of both projects," FASB said on its website.

FASB voted in April to revamp two accounting standards known as FAS 140 and FIN 46R, to eliminate a concept known as the "qualifying special-purpose entity," or QSPE, that banks use to keep assets like mortgage-backed securities and special investment vehicles off their balance sheets.

The board is expected to release its proposal by the end of August and leave it open for public comment for 60 days. It has suggested parts of the new rule could be applied as soon as next year for companies with fiscal years beginning after Nov. 15.

Troubles in those off-balance sheet assets have been blamed for helping trigger the credit crisis. FASB members have said they believe the current rules prevented investors from understanding the true risks banks faced. Analysts have estimated the rule change could force banks to bring $5 trillion in assets onto their books.

But concerns about the rule's effect on the capital requirements at financial institutions have triggered a firestorm on Wall Street and been partially blamed for the sharp decline in shares of mortgage lenders Fannie Mae and Freddie Mac over the past month.

Some have urged FASB to slow down the rule.

"Changes to securitization accounting could have a dramatic impact on the economy, the capital markets and consumers seeking credit," Republican Rep. Spencer Bachus of Alabama said in a letter to the chairmen of FASB and the U.S. Securities and Exchange Commission last week.

Industry groups such as the American Securitization Forum and the Securities Industry and Financial Markets Association have also written FASB to say "the risks of too much haste are high."

FASB spokesman Neal McGarity has said that other regulators, not FASB, are responsible for setting capital ratios for financial institutions. He was not immediately available for comment on the board's plans. (Editing by Leslie Gevirtz)

Traders Walking Like Egyptians Down "De Nile" on the Merrill Writedowns

First, and we cannot say this often enough, in light volume markets the short term action is more like a rugby scrum than a game of chess.

The funds are trying to 'paint the tape' into the end of month, and perhaps squeeze a few shorts along the way. Why? Because its fees and bonuses that drive Wall Street, the customers be damned, and don't ever forget it.

We are also in a period in which the cynicism and short term focus of professional traders is near all time highs thanks in large part to our government and regulatory environment. (See dollar chart below) This is the classic setup for a conflagration.

But in the short term, the market is what it is.

What Merrill shows is that the estimates of losses in the financials are substantially low, placing companies like Citigroup and Lehman and the other investment banks on the cliff edge of insolvency. Technical insolvency doesn't count, they are still a game until someone calls their hand, and Benny is trying to slip them a couple cards and some cash to help keep the game going.

Citigroup Markdowns May Rise $8 Billion, Analyst Says
By Adam Haigh

July 29 (Bloomberg) -- Citigroup Inc. will probably write down the value of collateralized debt obligations by $8 billion in the third quarter, Deutsche Bank AG analyst Mike Mayo said, after Merrill Lynch & Co. said it will sell the firm's CDO holdings for 22 cents on the dollar.

Citigroup values the securities, mortgage-related bonds at the heart of the credit crisis, at 53 cents, Mayo wrote in a report to clients today. Citigroup has $22.5 billion of CDOs and it may have another $7 billion in writedowns to come, Mayo said. That could force it to raise more money, as Merrill did today, he said.

''The decision about raising new capital may be closer than we previously thought,'' Mayo said in the report. He also expects the bank to write down an additional $1 billion because of its $2 billion in exposure to so-called monoline insurance companies.

The additional writedowns at Citigroup mean the bank probably will report a third-quarter loss of 59 cents a share and a full-year loss of 80 cents, said Mayo, who has a ''hold'' rating on the stock. He previously estimated the New York-based bank, the biggest in the U.S. by assets, would report a loss of 66 cents in 2008.

Citigroup fell 28 cents, or 1.6 percent, to $17.15 at 10:27 a.m. in New York Stock Exchange composite trading. They dropped 41 percent this year before today.

'Good News'

Merrill is taking a $4.4 billion loss on the sale of $11 billion of CDOs.

''The good news is that that the actual sales can give confidence that Merrill is finally selling assets rather than merely marking them to market,'' Mayo said. (Mayo is no Meredith by a long shot. Check out his revision just below on Merrill's full year losses. - Jesse)

Mayo estimates that Merrill, the third-largest U.S. securities firm, will report a full-year loss of $10.95 a share, compared with his earlier prediction of a $5.80 loss. Oppenheimer & Co. analyst Meredith Whitney estimates the company will report a loss of $10.50 in 2008.

UBS AG analyst Glenn Schorr estimates Merrill will report a full-year loss of $11.36 a share because of ''significant dilution'' from the plan to raise capital by selling about $8.5 billion of stock. Schorr has a ''neutral'' rating on Merrill.

''While we don't think Merrill's announcement necessarily implies a 40 percent writedown ($7.2 billion) for Citi, directionally we think investors should expect further incremental writedowns in coming quarters,'' Schorr wrote in a report to clients today.

Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, may have to sell ''significant assets'' to guard against further losses from its $65 billion of mortgage and real estate holdings, Schorr said.

Merrill Sells $30.6 Billion of "Super Senior" ABS Debt for 22 cents on the dollar and Provides the Financing for 75% of the Purchase Price

Until not too long ago this $30.6 B worth of super senior toxic crap was valued at over $11 B and is now in what can only be called a 'get us the hell out' distress sale with a government entity wealth fund. Said entity is also participating in a share offering, several billions of which is also coming from Merrill in penalties from prior offerings with resets based on share performance. Yikes!

As the IMF said today, this credit crisis is just not over yet at all, thereby taking down the US equities market and in particular the financial sector. Our cynical view is that there was knowledge of the coming Merrill announcement during the day in select trading circles as well.

There is no predicting how the Wall Street wiseguys will try to wrap this tomorrow. Is this finally the 'kitchen sink' mother of all writedowns for Merrill? Is this a sign of the bottom? We tend to think this shows what a farce the writedowns have been to date, and what accounting legerdemain underlies the valuations of several US financial companies. This does not bode well for a few of Merrill's Wall Street cousins. There may not be an indedependent investment bank standing by the time this is over, and north of fifty percent fewer hedge funds.

We are not sure about that. But we are reasonably confident that the credit crisis is going to come on with the relentless force and fury of a pyroclastic flow [1] and ignite a new bonfire of the vanities.

Get out of its way. Minimize your exposure to the financial system at your earliest convenience and seek the highest financial ground. The strategy now is the protection of wealth, the conservation of capital.

[1] A pyroclastic flow is a common and devastating result of some volcanic eruptions. The flows are fast-moving currents of hot gas and rock which travel away from the volcano at speeds generally greater than 80 km/h (50mph). The gas can reach temperatures of about 1,000 degrees Celsius (1,800 F). The flows normally hug the ground and travel downhill, destroying everything that they overtake.

Merrill to take $5.7 billion mortgage asset write-down
Mon Jul 28, 2008 6:31pm EDT
By Christian Plumb and Jeffrey Benkoe

NEW YORK (Reuters) - Merrill Lynch & Co Inc said it expects to take a $5.7 billion pretax write-down in the third quarter due to losses on the sale of mortgage assets and plans to raise at least $8.5 billion by selling new common shares.

Merrill said Singapore's Temasek Holdings Pte Ltd TEM.UL would buy $3.4 billion of the offering. Merrill has already taken billions of dollars in write-downs in past quarters and said it sold key holdings including a 20 percent stake in Bloomberg when it announced second-quarter earnings.

Merrill said on Monday it would pay $2.5 billion as required under a previous stock sale to state-run Temasek, along with $2.4 billion in required dividends to preferred shareholders. In previous deals to raise capital, Merrill had agreed that if it sold shares at too low a price in the future, it would reimburse investors.

The No. 3 Wall Street investment bank's shares were down 5 percent in after-hours trading after retreating 12 percent to $24.33 in the main trading session on the New York Stock Exchange.

Merrill also said it agreed to sell collateralized debt obligations with a face value of $30.6 billion for $6.7 billion to an affiliate of private equity fund Lone Star. (These are U.S. "super senior ABS collateralized-debt obligations" that are being sold for a little less than 22 cents on the dollar - Jesse)

Merrill Lynch Announces Substantial Sale of U.S. ABS CDOs, Exposure Reduction of $11.1 Billion
Monday July 28, 5:25 pm ET
Merrill Lynch Announces Initiatives to Further Enhance Capital Position
Original release from Merrill with Two Pro Forma Attachments

NEW YORK--(BUSINESS WIRE)--Merrill Lynch today announced a series of actions to significantly reduce the company’s risk exposures and further strengthen its capital position. These actions include:

-Announced substantial sale of U.S. super senior ABS CDO securities, resulting in an exposure reduction of $11.1 billion from June 27, 2008 (ABS CDOs are defined as collateralized debt obligations comprised of asset-backed securities).

-Agreement to terminate ABS CDO hedges with monoline guarantor XL Capital Assurance Inc. (“XL”) and settlement negotiations with other monoline counterparties

-Plans to issue new common shares with gross proceeds of approximately $8.5 billion through a public offering launched today (excluding a fifteen percent, or approximately $1.3 billion, option granted to the underwriter to purchase additional shares of common stock to cover over-allotments)

-Agreement that Temasek Holdings will purchase $3.4 billion of common stock in the public offering, a portion of which is subject to receipt of regulatory approvals

-Exchange of all of the outstanding mandatory convertible preferred securities for common stock or new preferred securities, which eliminates the reset features in the original securities

-Purchase of approximately 750 thousand shares of common stock in the public offering by executive management

“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said John A. Thain, Chairman and CEO of Merrill Lynch. “Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position by issuing common stock. The actions we announced both today and on July 17 will materially enhance the company’s capital position and financial flexibility going forward.”

As a result of the transactions announced today, the company expects to record a pre-tax write-down in the third quarter of 2008 of approximately $5.7 billion. This write-down is comprised of a $4.4 billion loss associated with the sale of CDOs, a $0.5 billion net loss on the termination of hedges with XL Capital Assurance and an approximately $0.8 billion maximum loss related to the potential settlement of other CDO hedges with certain monoline counterparties. In the third quarter, Merrill Lynch also expects to record an expense of $2.5 billion related to its reset payment to Temasek and $2.4 billion of additional dividends as a result of the exchange of certain existing mandatory convertible preferred stock for common stock as described under “Common Stock Offerings and Early Conversion of Mandatory Convertible Preferred.”

Pro forma for the transactions announced today, the sale of our interest in Bloomberg L.P. and the expected FDS transaction, Merrill Lynch’s Tier 1 capital ratio, total capital ratio and adjusted “if-converted” book value per share as of June 27, 2008 would have been 10.5%, 16.6% and $22.21. These figures do not include the impact of any exercise of the approximately $1.3 billion over-allotment option.

CDO Sale:

On July 28, 2008, Merrill Lynch agreed to sell $30.6 billion gross notional amount of U.S. super senior ABS CDOs to an affiliate of Lone Star Funds for a purchase price of $6.7 billion. At the end of the second quarter of 2008, these CDOs were carried at $11.1 billion, and in connection with this sale Merrill Lynch will record a write-down of $4.4 billion pre-tax in the third quarter of 2008.

On a pro forma basis, this sale will reduce Merrill Lynch’s aggregate U.S. super senior ABS CDO long exposures from $19.9 billion at June 27, 2008, to $8.8 billion, the majority of which comprises older vintage collateral – 2005 and earlier. The pro forma $8.8 billion super senior long exposure is hedged with an aggregate of $7.2 billion of short exposure, of which $6.0 billion are with highly-rated non-monoline counterparties, of which virtually all have strong collateral servicing agreements, and $1.1 billion are with MBIA. The remaining net exposure will be $1.6 billion. The sale will reduce Merrill Lynch’s risk-weighted assets by approximately $29 billion.

Merrill Lynch will provide financing to the purchaser for approximately 75% of the purchase price. The recourse on this loan will be limited to the assets of the purchaser. The purchaser will not own any assets other than those sold pursuant to this transaction. The transaction is expected to close within 60 days.

Termination of Monoline Hedges:

In addition to the CDO sale referenced above, Merrill Lynch also agreed to terminate all of its CDO-related hedges with XL and is in the process of negotiating settlements on certain contracts with other monoline counterparties. These short positions were the hedges on long CDO positions that are part of the announced sale.

Merrill Lynch executed an agreement to terminate all of its CDO-related hedges with XL. The transaction is expected to close in early August 2008. When the transaction closes, all of Merrill Lynch’s CDO-related hedges with XL will be terminated in exchange for an upfront cash payment to Merrill Lynch of $500 million. These hedges had a carrying value of approximately $1.0 billion at June 27, 2008. As a result of this transaction, Merrill Lynch will record a pre-tax loss of $528 million during the third quarter of 2008.

Merrill Lynch is also in the process of negotiating settlements on certain contracts relating to CDO hedges with MBIA and other lower-rated monolines. If Merrill Lynch were to receive no payments in connection with the settlement of these hedges, the maximum loss Merrill Lynch expects to record would be their current carrying value, $0.8 billion.

The hedges described above had a net notional value of $8.4 billion. To reflect the XL termination and the other potential settlements with other monolines, Merrill Lynch will reduce its U.S. super senior ABS CDO short exposures, or hedges, from $15.6 billion at June 27, 2008, to $7.2 billion on a pro forma basis.

Common Stock Offering and Early Conversion of Mandatory Convertible Preferred:

Merrill Lynch plans to raise $8.5 billion through the public offering of common stock announced today (excluding a fifteen percent, or approximately $1.3 billion option granted to the underwriter to purchase additional shares of common stock to cover over-allotments). Temasek Holdings, Merrill Lynch’s largest shareholder, has committed to purchase $3.4 billion of common stock in the offering, a portion of which is subject to regulatory approvals that are expected to be obtained after the closing of the offering. In addition, Merrill Lynch’s executive management team intends to purchase approximately 750 thousand shares of common stock in the offering.

In satisfaction of Merrill Lynch’s obligations under the reset provisions contained in the investment agreement with Temasek Holdings, Merrill Lynch has agreed to pay Temasek $2.5 billion, 100% of which Temasek has contractually agreed to invest in the offering at the public offering price without any future reset protection.(This reminds one of a company going to the vulture capitalists for last gasp financing. They are rolling penalties Merrill owes them from prior fundraising into this latest tranche. - Jesse)

In addition, $5.4 billion of the $6.6 billion of outstanding mandatory convertible preferred holders have agreed to exchange their outstanding preferred stock for approximately 195 million shares of common stock, plus accrued dividends payable in cash or stock at the option of the holder. A holder of $1.2 billion of outstanding mandatory convertible preferred has agreed to exchange their securities for new mandatory convertible preferred securities with a reference price of $33.00. The reset feature for all securities exchanged has been eliminated.

Toyota Suffers First Sales Declines in Seven Years

Toyota sees first output fall in 7 years, cuts '08 forecast
29 Jul, 2008, 0141 hrs IST,
The Economic Times

TOKYO: (Reuters) Toyota Motor on Monday cut its 2008 groupwide global sales forecast by 3,50,000 units to 9.5 million vehicles due to a pronounced downturn in the US market, in a rare setback for the world’s biggest automaker. The weaker sales outlook also means global production at the parent company would fall 1% from 2007 to 8.43 million vehicles, marking the first decline in seven years.

Toyota’s revision underscores an ever-toughening environment for global automakers faced with falling demand for cars, especially higher-margin, bigger vehicles amid rising gasoline pump prices. Profits are already under severe pressure as prices of steel and other raw materials continue to climb, while tightening environmental regulations raise the cost of research and development.

Analysts said the sales revision was expected after a weak performance in the year to date, particularly in the US, but one raised concerns about a possible profit warning when Toyota announces its April-June results on August 7.

“Toyota typically doesn’t alter its forecasts at the first quarter, but after a revision of this scope there’s always an off chance that they’ll lower their earnings outlook,” said Credit Suisse auto analyst Koji Endo.

Hit by a demand meltdown for pickup trucks and large sport utility vehicles in the United States, Toyota cut its parent-only sales forecast there to 2.44 million vehicles from the 2.64 million it announced in December. The new projection would represent a 7% fall from 2007. — Reuters

Toyota’s initial global sales plan called for sales at the group, which includes truck unit Hino Motors and minivehicle maker Daihatsu Motor, to grow 5% to 9.85 million vehicles this year. Overall sales forecasts did not change at Hino and fell only 10,000 units at Daihatsu. Toyota was responsible for the rest of the undershoot. Global sales are now expected to rise just 1%, likely keeping Toyota ahead of General Motors as the world’s biggest carmaker.

Industrywide US vehicle demand has taken a sharp turn for the worse in the second quarter of this year, prompting many automakers and forecasters to revise their 2008 sales outlook by around 1 million vehicles compared with even some of the more sober views at the beginning of the year....