Interest Rate Roundup

Thursday, January 10, 2008

Write-downs, charges, and losses are coming fast and furious -- and it's not even 9:30 yet!

That's the story this morning. A quick summary:

* Credit card, auto loan, and regional banking firm Capital One Financial laid an earnings egg in the wee hours of this morning. The company said -- at midnight -- that it would earn just $3.97 a share in 2007, well below its previous forecast of about $5 (analysts were expecting $4.86). The company also announced a $1.9 billion provision to cover rising delinquencies and charge-offs, and additional legal reserves. Both its portfolio of consumer loans, and its book of leftover home equity loans that were originated by GreenPoint Mortgage (which COF is shutting down), are showing credit deterioration.

* Regional bank Huntington Bancshares said it would lose 65 cents per share in the fourth quarter. The problems: $424 million in pre-tax charges tied to loans made to Franklin Credit Management, a subprime lender and investor. $64 million in pre-tax losses on loans held for sale, investment securities, and other assorted things. $44 million in charges tied to an acquisition.

Meanwhile -- and this is key -- the bank said it is seeing "continued competitive pricing in our markets, mostly deposit related." The Wall Street Journal recently carried a story about how net interest margins are under pressure due to intense competition for consumer money (in plain English, banks are being forced to offer juicy yields to attract deposit holders).

* Home builder M/I Homes also weighed in with some news -- contracts were down to 322 in the fourth quarter of 2007 from 353 a year earlier. That's a drop of 8.8%.

* Lastly, Moody's Investors Service said it may lower Freddie Mac's financial strength rating. It's currently A-, the second-highest. But Moody's believes Freddie "may experience higher credit losses" than the ratings firm previously expected. As Bloomberg notes, the financial strength rating "measures the likelihood a company will need financial assistance from a third party, such as the government or its shareholders."

If you have access to the WSJ, by the way, check out this story on concerns about credit derivatives. They underscore those spelled out several days ago by Bill Gross and others, which I summarized in this post.


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