Merrill Lynch Posts Steep 4Q Loss. Moody’s Sinks Bond Insurance Stocks. Stocks Extend Plunge; Dow Falls 306.

Jan.17, 2008 in Market Outlook

Merrill CEO Thain Thinks the Worst Is Over for the Brokerage Subprime Woes — for Now

NEW YORK (AP) — John Thain, presiding over his first set of earnings on Thursday as the new leader of Merrill Lynch & Co., cleared the decks with some $15 billion of subprime mortgage related write-downs that led to the largest quarterly loss since the brokerage was founded 94 years ago.

And, while it was among the most aggressive moves on Wall Street to deal with bad bets on subprime mortgages, Thain’s still not ready to say the worst of the credit crisis is over.

With a possible recession looming, the world’s largest brokerage and other Wall Street investment houses might still be saddled with unforeseen turmoil. While taking steps to minimize future disruptions, Thain is still wary about challenges that face the global financial markets.

“We will continue to take risks — you don’t make money if you don’t take risk,” Thain said. “But the risk will be sized appropriate for the business. Nobody should be taking risks that wipe out the entire annual earnings of a business, and certainly not the entire firm.”

That’s exactly what happened under former CEO Stan O’Neal, whose heavy bets in subprime mortgage securities backfired as homeowners defaulted on their loans at an alarming rate. That strategy led to a nearly $10 billion loss during the fourth quarter, on top of $2.31 billion during the previous period.

Moody’s Report Threatening Ambac Downgrade Sends Bond Insurance Stocks Reeling

NEW YORK (AP) — Bond insurance stocks plunged Thursday after a ratings company said Ambac Financial Group Inc.’s plan to raise cash may not be enough to save its crucial credit rating.Ambac shares fell 51.9 percent to $6.24, while shares of chief rival MBIA Inc. fell 31.2 percent to $9.22. Smaller competitors Security Capital Assurance and ACA Capital Holdings also fell substantially. The sector’s woes helped dragged the broader market sharply lower as well, with the S&P 500 closing nearly 3 percent lower.

Moody’s Investors Service said Wednesday night it is considering cutting Ambac’s “AAA” financial-strength rating, which would squelch the insurer’s prospects for winning new business.

The ratings company issued the report after the New York-based bond insurer cut its dividend by two-thirds, said a portfolio of insurance contracts had lost $5.4 billion in value, replaced its chief executive and unveiled a plan to sell $1 billion in stock to fortify its cash reserves.

“A rating agency downgrade would be the death knell for Ambac,” Friedman Billings Ramsey analyst Steve Stelmach wrote in a client note. “Merely the threat of a downgrade complicates the company’s capital-raising plans even further.”

After the market closed Thursday, Moody’s said it is also considering cutting MBIA’s financial strength rating because of concerns about the risky mortgage debt that MBIA insures.

Ambac and MBIA are under pressure to prove their capital cushions are sufficient to cover claims.

For the last decade, Wall Street firms bundled and sold pools of mortgages, auto loans, credit card bills and other debt to investors. The riskiness of these securities was thought to be offset by the promise that insurers would step in to make principal and interest payments if issuers defaulted.

Because default rates have been low, bond insurers’ earnings and share prices had soared — until recently.

The prospect of ratings downgrades has devastated the sector in the past six months. Some stocks have plummeted 85 percent or more as investors worry about more claims from defaulted bonds, and the degree to which a ratings downgrade would damage new business prospects.

Stocks Extend Plunge As Manufacturing Index Falls; Bond Insurers Fall Amid Fears of Losses

NEW YORK (AP) — Wall Street extended its 2008 plunge Thursday, sending the Dow Jones industrials down 306 points and to their lowest level since last March after a regional Federal Reserve report showed a sharp and unexpected decline in manufacturing activity. Downgrades of key bond insurance companies added to the market’s black mood, with investors fearing an escalation of months of credit market problems.

The Dow lost nearly 2.5 percent, giving the index its worst three-day percentage decline since October 2002. The Standard & Poor’s 500, the index closely watched by market professionals, fell nearly 3 percent Thursday. The Dow, S&P 500 and the Nasdaq composite index have now given back all of the gains they achieved in 2007.Stocks opened higher but quickly gave up their gains after the Philadelphia Federal Reserve said its survey of regional manufacturing activity registered a negative 20.9 from a revised reading of negative 1.6 in December. The latest number came in well short of what Wall Street had been expecting and underscored the seriousness of the economic worries that have gripped both Wall Street and Washington in recent weeks.

Credit concerns also dogged Wall Street after rating agency Moody’s Investors Service placed bond insurer Ambac Assurance Corp. on review for a possible downgrade. That possibility alarmed investors because it would place all bonds insured by Ambac on review as well. Wall Street are concerned that bond insurers would be unable to absorb a spike in claims.

Investors’ fears of a slowing economy, the consequence of a months-long housing and credit market crisis, dominated trading, as they have since the start of the year.

http://biz.yahoo.com/ap/080117/wall_street.html

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