Wall Street banks face 'systemic margin call,' Morgan warns

Submitted by cpowell on 10:11AM ET Saturday, March 8, 2008. Section: Daily
Dispatches
By Walden Siew
Reuters
Saturday, March 8, 2008

http://www.reuters.com/article/ousiv...

NEW YORK -- Wall Street banks are facing a "systemic margin call" that may
deplete them of $325 billion of capital due to deteriorating subprime U.S.
mortgages, JPMorgan Chase & Co. said in a report late on Friday.

JPMorgan, which sent a default notice to Thornburg Mortgage Inc. after the
lender missed a $28 million margin call, said more default notices and
margin calls were likely. The Carlyle Group's mortgage fund also failed to
meet $37 million in margin calls this week.

"A systemic credit crunch is under way, driven primarily by bank writedowns
for subprime mortgages," according to the report co-authored by analyst
Christopher Flanagan. "We would characterize this situation as a systemic
margin call."

The credit crisis that began about a year ago will likely intensify after
Friday's weak February U.S. employment report "that most definitely signals
recession," JPMorgan said.

Indeed, corporate bond spreads widened to a new record on Friday, surpassing
levels seen in October 2002 during a boom in bankruptcies following the
dot-com crash. U.S. employers cut payrolls in February for a second
consecutive month, slashing 63,000 jobs, the biggest monthly job decline in
nearly five years, the U.S. Labor Department reported on Friday.

"The weak February employment report points to an economy in recession,"
JPMorgan said.

The JPMorgan report included a revised bleaker forecast for subprime-related
home prices. The bank now sees prices falling 30 percent, from its prior 25
percent forecast. Those prices have declined 14 percent since mid-2006,
JPMorgan said.

The U.S. jobs results also came after the Federal Reserve expanded the
amount of its short-term auctions to $100 billion in total in the central
bank's latest effort to ease credit concerns. Ongoing concerns about bond
insurers, known as monolines, and their effort to save their top ratings
also are weighing on market sentiment.

Countrywide Is Probed by FBI for Possible Fraud, Person Says

By Robert Schmidt and David Mildenberg

March 9 (Bloomberg) -- Countrywide Financial Corp., the largest U.S. mortgage lender, is under investigation by the Federal Bureau of Investigation for possible securities fraud, according to a person familiar with the probe.

Investigators are focusing on whether Countrywide officials misrepresented the company's financial position and the quality of its mortgage loans in securities filings, the person, who declined to be identified because he wasn't authorized to speak about the probe, said yesterday. He described the inquiry, reported earlier by the Wall Street Journal, as preliminary.

Countrywide is among at least 14 companies that the FBI is checking for possible accounting violations related to the subprime lending crisis, including mortgage lenders, housing developers and Wall Street firms that package loans as securities. The FBI announced the review in January without identifying any of the companies.

``There's a whole lot of excitement and hullabaloo, but proving criminal conduct is likely to be difficult,'' David Lykken, president of Mortgage Banking Solutions, an Austin, Texas consulting firm, said yesterday. ``A lot of people were caught up in the atmosphere when the housing market was booming.''

FBI spokesman Richard Kolko declined to comment yesterday. Jumana Bauwens, a spokeswoman for Calabasas, California-based Countrywide, said the company is unaware of any FBI probe. Bank of America Corp., which is in the process of buying Countrywide, declined to comment, spokesman Scott Silvestri said.

Growing Scrutiny

Lenders are facing increased scrutiny from regulators as record foreclosures displace homeowners and depress property values. U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said last week.

Countrywide and San Francisco-based Wells Fargo & Co. were subpoenaed last week as part of an Illinois probe into whether minority borrowers were steered into higher-cost loans. Countrywide pledged to cooperate in any probe and said it analyzes its data to ensure that borrowers are treated fairly. Wells Fargo said race isn't a factor in lending.

Countrywide declined 2.5 percent to $5.07 a share on March 7, 20 percent lower than its closing price on Jan. 11, when Bank of America, the nation's second-biggest bank by assets, offered to buy the company for about $4 billion in stock. The stock has declined 86 percent in the past year in New York Stock Exchange trading.

Mozilo Testimony

Angelo Mozilo, Countrywide's chief executive, testified March 7 before the House Oversight and Government Reform committee, which questioned why CEOs received hundreds of millions of dollars in compensation while shareholders took the brunt of millions in writedowns from subprime mortgages.

``Countrywide is the focus of politicians and others who often are looking for people they can paint as villains,'' said Gary Townsend of Chevy Chase, Maryland-based Hill-Townsend Capital, which invests in financial-industry stocks. ``Congress could be the motivator if the FBI is taking this action.''

The mortgage lender's board ``adopted a compensation policy that aligns the interests of top executives with shareholders by making compensation largely performance-based,'' Mozilo told the panel.

The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the Mortgage Bankers Association said in its report.

Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report. Those types of loans accounted for about 7 percent of all mortgages.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net; David Mildenberg in Charlotte at dmildenberg@bloomberg.net