Rock raises £2.25bn from mortgage sale

(FT.com) - Northern Rock expects to raise £2.25bn through the sale of its portfolio of Lifetime home equity release mortgages to JPMorgan Chase at a premium to its balance sheet value.

 

The move is likely to be seen as an encouraging sign that buyers are beginning to emerge for mortgage assets owned by the stricken bank that are regarded as good quality.

 

However it may raise concerns that Northern Rock is selling off the better quality assets, leaving the government and shareholders with less attractive portfolios.

A spokesman for Northern Rock said: "It's not a question of degrees of quality. This was an opportunity to sell a relatively small percentage of our assets."

In another twist in the Northern Rock saga, trustees of the pension scheme have asked the company to place members on the same footing as depositors by setting aside enough mortgage assets to guarantee that all promised benefits could be fully paid if the bank becomes insolvent.

The move, detailed in a letter to scheme members sent on Friday, puts yet more pressure on a government that has already extended more than £25bn in loans to keep Northern Rock solvent.

But the bank would be unable to meet the trustees' request to pledge assets as security without the permission of its regulator and the guarantors of its loans - the Financial Services Authority, Bank of England and the Treasury.

In the letter, Sir David Chapman, chairman of the Trustees, notes that if Northern Rock were to become insolvent immediately "significant additional funds would need to be paid into the scheme" of around £150m to £200m.

Last October, as the lender's woes mounted, Trustees moved to shift the scheme's assets into much less risky areas. Nearly half is currently invested in index-linked government gilts.

But Friday's sale of the mortgage portfolio may raise hopes at the Treasury, the FSA and the Bank that a private sale may still be possible.

However, among leading shareholders concerns that the bank is selling the lender's most desirable assets may rise.

The sale value of £2.2bn, represents a premium of 2.25 per cent or about £50m over the balance sheet value, bringing the total cash proceeds from the agreed sale to £2.25bn. The Lifetime assets comprise about 2 per cent of the company's total assets.

Andy Kuipers, new chief executive, welcomed the sale.

"This...is a positive development in the company's ongoing strategic review," he said in a statement.

"It illustrates the quality of our assets, which has enabled us to achieve a sale at a premium despite continuing difficult financial markets, and will allow the company to reduce its debt to the Bank of England."

Read more at FT.com

FTSE falls amid global weakness, food stocks weigh

(Reuters) - Britain's top share index fell on Friday amid global weakness in equities fuelled by fears of more subprime-related writedowns and as food stocks suffered from a brokerage downgrade and profit-warning talk.

Britain's FTSE 100 .FTSE shed 0.3 percent to end at 6,202.0 points, while the pan-European FTSEurofirst 300 benchmark hit its lowest level in over a year before ending down 0.5 percent.

The New York Times reported Merrill Lynch (MER.N: Quote, Profile, Research) is expected to suffer $15 billion in losses stemming from soured mortgage investments, reminding investors the jury was still out on the extent of the fallout of the credit crisis.

This came on the heels of a profit warning from American Express (AXP.N: Quote, Profile , Research).

Worries over global growth pushed the price of crude further off record highs hit last week, taking oil stocks along with it. BP (BP.L: Quote, Profile, Research) fell 0.7 percent and Royal Dutch Shell (RDSa.L: Quote, Profile, Research) shed 1.6 percent as crude slipped to near $93 a barrel.

Unilever (ULVR.L: Quote, Profile, Research) was among the biggest percentage losers on the index after Morgan Stanley downgraded its rating on the consumer goods giant late on Thursday to "underweight" from "equal weight".

Elsewhere in the sector Reckitt Benckiser (RB.L: Quote, Profile, Research) fell 3.4 percent and Associated British Foods (ABF.L: Quote, Profile, Research) fell 0.9 percent. Cadbury (CBRY.L: Quote, Profile, Research) shed nearly 3 percent, with traders citing market talk the confectionery group would issue a profit warning. The company had no immediate comment.

 

Read more at Reuters

Merrill seen suffering $15 billion loss: report

(Reuters) - Merrill Lynch (MER.N: Quote, Profile, Research) is expected to suffer $15 billion in losses stemming from soured mortgage investments, almost twice the company's original estimate, the New York Times reported on Friday.

The losses were prompting the company to raise additional capital from an outside investor, the newspaper said in a report on its Web site. Merrill is expected to disclose the huge write-down when it reports earnings next week, the New York Times said, citing people who had been briefed on the company's plans.

The loss exceeds the $12 billion hit that many Wall Street analysts had forecast, the newspaper said.

 

Read more at Reuters

Citigroup and Merrill in talks for foreign capital: report

(Reuters) - Citigroup Inc. (C.N: Quote, Profile, Research) and Merrill Lynch & Co Inc. (MER.N: Quote, Profile, Research) are in discussions to receive more capital from investors, primarily foreign governments, The Wall Street Journal reported on Thursday.

Citigroup could get as much as $10 billion, likely all from foreign governments, while Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund, the report said.

The report also said Citigroup's board is expected to discuss cutting the firm's dividend in half, a move that could save it more than $5 billion a year.

Representatives were not immediately available for comment at either bank.

U.S. banks have been wrestling with huge subprime mortgage losses, prompting some to seek cash from sovereign wealth funds

 

Read more Reuters

Recession fears are growing

(Reuters) - Expectations for the weakest consumer spending performance in 17 years during 2008 kept the odds of a recession at nearly 40 percent, a survey of top forecasters showed on Thursday.

Panelists surveyed by the Blue Chip Economic Indicators newsletter have the odds of a recession in the next year at 38 percent, a little weaker than the 39 percent odds forecast a month ago.

But the most recent survey was taken ahead of December's grim unemployment report and the newsletter stated that growth forecasts would have been weaker if taken after release of that data.

"The January 4th news of the first decline in private sector nonfarm payrolls since July 2003 and whopping 0.3 of a percentage point jump in the unemployment rate during December no doubt caused some of our panelists to further trim their forecasts of economic growth this year and heightened speculation about the possibility of a recession," the newsletter stated.

"Whether or not the economy is already in a recession, about to enter one, or manages to muddle through without one, will only be known in the fullness of time," the newsletter wrote.

Based on the Jan 2-3 survey of economists -- taken a day ahead of the government's weak employment report that showed a huge uptick in the December unemployment rate and the weakest job growth in more than four years -- consumer spending this year is expected to grow at the weakest annual pace since 1991.

 

Read more at Reuters

Freddie Mac's Strength Rating May Be Cut by Moody's

(Bloomberg) -- Freddie Mac, the U.S. mortgage company that reported its biggest loss last quarter, may be downgraded by Moody's Investors Service because the damage from loan defaults could be worse than the ratings company expected.

Moody's said it may lower Freddie Mac's financial strength rating from A-, the second-highest grade. The McLean, Virginia- based company's top Aaa senior long-term debt rating and the Prime-1 rating for its commercial paper or short-term IOUs won't be cut, Moody's said.

Chief Executive Officer Richard Syron has attempted to shore up Freddie Mac's finances by selling $6 billion of preferred stock, slicing its dividend in half and reducing its mortgage assets by $30.9 billion to $701.4 billion in the three months to Nov. 30. The government-chartered company may need to take similar steps again, Moody's said.

Freddie Mac ``may experience higher credit losses than Moody's previous expectations,'' Moody's analysts led by Brian L. Harris in New York said in the report late yesterday. ``In its review, Moody's will focus on Freddie Mac's asset quality and the potential that the company may experience an elevated level of credit charges over the near to medium term.''

Freddie Mac, which owns or guarantees one in five U.S. home loans, and larger competitor Fannie Mae are suffering as the worst U.S. housing slump in 27 years increases defaults. More than 100 mortgage lenders were shut, scaled back or sold last year as U.S. home foreclosures rose to the highest on record.

`Credit Stress'

``People may regard the financial strength rating as a signal as to whether the agency is becoming more or less positive on a particular institution, and that may feed through to the debt rating,'' said Simon Adamson, a financial services analyst at CreditSights Inc. in London.

Any downgrade to Freddie Mac's financial strength rating is unlikely to be severe enough to result in a cut to its senior debt ranking, Moody's said.

U.S. home prices may fall 12 percent from their peak through 2010 in ``the toughest housing correction in our lifetimes,'' Fannie Mae Chief Executive Officer Daniel Mudd said this week.

``Credit stress is most likely to occur in the company's guarantee portfolio,'' Moody's said.

The New York-based rating company's financial strength rating measures the likelihood a company will need financial assistance from a third party, such as the government or its shareholders.

 

Read more at Bloomberg

U.S. Stock-Index Futures Drop; Capital One, Citigroup Decline

(Bloomberg) -- U.S. stock-index futures fell after Capital One Financial Corp. said profit last year missed its projection because of bad loans and Goldman Sachs Group Inc. analysts reduced their share-price estimates for the country's biggest banks and brokerages.

Capital One, the largest independent U.S. credit-card issuer, dropped after saying 2007 profit missed its October projection by about 20 percent. Citigroup Inc., Morgan Stanley and Merrill Lynch & Co. slipped after Goldman predicted a U.S. recession this year will hurt earnings at financial companies. Exxon Mobil Corp., the nation's largest energy company, declined as oil retreated for the fifth time in six days.

Standard and Poor's 500 Index futures expiring in March lost 5.8 to 1,405.8 as of 9:06 a.m. in New York. Dow Jones Industrial Average futures decreased 40 to 12,705. Nasdaq-100 Index futures fell 13 to 1,954.5.

``The worry is that current earnings estimates are far too optimistic and need to be cut aggressively,'' said Chirin Gill, who helps manage the equivalent of $3 billion at Daiwa SB Investments in London.

Fourth-quarter profit at S&P 500 companies probably fell 8.1 percent from a year ago, the biggest drop since 2001, according to analysts' estimates compiled by Bloomberg. Earnings at financial companies probably declined 63 percent, the only drop among 10 industries.

U.S. stocks gained the most in two weeks yesterday after Warren Buffett's Berkshire Hathaway Inc. said it may invest in municipal bond insurers and Hewlett-Packard Co. predicted earnings will withstand an economic slowdown.

 

Read more at Bloomberg