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NEW YORK (Fortune) — Shares of BB&T Corp. shot higher Friday after reports that it might be scooping up the remains of Colonial BancGroup. It’s no wonder: Such purchases give healthier banks a chance to grow on the cheap. That’s valuable at a time when many institutions have been shrinking in response to the recession.More than 70 banks have failed this year. Scores of additional failures are expected in coming years, as the industry works through trillions of dollars worth of residential and commercial real estate problems. While most of the biggest recent bank failures have been resolved via sales to major institutions or investor groups, regional banks have been bulking up as well. Since the banking crisis started last year, six regional banks have bought at least two failed banks from the FDIC. The leader has been Zions Bancorp (ZION), a Salt Lake City-based institution that has acquired four banks from the FDIC. Other buyers of multiple troubled banks include U.S. Bancorp (USB, Fortune 500), the Minneapolis-based bank that last year bought the remains of troubled thrifts Downey Savings and PFF, which failed on the same day. The joint purchase of Downey and PFF wound up being the third largest deal by assets for failed banks last year, after the WaMu and IndyMac sales. FDIC rules require the agency to resolve bank failures in the manner that’s least costly to the deposit insurance fund. The deposit fund is backed by fees paid by banks, but the FDIC has a credit line with the Treasury Department that it could tap in an emergency. The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance. The cost to the FDIC fund in the U.S. Bancorp and Zions deals alone was 3.6 billion. The agency also agreed to so-called loss-sharing agreements on some of the transactions, which means the fund could end up shouldering additional costs on troubled assets taken on by the acquirers. It’s this provision — capping the acquirer’s losses at the expense of the fund — that is most alluring to regional banks and their investors. In addition to BB&T (BBT, Fortune 500), analysts have pointed to Cincinnati’s Fifth Third (FITB, Fortune 500) and Atlanta’s SunTrust (STI, Fortune 500) as regional banks that might be chosen to participate in future deals. Some bankers have downplayed questions about buying failed institutions. Such deals “really are off our radar,” Fifth Third chief executive officer Kevin Kabat told investors last month, noting that there have been relatively few bank failures in the Midwest.But given the advantageous terms, no one is ruling FDIC-assisted deals out, either. U.S. Bancorp chief executive officer Richard Davis said in a conference call with analysts and investors last months that the bank “will always be available” for any “opportunities that come along” on the FDIC failed bank list, though it is keeping an eye out for bigger ones.

(Fortune Magazine) — One of Washington’s true epic battles will play out over the next several weeks. It’s the fight over health-care reform, of course, and it will be big, brutal, and ugly. The stakes are high — trillions of dollars, the reelection prospects of hundreds of legislators, and President Obama’s legacy. So let’s acknowledge right now that nobody will be fighting fair. We will hear half-truths, shameless spin, and outright lies coming from all sides. How to keep your head when all about you are losing theirs? You can start by understanding three myths about health-care reform we’re guaranteed to hear repeatedly. Remember them. Whenever you hear one of them, you’ll know that someone is trying to mislead you.Myth no. 1: Rising health-care costs are a problem in themselves. We’ve all seen the graph that shows health-care costs increasing much faster than GDP; it’s usually presented as evidence of the crisis we’re in. Take a graph with that same trajectory and label it “Sales of hybrid vehicles” or “Downloads from the iTunes Music Store,” and nobody proposes government intervention to stop it. Yet health-care costs, too, are in fact revenues, and fast-rising revenues are generally seen as exciting and laudable in every industry except one. How come?0:00
/3:36Health care attitudesIt’s because we all sense that in health care we aren’t getting our money’s worth — that tons of dollars are wasted. So the problem isn’t that we’re spending so much, but why. That distinction is crucial because partisans on all sides will soon be telling us how their plan would slow the rate of spending growth. But slowing spending is easy — just give people less care. Instead, make advocates tell how their plan would address the “why” by cutting waste and boosting efficiency. When they do, make sure they don’t invoke …Myth no. 2: The fee-for-service system is a major part of the problem. You hear this from both sides: When you pay providers for each service, they have an incentive to sell you more services. Thus, the argument goes, we squander billions on needless MRIs, doctor visits, hospital nights, and so on. The trouble with this reasoning is that we avoid that problem when buying other complex services, from consulting to car repair, on a fee-for-service basis.The reason we buy loads of unnecessary health-care services is not the fee-for-service system, which we use to buy almost all services. It’s that we aren’t paying with our own money. Only 12% of U.S. health-care spending is out-of-pocket, a proportion that has been falling for decades. If each of us controlled more of the money that’s being spent on our behalf for health care, we can be certain it would be spent more carefully, on services directly or on insurance that covers those services. Don’t let reform partisans tell you how they’d eliminate fee-for-service; make them tell you how they’d let consumers direct more of their own health-care spending.Myth no. 3: A well-designed government plan can avoid rationing. The Obama administration has stated flatly that “health care will not be rationed” under its plan. So let’s be clear on this: Health care will be rationed. It must be. To say otherwise is to say the government can supply it in unlimited quantities to everyone. This point is so obvious it should not be controversial, but the high-voltage word “rationing” seems to blow people’s processors. (By the way, health care is rationed in private systems too, but it’s done by price, and we don’t call it rationing.)Reform that broadens coverage, improves outcomes, and reduces waste is such an ambitious goal that we may fail to achieve it. The contending forces are so powerful and have so much at stake that I won’t attempt to predict the outcome. But we’re likely to get something, so we should at least try for reform that isn’t based on these myths. That may be asking a lot.

Source:CNN

NEW YORK: Lawmakers are quickly learning that “too big to fail” may be too complex to legislate away.The issue of determining which financial firms are worthy of a government rescue, which first took hold when the credit crisis intensified last fall, has been a subject of persistent — and divisive — debate.Top regulators at the Treasury Department and Federal Reserve were widely criticized after making the difficult decision to let Lehman Brothers file for bankruptcy, while stepping in more than once to bail out insurer AIG (AIG, Fortune 500).The topic has taken center stage in Washington recently as the debate on regulatory reform picks up speed on Capitol Hill.One of the biggest challenges facing lawmakers, experts argue, is determining which companies are so important that their downfall would have disastrous implications for the financial system and entire U.S. economy.In addition to AIG, the government has propped up big banks such as Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) with multiple capital injections. Each bank has received 45 billion from the Treasury Department as part of the Troubled Asset Relief Program, or TARP. Taxpayers now own more than a third of Citi following a conversion of part of the government’s preferred shares into common stock.At the same time, the Obama administration looked the other way when the smaller commercial lender CIT (CIT, Fortune 500) was teetering on the brink earlier this month.But determining who makes the cut shouldn’t be based simply on size, said Peter Wallison, a fellow in financial policy studies at the American Enterprise Institute. He noted that even small, seemingly innocuous firms can pose a risk to the financial system.”The major problem with ‘too big to fail’ is that we don’t really know when an institution is too big to fail,” said Wallison.The notion of creating of a list of systemically important institutions appears to have the backing from the Federal Deposit Insurance Corp. and the White House, but there have already signs of a pushback from Congress.Rep. Barney Frank, D-MA, whose House Financial Services Committee will likely impose a heavy hand on any forthcoming regulatory legislation, warned earlier this week that creating such a list would encourage the very problem that regulators have sought to stamp out.”It would be kind of a license to do well because people would think you couldn’t fail,” he said. Many have cited the implicit government guarantee behind mortgage giants Fannie Mae and Freddie Mac as helping to fuel problems there. Because there was a widely-held belief that regulators wouldn’t allow Fannie and Freddie to collapse, the two firms took on sizeable risks during the housing boom. Fannie and Freddie eventually grew to such mammoth proportions that the government was ultimately forced to seize control of them nearly a year ago to prevent them from completely going under.Mechanics and the marketBut even if lawmakers are able to agree on who is and isn’t too big to fail, there are several other complicated issues for Congress to consider.One nagging question is determining just how to let a failed financial institution go under without causing a major disruption to the financial system. Many blamed the lack of such a mechanism for regulators’ inability to dismantle AIG last fall once they learned just how grave the insurer’s health was.One leading proposal would entail creating a system similar to how the FDIC handles failed banks. In such cases, the agency takes control of a failing institution, often with a buyer already in place for all of its assets.0:00
/9:50Does regulation work?Bipartisan legislation put forth this week by Sen. Bob Corker, R-Tenn. and Mark Warner, D.Va., would effectively allow the FDIC to do the same thing with large, complex financial firms that are organized as bank holding companies.Still, there are questions about whether money should be set aside in the event a systemically important company goes under and how to fund such a reserve.Taking a page from her agency’s own playbook, FDIC Chairman Sheila Bair proposed last week that a fund paid for by large financial companies be created in order to avoid needing more bailout money from the U.S. taxpayer.But this plan would likely meet plenty of resistance from those who would bear the biggest costs, the financial services companies themselves. George Kaufman, a professor of finance and economics at Loyola University Chicago, added that lawmakers would also need to decide whether firms be charged before, or after, a troubled institution goes under. “If you do it [afterwards] then you let the guilty party escape without paying,” Kaufman said.Regardless of how the issue is resolved, it is clear that the government needs to find some way to let major financial firms go under without feeling as if they are putting the economy at risk.”We must find ways to impose greater market discipline on systemically important institutions,” Bair told lawmakers last week. “Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail.”Talkback: Should the government allow even the largest financial firms to go under or do you think there is such a thing as a bank that is too big to fail? Share your comments below.

Source:CNN

NEW YORK (Fortune) — Cleaning up after bank failures is one chore you won’t hear bankers complaining about. Since the start of 2008, 89 banks have failed, including giants Washington Mutual, IndyMac and BankUnited. Scores of additional failures are expected in coming years, as the industry works through trillions of dollars worth of residential and commercial real estate problems. While the failures are taking a toll on the Federal Deposit Insurance Corp.’s deposit insurance fund — the FDIC this year raised fees on banks in a bid to rebuild the fund’s depleted balances — they can also give healthier banks a chance to grow on the cheap. That’s valuable at a time when many institutions have been shrinking in response to the recession.”We continue to believe a select group of regional banks with sufficient capital, credit quality and management talent stand to benefit by rolling up failed institutions, thereby expanding their banking franchise,” analysts at Keefe Bruyette & Woods wrote in a note to clients this week. Indeed, while most of the biggest recent bank failures have been resolved via sales to major institutions or investor groups — JPMorgan Chase (JPM, Fortune 500) purchased WaMu, and private equity interests took over IndyMac and BankUnited — regional banks have been bulking up as well. 0:00
/4:40Bair: Trust the FDICSince the banking crisis started last year, six regional banks have bought at least two failed banks from the FDIC. The leader has been Zions Bancorp (ZION), a Salt Lake City-based institution that has acquired four banks from the FDIC. Other buyers of multiple troubled banks include U.S. Bancorp (USB, Fortune 500), the Minneapolis-based bank that last year bought the remains of troubled thrifts Downey Savings and PFF, which failed on the same day. The joint purchase of Downey and PFF wound up being the third largest deal by assets for failed banks last year, after the WaMu and IndyMac sales. FDIC rules require the agency to resolve bank failures in the manner that’s least costly to the deposit insurance fund. The deposit fund is backed by fees paid by banks, but the FDIC has a credit line with the Treasury Department that it could tap in an emergency. The rash of failures over the past year and a half has come at heavy cost to the fund, which is now 75% below its statutory minimum balance. The cost to the FDIC fund in the U.S. Bancorp and Zions deals alone was 3.6 billion. The agency also agreed to so-called loss-sharing agreements on some of the transactions, which means the fund could end up shouldering additional costs on troubled assets taken on by the acquirers. It’s this provision — capping the acquirer’s losses at the expense of the fund — that is most alluring to regional banks and their investors. Strong regional banks “should benefit from picking up relatively attractive deposit franchises with low or no credit risk given the FDIC loan guarantees that have so far accompanied these deals,” Morgan Keegan analyst Robert Patten wrote in a note to clients this month. Patten pointed to Cincinnati’s Fifth Third (FITB, Fortune 500) and Atlanta’s SunTrust (STI, Fortune 500) as two of the banks that might be chosen to participate in future deals, while Keefe analysts said U.S. Bancorp and BB&T (BBT, Fortune 500) could be singled out as buyers of more failed banks. Some bankers have downplayed questions about buying failed institutions. Such deals “really are off our radar,” Fifth Third chief executive officer Kevin Kabat told investors last week, noting that there have been relatively few bank failures in the Midwest.But given the advantageous terms, no one is ruling FDIC-assisted deals out, either. U.S. Bancorp chief executive officer Richard Davis said in a conference call with analysts and investors last week that the bank “will always be available” for any “opportunities that come along” on the FDIC failed bank list, though it is keeping an eye out for bigger ones.

NEW YORK: Will the big banks do it again? After enduring criticism that their impressive performance in the previous quarter was largely a fluke, all eyes are on financial giants like Goldman Sachs (GS, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500) as they begin to report their second-quarter results starting later this week. “I think you are going to see something quite similar to what we saw in the first quarter,” said Martin Kinsler, a London-based fund manager at Henderson Global Investors, which oversees approximately 80 billion in assets. But not every analyst agrees. While many of the factors that gave top lenders a boost last quarter were still in effect this quarter, big banks were forced to reckon with, among other things, issuing new shares to pay back money from TARP, a special assessment from the FDIC, as well as higher loan losses, all of which has weighed on earnings and muddied expectations. Right now estimates for the banks vary wildly. JPMorgan Chase, for example, is expected to report anywhere from a profit of 27 cents a share to a loss of 23 cents a share. Bank of America’s estimates, on the other hand, range from a loss of 11 cents to a profit of 70 cents a share. Kicking off the earnings season for financial firms is Goldman Sachs (GS, Fortune 500), which reports before Tuesday’s opening bell. The Wall Street firm is expected to have earned 1.7 billion, or 3.54 a share, according to estimates compiled by Thomson Reuters. The Thomson Reuters consensus for JPMorgan Chase (JPM, Fortune 500) is a much smaller profit of 280 million, or 4 cents a share, when it reports on Thursday. Peers Bank of America and San Francisco-based Wells Fargo, which report Friday and next Wednesday respectively, are also expected to remain comfortably in the black this quarter, based on the latest estimates. The exceptions to that group, however, may be Citigroup (C, Fortune 500) and Morgan Stanley (MS, Fortune 500). After logging its first period of profitability in 18 months last quarter, Citi is expected to report a loss of more than 1 billion, or 31 cents a share, when it reports results on Friday morning. A loss is also expected for investment bank Morgan Stanley, which reports next Wednesday.”We expect the quarter to be one of the noisiest in recent memory,” Friedman Billings Ramsey analyst Paul Miller said in a research note to clients Friday.Repeat performanceThe last time the group reported quarterly numbers, there was widespread speculation that their results were little more than a one-off, as lenders were buoyed by a flurry of mortgage refinancing activity and robust capital markets activity, namely a surge in newly-issued corporate debt.0:00
/4:22Bailout culture clashAll signs seem to suggest however, that many of those same factors have been in play over the last three months.Even though mortgage refinancing activity tapered off significantly in June, lower interest rates helped fuel activity during the first two months of the quarter, according to weekly figures published by the Mortgage Bankers Association.And while corporate debt issuance remained vigorous, large lenders like Goldman Sachs, JPMorgan Chase and Bank of America scored big after underwriting their own debt and equity after the government deemed they raise more capital as a result of the stress-test program. Equity underwriting volume alone soared 666% domestically to 105.6 billion from 13.8 billion in the previous quarter, according to data from research firm Dealogic. Still focused on creditWhat is quite clear, however, is that the issue of loan losses, particularly in areas tied to the American consumer, remain front and center for big banks with retail banking arms.Credit card default rates, for example, jumped during the months of April and May at Bank of America, JPMorgan Chase and Citigroup, as the nation’s jobless rate headed higher.The nation’s unemployment rate, a widely relied upon indicator of losses a bank may suffer in consumer-related loans, climbed a full percentage point during the quarter from 8.5% to 9.5%.Commercial real estate, whose health is also closely tied to the nation’s labor market, has also entered a significant slump as of late. At the end of the first quarter, delinquencies on commercial real estate loans had doubled from where they were just a year ago, according to the Federal Reserve.What is encouraging for many of these large lenders, notes Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors, whose firm owns shares of JPMorgan Chase and Citigroup, is that they were rather aggressive last quarter in setting aside money for loan losses. “The assumptions made in the first quarter were so draconian,” said Sorrentino. “It bought them a hall pass for the second quarter.”

Source:CNN

NEW YORK: Californians will have fewer places to redeem IOUs issued by the cash-strapped state after Friday.At least two major banks, Wells Fargo (WFC, Fortune 500) and Bank of America (BAC, Fortune 500), will stop accepting the IOUs, while JPMorgan Chase (JPM, Fortune 500) has not yet decided whether it will extend its original July 10 deadline. More than 60 credit unions, however, will continue to accept the paper.State Controller John Chiang started issuing the IOUs on July 2 to conserve cash, while lawmakers and Gov. Arnold Schwarzenegger tussle over closing a 26 billion budget gap. The state, the world’s eighth largest economy, this month is facing a nearly 3 billion cash shortfall, which will balloon to 16.7 billion in October.More than 91,200 IOUs worth 354.4 million were issued through Wednesday. Also called registered warrants, the IOUs pay an interest rate of 3.75% and are redeemable at the State Treasurer’s Office on Oct. 2 or earlier if divided state officials reach a budget deal. Recipients will include state contractors, social service agencies and those owed income tax refunds.Banks will work with customers on an individual basis to assist them, perhaps offering them home equity lines or short-term loans, said Beth Mills, spokeswoman for the California Bankers Association. But the institutions are also hoping to send a message to Sacramento.”What’s ultimately in the best interest of everyone will be for the state to act quickly and resolve the budget impasse,” she said.Bank of America’s decision stems from its experience in 1992, the last time the state issued IOUs amid a financial crisis. The bank, along with Wells Fargo, were among the first to stop accepting the IOUs. A budget was signed about a month later.”The longer the registered warrants were accepted, the longer it took the legislature to resolve the matter,” said Britney Sheehan, a Bank of America spokeswoman. “We do not want our acceptance of registered warrants to deter the state from reaching a budget agreement as soon as possible.”Customers at participating credit unions can continue to redeem the IOUs. The institutions are bracing for a crush of people looking to turn the warrants into cash.0:00
/2:26States face budget disasters”There are options,” said Daniel Penrod, senior industry analyst at the California Credit Union League. “If people look for those options, they’ll realize they are not stuck past the July 10 deadline.”IOUs to be regulatedSome people actually want to get their hands on the registered warrants, posting ads on online marketplaces such as Craigslist. Several postings offer to buy the paper for 85 cents on the dollar, while another listing is looking to sell the IOUs for 95 cents.This practice, however, has heightened fears that desperate IOU holders might be taken advantage of and that counterfeiters might make copies of the warrants.State Treasurer Bill Lockyer earlier this week said that warrant buyers must obtain a notarized bill of sale from the recipient when purchasing the IOUs. This will help ensure that the person redeeming the IOUs is the legitimate owner, said Bill Dresslar, Lockyer’s spokesman.The Securities and Exchange Commission Thursday said that the IOUs are securities and are subject to federal anti-fraud provisions. The agency also issued an investor alert warning both buyers and sellers to be careful when trading the warrants.”If you hold an IOU and wish to sell it prior to maturity you should consider whether you think you are getting a fair price,” the alert said. Investors who wish to buy IOUs should also understand who the seller is. If you are buying from a third party, ask if the person is registered to do this business. The SEC’s action has both positive and negative impacts on IOU recipients, experts said.It should cut down on scams because the warrants would have to be traded through registered brokers, said Joseph Fichera, who heads Saber Partners, a financial consulting firm for governments and corporations. Sellers would have to provide disclosure and make sure they are marketing the products properly.This, however, would also make it harder to offload the IOUs, which could frustrate recipients in need of cash.”The SEC is trying to provide some sort of framework for investor protection in the middle of uncharted territory,” Fichera said.
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Source:CNN

NEW YORK: Big companies, ranging from AT&T to Dell to FedEx to Tyson Foods, are among those cashing in on the billions of dollars of federal stimulus money that is rolling out the door.Some 4.3 billion of federal money is already funding more than 1,500 projects. Of that total, 85%, or 3.6 billion worth, has been funneled to big business.”Out of the gate, the big players are getting the lion’s share, but that’s not unusual,” said Tim Dowd, chief executive of Input, a consulting firm that provides information about government contracts. “Companies have to have the infrastructure to handle a big pile of money being dropped in their lap and be able to put it to good use.”The Obama administration said 70% of stimulus money must be allocated by the end of 2010. Though the vast majority of stimulus projects (more than 300 billion worth) have yet to be funded, the bid and contract process has begun to pick up. The number of contracts awarded grew by 5% between Monday and Tuesday.0:00
/4:23Bill Clinton on stimulusHere’s a look at where some of the money is going.Cleaning the environment. So far, the biggest contracts have gone toward hazardous waste cleanup and creating energy efficiency projects. Engineering and construction giant Bechtel received 163 million of stimulus funds from the Department of Energy for environmental clean-up activities, including decontamination of nuclear waste at a site in Oak Ridge, Tenn.A spokeswoman for Bechtel said the contracts were signed before the stimulus money was allocated. The timeline for the project was accelerated once the Energy Department received and allocated stimulus money for it. Other contracts have focused on protecting rather than cleaning up the environment. For example, FedEx (FDX, Fortune 500) was one of several companies to receive funds from the DoE to implement new battery fuel cells. The shipping company received 1.3 million to replace the cells in its Springfield, Mo., fleet of electric trucks.FedEx was unavailable for immediate comment.Time to upgrade. Many stimulus contracts involve revamping government agencies’ computers, networks and telephones.So far, computer maker Dell (DELL, Fortune 500) received about 34,000 in contracts to upgrade servers and laptops at the Social Security Administration and Department of Energy. But the company, which took in more than 2 billion from IT contracts with the government last year, said it is looking for much more.”We’re the top provider of IT to the federal government so, we’ll of course continue to see how we can work with government customers to leverage the stimulus to upgrade their IT infrastructures,” said Dell spokeswoman Colleen Ryan. She said Dell is closely tracking and hopes to participate in the bidding for a couple of long-term stimulus projects, including a DoE initiative aimed at improving data center energy consumption. Meanwhile, AT&T (T, Fortune 500) was awarded 419,000 to upgrade circuits in several Social Security Administration offices across the country. Competitor MCI received 1 million for a similar contract with the SSA.Chicken contracts. Money is also being used to buy chickens and eggs for local school lunch programs and food banks.The U.S. Department of Agriculture’s Agricultural Marketing Service (AMS) signed four contracts worth 1.8 million with poultry producers Tyson (TSN, Fortune 500) and Pilgrim’s Pride (PGPDQ, Fortune 500). According to Hakim Fobia, a spokesman for AMS, the contracts are part of a 150 million stimulus program to restock food banks and feed the nation’s hungry.A spokesman for Pilgrim’s Pride said the company frequently signs contracts with AMS, but said he was surprised to discover that three of those deals were stimulus-related.”Typically, throughout the course of the year, we bid on a number of commodity purchases,” said Pilgrim’s Pride spokesman Ray Atkinson. “We submitted a standard bid process, and AMS happened to use stimulus funds for this one.”What’s next. With billions still left to be allocated, many companies are lobbying federal, state and local governments to use their services for stimulus programs.And government agencies are searching for stimulus projects that can be acted on quickly because federal funding carries an expiration date. “Typically, projects chase money, but stimulus has created a situation where money is chasing projects, with agencies asking, ‘What can we do with all this money?’” said Dowd. “Stimulus is all about the speed in which the money has to be spent, and that may favor big companies.”Large firms like IBM (IBM, Fortune 500), GE, Boeing and Cisco said they are ready and able.”As our campaign has been formulated and put out in the marketplace, we’re seeing a lot of government customers calling us and asking us for help,” said Gerry Mooney, IBM’s general manager of government. For example, Mooney said IBM has talked with local governments about the Department of Transportation’s grants to ease congestion in cities. He said IBM has the technology to help implement a smart traffic project, calling it a “sweet spot that we’re well-positioned for.”A spokesman for GE (GE, Fortune 500) said the company hopes to bid on 100 billion of stimulus contracts worldwide. A Cisco (CSCO, Fortune 500) spokesman said the company thinks its broadband and telemedicine technology would be well suited for many local contracts. And a Boeing (BA, Fortune 500) spokeswoman said the company “stands ready” to support a border control project.

NEW YORK (Fortune) — The refinancing tide has ebbed, but mortgage profits for the nation’s biggest banks are in no danger of drying up. The recent uptick in bond yields has muffled this spring’s home-mortgage refinancing boom. The Mortgage Bankers Association said Wednesday that its refinancing index dropped 24% last week to its lows level since February. It stands to reason that a slowdown in mortgage activity could hurt Wells Fargo (WFC, Fortune 500), Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500), the three biggest private-sector mortgage players and big beneficiaries of the earlier refinancing spike. But fret not for the big three mortgage banks. Thanks to the scale of the recent refinancing boom and the banking industry shakeout of the past 18 months, the mortgage profits should keep coming for them this year — helping these institutions to weather deepening loan losses and tricky markets. What’s more, while mortgage rates have risen from last month’s lows, government programs aimed at reducing rates may reassert themselves over the course of the year. Some observers contend that future declines may well be met with a new rush of lucrative mortgage refinancing. “Recent performance of [refinancing activity indexes] showed surprising declines in the face of modest increases in mortgage rates,” Bank of America-Merrill Lynch credit strategist Jeffrey Rosenberg wrote in a note to clients last week. “Such declines may reflect an expectation of [lower] mortgage rates in the future.” Refinancing activity has dropped sharply since April, when rates for a 30-year fixed mortgage stabilized below 5% for the first time. The MBA’s refinancing index has plunged 57% since hitting its recent peak in the first week of April. But while 30-year conforming mortgage rates have recently risen to about 5.4% amid a sharp rise in Treasury rates driven in part by worries about the U.S. fiscal outlook, officials haven’t given up on trying to bring rates down. Federal Reserve chairman Ben Bernanke told the House Budget Committee Wednesday that “we’re pretty comfortable” with programs launched in January that call for the Fed to buy hundreds of billions of dollars of mortgage-backed securities, or MBS, in a bid to bring down interest rates and bolster financial markets. The Fed has bought some 500 billion worth of agency-backed MBS — those guaranteed by government-sponsored entities such as Fannie Mae and Freddie Mac — and has plans to buy as much as 1.25 trillion of the securities this year. Despite the recent uptick in rates and questions about the program’s effectiveness, Rosenberg said the effort will be a key driver of interest rate trends. 0:00
/1:23Buoying the banks”Expanding Fed purchases of mortgages remains a key tool to bring mortgage rates back down,” he wrote. “Given how quickly rates have increased, for many the mortgage refinancing decision is no longer economically rational, increasing the motivation of the Fed to accelerate its pace of intervention in mortgage markets.” Even if rates don’t immediately drop, JPMorgan Chase, Wells and BofA should post solid mortgage numbers for the rest of the year. That’s because after buying out a raft of distressed rivals, the big three now account for the lion’s share of U.S. mortgage originations. They also service about half of U.S. home loans, mailing out and collecting mortgage payments even for loans they did not originate.That means the profit margin on each transaction is bigger than it was during the housing boom, when the home loan business was rife with competition. So unless rates unexpectedly spike, the mortgage business should be a money maker in coming quarters.Bank of America, whose mortgage origination nearly doubled in the first quarter from the fourth quarter of 2008, said in April it expects the strength in mortgage lending to persist for the rest of the year.JPMorgan Chase, the No. 3 mortgage player after leading servicer Wells and top lender BofA, likewise appears poised for solid gains, though the bank has warned that it won’t repeat a 1 billion first-quarter gain tied to the value of its mortgage servicing rights. Wells, the biggest beneficiary with a fourfold rise in first-quarter mortgage-banking revenue from a year ago, has been most confident about how it will do in the quarter ending this month. Wells Fargo chief financial officer Howard Atkins said at a banking conference in London last month that “the second quarter promises to be strong as well,” citing the company’s pipeline of 100 billion in unclosed loans at the end of March.

NEW YORK: Bank of America revealed Tuesday that it was nearly finished raising the 33.9 billion in capital that industry regulators deemed it needed to shield itself from future losses.The nation’s biggest lender by assets said it had raised almost 33 billion since the government announced the results of its so-called stress test for 19 of the nation’s largest banks nearly a month ago. “We are pleased to have nearly reached our goal this quickly,” Joe Price, Bank of America’s chief financial officer said in a statement.Nearly half of that amount came from the sale of 13.5 billion in common stock that the company has conducted over the past month.Bank of America said it has also raised funds by converting 9.5 billion of preferred shares not owned by the government into common shares. That conversion enabled the bank to further boost its capital by 1.3 billion because of reduced dividend payments. The Charlotte, N.C.-based lender said the additional capital came from the company’s sale of its stake in China Construction Bank, 2 billion in benefits from other dispositions and a 2.1 billion deferred tax asset gain as a result of higher capital levels.0:00
/3:59Stuck banks in troubleThe company reiterated Tuesday that it was still considering issuing more common shares or converting more preferred shares into common stock.Bank of America (BAC, Fortune 500), like many peers who were deemed to be facing a capital deficiency as a result of the stress test, is trying to avoid having to convert the government’s 45 billion preferred share stake in the company into common stock. Such a move would not only dilute existing shareholders but give the government a greater stake in the company.Tuesday’s announcement by Bank of America comes just hours after rivals JPMorgan Chase (JPM, Fortune 500), Morgan Stanley (MS, Fortune 500) and credit-card issuer American Express (AXP, Fortune 500) unveiled plans to sell stock worth a combined 7.7 billion aimed at repaying taxpayer funds from the government’s Troubled Asset Relief Program, or TARP. Bank of America, which faced the biggest capital shortfall as a result of the stress-test program, hinted Tuesday that it too was getting close to be able to free itself from the TARP.The company said it believed that it would “comfortably exceed” the 33.9 billion that regulators deemed it would need. It also noted that it recently sold 3 billion in five-year notes and 2.5 billion in 10-year notes during the month of May without guarantees from the Federal Deposit Insurance Corp., a key requirement for banks to repay TARP.

Source:CNN

Big drop in global server sales
Sales of servers worldwide fell almost 25% in the first three months of 2009, against the same period a year earlier, according to market research firm IDC.Global sales were 9.9 bn (6.14 bn), IDC said, the lowest figure since the firm started monitoring the computer server market 12 years ago. Dell was the vendor hardest hit, with server revenue falling 31.2%. IDC said they expected the situation to continue, although they predicted some recovery by 2010. “Market conditions worsened in all geographic regions during the first quarter as customers of all types pulled back on both new strategic IT projects and ongoing infrastructure refresh initiatives,” said Matt Eastwood, IDC’s group vice president. All three server sectors – volume, midrange, and high-end systems – registered a decline in sales. This is the first time this has happened since 2002. The five big server vendors – HP, IBM, Dell, Sun Microsystems and Fujitsu/Fujitsu Siemens – all suffered a double digit percentage drop in revenue. Revenue declineServer operating system revenue also declined, IDC said. Revenues for Unix servers fell 17.5% compared with the same period a year earlier. Revenues for IBM’s System z servers, running the z/OS operating system, fell 18.9%. Microsoft Windows server revenues fell 28.9% to 3.7bn and Linux server revenues fell 24.8% year-over-year to 1.4 billion, its lowest in five years. Mr Eastwood said companies had suspended buying new equipment and were focusing on extending the lifespan of existing products. “While these strategies are effective in the near term, server demand will begin to improve in the second half of the year as customers begin to rebuild their IT capabilities in advance of a meaningful economic recovery in 2010,” he said.
Source:BBC