Lehman's Fuld Says `Worst Is Behind Us' in Crisis

Richard Fuld, chief executive officer of Lehman Brothers Holdings Inc., told shareholders the worst is behind us in the credit-market contraction that has cost the biggest banks and brokerages $245 billion so far.

Fuld, speaking at the annual shareholders meeting of his New York-based firm, said the current environment remains challenging.

The comments echo those of Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., who told shareholders at the firm's annual meeting last week that we're closer to the end than the beginning of the crisis. John Mack, Morgan Stanley's CEO, said last week that the credit-market contraction will probably last a couple of quarters longer.

Lehman's chief financial officer, Erin Callan, said in an interview on April 11 that the firm had faced a very, very tough month, in March. I don't see what the real catalyst for change would be over the next several months, she said. We've got to look out to 2009 for where we're going to change.

Lehman, the fourth-largest U.S. securities firm, said on April 9 it had to bail out five short-term debt funds last quarter that were crippled by frozen credit markets. The firm took $1.8 billion of assets from the funds onto its books at the time, and recorded a $300 million loss. Earlier this month Lehman raised $4 billion from a stock sale, seeking to quell concern the firm was low on capital.

Sending a Message

Fuld said at the meeting that the sale was intended to strengthen capital and send a message to investors. He said the firm will continue to reduce leverage by selling assets, and can counter market rumors with good performance.

March was difficult because the collapse of Bear Stearns Cos. in the middle of the month created a sense of fear and paralysis about the securities industry, Callan said.

Derivatives used to hedge cash securities also diverged widely from their usual levels, she said. Investors were using indexes of credit-default swaps, which typically rise when perceptions of company creditworthiness worsen, to hedge against losses on everything from stocks to collateralized debt obligations. The indexes started to drop in mid-March at a faster rate than underlying securities improved, leaving investors with losses.

The world's biggest banks have recorded $245 billion in asset writedowns and credit losses since the beginning of 2007. Lehman avoided the much bigger losses reported by rivals such as Merrill Lynch & Co., which posted $25.1 billion of writedowns in the second half of last year.

Lehman, down 40 percent this year on the New York Stock Exchange, declined 9 cents to $39.29 at 11:58 a.m.

Japanese Stocks Decline on Record Oil Price, Writedown Concern

Japan's stocks fell after crude oil surged to a record and Wall Street firms reported owning more securities that are difficult to value, renewing concern financial companies will increase writedowns.

Sumitomo Trust & Banking Co., Japan's fifth-largest listed bank, slipped 1.6 percent, while Daiwa Securities Group Inc., the nation's second-largest brokerage, fell 1.9 percent.

There's growing concern Japanese companies will incur even bigger profit declines this business year because of rising material costs, Mitsushige Akino, who oversees the equivalent of $589 million at Ichiyoshi Investment Management Co. in Tokyo, said in an interview with Bloomberg Television.

The Nikkei 225 Stock Average declined 87.32, or 0.7 percent, to 13,024.57 as of 9:03 a.m. The broader Topix index fell 11.49, or 0.9 percent, to 1,251.41.

Crude oil surged 2.2 percent to a record $110.87 a barrel in New York trading yesterday after U.S. crude supplies unexpectedly dropped. U.S. brokerages including Goldman Sachs Group Inc. had more assets at the end of February whose market prices aren't readily available compared with the amount in November, according to filings.

Nikkei futures expiring in June retreated 0.8 percent to 13,020 in Osaka and slumped 1 percent to 13,015 in Singapore.

Citigroup May Sell $12 Billion of Loans

Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.

A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who declined to be identified because the negotiations are private. The loans are part of the $43 billion in financing Citigroup agreed to provide for leveraged buyouts last year before credit markets froze, saddling the company with the hard- to-sell assets.

Citigroup shares have plunged 19 percent this year, partly on concern that writedowns of leveraged loans might compound $24 billion of losses the New York-based bank has taken so far on mortgages and bonds that have tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings on the bank's $2.2 trillion balance sheet.

As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans, said William B. Smith, senior portfolio manager at Smith Asset Management in New York, which oversees about $80 million, including about 66,000 Citigroup shares. There's now a consortium of private-equity firms saying what they're worth.

Daniel Noonan, a Citigroup spokesman, declined to comment, as did Apollo spokesman Steven Anreder and Blackstone spokesman Peter Rose. TPG didn't return messages seeking comment.

$200 Billion Logjam

The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they're considered by Moody's Investors Service and Standard & Poor's to carry a higher risk of default.

Citigroup is planning to complete the loan sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said. The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at research firm CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.

It would definitely raise loan prices given that large- scale buyers are stepping in, Taggert said.

Record Low

Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup's discounted sale price, which may be about 90 cents on the dollar, the Financial Times reported earlier today. Apollo and Blackstone, which manages the world's biggest buyout fund, are based in New York. TPG, based in Fort Worth, Texas, led a group that bought a $7 billion stake today in Washington Mutual Inc., the largest U.S. savings and loan.

The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to Standard & Poor's. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.

Pandit is poised to dispose of more than $200 billion of the company's assets, which increased by almost $700 billion from 2005 through 2007. Since he succeeded Charles O. Chuck Prince in December, Pandit has been whittling down Citigroup's inventory of leveraged loans and high-yield bonds while balking at financing pending deals. Under U.S. accounting rules, Citigroup must record losses when the market value of the buyout loans on its balance sheet falls.

U.S. Stocks Rally on Goldman, Lehman Earnings, Fed Rate Cut

U.S. stocks rallied the most in five years as earnings from Lehman Brothers Holdings Inc. and Goldman Sachs Group Inc. allayed concern investment banks are collapsing and the Federal Reserve cut its benchmark rate.

Lehman, the fourth-biggest securities firm, had its steepest advance ever and helped lead financial stocks to their biggest gain since 2000. Goldman, the largest securities firm, rallied the most in almost nine years. All 10 industry groups in the Standard & Poor's 500 Index added at least 1.7 percent after the Fed cut the target rate for overnight lending by 0.75 percentage point, helping the market erase a two-day tumble that wiped out $767 billion following Bear Stearns Cos.'s collapse.

The run on the investment banks would appear to be over, said Doug Peta, a New York-based market strategist at J&W Seligman & Co., which oversees about $19 billion. It seems certain we are going to finish the week with the four investment banks we started with, and we couldn't be sure of that Monday morning. The Fed decision is actually a bit of a sideshow.

The S&P 500 rose 54.14 points, or 4.2 percent, to 1,330.74, its biggest rise since October 2002. The Dow Jones Industrial Average climbed 420.41, or 3.5 percent, to 12,392.66, its fourth-biggest point gain ever. The Nasdaq Composite Index increased 91.25, or 4.2 percent, to 2,268.26. Almost 16 stocks rose for every one that fell on the New York Stock Exchange, the broadest advance since September. Treasuries dropped and the dollar surged the most in nine years against the yen.

Financial shares in the S&P 500 gained 8.5 percent as a group, the top advance among 10 industries, after the better- than-forecast earnings at Lehman and Goldman assuaged concern that Wall Street firms were overvalued. The group is still down 13 percent this year after the world's largest financial firms posted $195 billion in credit losses and asset writedowns stemming from the collapse of the subprime mortgage market.

Lehman, Goldman

The Fed reduced its benchmark rate to the lowest level in more than three years. The central bank has cut the rate six times and slashed the discount rate for direct loans to banks eight times since the middle of August, when the collapse of subprime mortgages started to infect markets around the world.

Goldman surged $24.57, or 16 percent, to $175.59. Net income fell to $1.51 billion, or $3.23 a share, in the three months ended Feb. 29 from $3.2 billion, or $6.67, a year earlier, Goldman said in a statement. The average estimate of 17 analysts surveyed by Bloomberg was for $2.59 a share, with forecasts ranging from $1.95 to $3.40.

`Bad Bet'

Lehman, which lost 19 percent yesterday, climbed 46 percent today to $46.49. First-quarter net income declined to $489 million, or 81 cents a share, from $1.15 billion, or $1.96, a year earlier, the New York-based firm said. That beat the 72- cent average estimate of 16 analysts surveyed by Bloomberg. Earnings were depressed by a $1.8 billion writedown caused by the slump in the mortgage market.

Assuming Lehman will fail because Bear Stearns did is a bad bet to make, said Punk Ziegel & Co. analyst Richard Bove. While both are involved in mortgage securities, Lehman has more diversity from overseas operations, money-management businesses and high-profile deals, Bove wrote in a note to clients.

Citigroup Inc., the biggest U.S. bank, advanced $2.09 to $20.71. JPMorgan Chase & Co., the third-largest U.S. bank, gained 6 percent. Merrill Lynch & Co., the third-biggest securities firm, added 13 percent.

U.S. financial stocks are getting closer to bottoming out, analysts at Morgan Stanley said.

We view the banks as vulnerable to the credit cycle, with Fed rate cuts only a partial offset, the analysts, led by Nigel Dally, wrote in a report to clients. But some of these risks are now in the stocks.

Bear Stearns

Financial shares tumbled to their lowest level in almost five years yesterday on concern Wall Street's biggest firms may be overvalued following the $2-a-share takeover of Bear Stearns by JPMorgan.

Bear Stearns, which lost 84 percent yesterday, climbed 23 percent to $5.91 today on speculation the company may receive a higher offer. JPMorgan's $240 million bid was a 90 percent discount to Bear's closing price at the end of last week.

Getting some reinforcement that the wheels weren't falling off of all the brokers was a great thing, because everyone was fixated on the troubles at Bear, said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. It had gotten so negative that people were thinking the entire financial system might be collapsing, so anything short of that was seen as a positive.

Exxon, GM

Exxon Mobil Corp., the largest U.S. oil company, increased $2.68 to $88.47 as oil recovered some of yesterday's 4.1 percent retreat, the steepest decline since August. Chevron Corp., the second-biggest U.S. energy company, added $1.93 to $86.12.

Crude oil for April delivery rose 3.5 percent to $109.42 a barrel in New York on speculation the interest rate reduction will strengthen the economy.

General Motors Corp. climbed $1.58 to $19.41. The largest U.S. automaker has enough cash and doesn't expect any fallout from its ties to Bear Stearns, Chief Operating Officer Fritz Henderson said.

Yahoo! Inc. added $1.81, or 7 percent, to $27.66. The Internet search company that snubbed advances from Microsoft Corp. reaffirmed its forecasts for the first quarter and the year in a bid to prove it can stay independent. Cash flow may almost double in the next three years, Yahoo said.

A measure of homebuilders in the S&P indexes climbed the most in almost eight weeks, gaining 9.9 percent. Hovnanian Enterprises Inc., New Jersey's biggest homebuilder, and Standard Pacific Corp., the worst-performing stock in the index in the past year, each climbed 18 percent.

Economy Watch

Prices paid to U.S. producers rose less than forecast in February, while prices excluding food and energy jumped the most since November 2006. The 0.3 percent increase followed a 1 percent gain in January, the Labor Department said. Excluding food and energy, so-called core wholesale prices climbed 0.5 percent, more than double the gain economists forecast.

Housing starts in the U.S. dropped in February and construction permits fell to the lowest level in more than 16 years, signaling construction will continue to hurt economic growth. Builders broke ground at an annual rate of 1.065 million homes, down 0.6 percent from a revised 1.071 million pace in January that was higher than previously reported, the Commerce Department said.

The Fed has cut the benchmark lending rate by 2 percentage points this year, the most aggressive easing since the federal funds rate became an explicit target of policy in the late 1980s.

Recent data show the economic outlook has weakened further while inflation remains elevated, the Federal Open Market Committee said in a statement.

Bets on Bigger Cut

Stocks rallied even though traders had priced in 86 percent odds that the Fed would cut rates by a full percentage point, according to futures trading.

This is maybe the start of the Fed trying to walk the market back from the brink and not necessarily following every single demand the market makes of it, said Joseph Veranth, who helps manage about $2.8 billion as chief investment officer at Dana Investment Advisors in Brookfield, Wisconsin. The market's taking it very well.

The S&P 500 has dropped 9.9 percent since Sept. 17, the day before the Fed cut its benchmark lending rate for the first time in four years. The worst housing market in a quarter century and $195 billion of credit losses at the world's biggest financial firms have hindered the central bank's efforts to restore confidence in financial markets and prevent the first U.S. recession since 2001.

The Russell 2000 Index, a benchmark for companies with a median market value 22 times smaller than the S&P 500, climbed 4.8 percent to 681.93. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, rose 4.1 percent to 13,354.94.

Dollar Falls Below 97 Yen, First Time Since 1995, as Fed Cuts

The dollar fell below 97 yen for the first time in 12 years after the Federal Reserve cut its discount rate and financed a bailout of Bear Stearns Cos. by JPMorgan Chase & Co.

The dollar also dropped to a record low against the euro and the Swiss franc after the Daily Telegraph said yesterday Goldman Sachs Group Inc. will reveal $3 billion in writedowns when it releases quarterly earnings tomorrow. The dollar earlier trimmed losses after the Fed unexpectedly cut its discount rate by half a percentage point. Traders have also increased bets the Fed will slash the benchmark federal funds rate by 1 percentage point tomorrow.

The Fed's measures just provided a temporary impact, said Masafumi Yamamoto, head of foreign-exchange strategy for Japan at Royal Bank of Scotland Group Plc, the U.K.'s second- biggest bank. But those liquidity injections won't solve the problems. The injection of public money should be really needed. The dollar may fall to 96 yen this week.

The dollar fell to as low as 96.58 yen, the weakest since Aug. 28, 1995, before trading at 96.71 yen at 9:32 a.m. in Tokyo from 99.09 yen late in New York on March 14. Against the euro, the dollar fell to a record low of $1.5807. The dollar fell to an all-time low of 0.9804 Swiss francs.

The dollar also set record lows against the euro the previous four days as investor confidence tumbled, sending U.S. stocks lower for a third straight week and driving gold to a record high of $1,009 an ounce.

Fed Meeting

Easing monetary policy, ongoing uncertainties in the financial sector and rising fears of capital outflows are chief reasons for our short-term bearish outlook.

The U.S. currency has lost about 16 percent against the euro and 17 percent versus the yen in the past year as the worst housing slump since 1991 forced the Fed to cut its benchmark rate 2.25 percentage points to bolster the economy, lowering returns on dollar deposits.

The New York Fed agreed to provide financing through JPMorgan for up to 28 days after Bear Stearns said its liquidity position had significantly deteriorated. Bear Stearns shares fell 47 percent in New York trading.

The likelihood the Fed will cut its target rate for loans between banks by one percentage point to 2 percent at a meeting tomorrow rose to 56 percent on March 15, up from 6 percent a week earlier, futures on the Chicago Board of Trade showed. The balance of bets is on a cut to 2.25 percent. The euro region's main rate is 4 percent.

The dollar briefly recouped some of its losses after the Fed, in an emergency move, lowered the discount rate at which commercial banks borrow from the central bank to 3.25 percent from 3.50 percent. Primary dealers can borrow at the discount rate in exchange for a broad range of collateral, the Fed said in a statement today.

JPMorgan-Bear deal close

JPMorgan nearing completion of deal to acquire foundering Wall Street brokerage Bear Stearns, Wall Street Journal reports.

JPMorgan Chase & Co. was reportedly close Sunday to acquiring troubled Wall Street firm Bear Stearns as fears deepened that Bear's demise could send shockwaves across the already shaky financial markets.

The Wall Street Journal cited unnamed sources who said the parties were trying to complete a tie-up before the financial markets open in Asia on Monday. The Journal also said that Bear Stearns executives are preparing for a possible bankruptcy filing - a move the firm might have to take if it doesn't consummate a deal.

Bear Stearns was on the brink of financial collapse Friday when JPMorgan and the Federal Reserve Bank of New York said they would provide the brokerage a short-term loan.

With the global credit crisis worsening, the Fed - along with officials from the Treasury Department and other government agencies - took the dramatic action to prevent the investment bank from going under and igniting widespread panic through the financial markets.

Treasury Secretary Henry Paulson said on Sunday that talks about how to rescue Bear had continued throughout the weekend. He defended the Fed's bailout on Friday as "the right decision" and said the Bush administration was ready to take other actions to bring stability to the financial markets.

The Journal report said the terms of the deal were still being negotiated, but that Bear Stearns could sell for about $2.2 billion, or slightly less than $20 a share. Bear Stearns shares closed at $30 on Friday, down 47%.

A deep, fast fall

The deal would mark an inglorious final chapter for 85-year-old Bear Stearns, a storied Wall Street firm whose unraveling has been fast and furious.

Rumors that Bear Stearns was on the verge of collapse started buzzing around Wall Street trading desks last Monday. Chief Executive Alan Schwartz - who took over as CEO in early January from longtime chief Jimmy Cayne - appeared on television on Wednesday afternoon to reassure the markets that the firm was stable.

But by Thursday night, Bear was in a severe crunch. Some firms that trade with it effectively stopped offering it credit because they feared that Bear was running short of short-term funding, or liquidity.

Shares of Bear Stearns opened last week at $69.75 and traded as high as $159 last year.

Bear Stearns May Lose Independence After Fed Bailout

Bear Stearns Cos.'s 85 years as an independent Wall Street firm may be coming to an end as JPMorgan Chase & Co. considers buying the crippled company.

Teetering on the brink of collapse from a lack of cash, New York-based Bear Stearns got emergency funding yesterday from the Federal Reserve and JPMorgan in the largest government bailout of a U.S. securities firm. The move failed to avert a crisis of confidence among Bear Stearns's customers and shareholders, who drove the stock down a record 47 percent.

After denying earlier this week that access to capital was at risk, Bear Stearns Chief Executive Officer Alan Schwartz said yesterday that the company's cash position had significantly deteriorated in the past 24 hours. The Fed agreed to provide financing through JPMorgan for up to 28 days, the bank said in a statement yesterday.

Now JPMorgan, led by Chief Executive Officer Jamie Dimon, is considering buying Bear Stearns, according to three people briefed on the matter. No agreement has been reached and it's possible no deal will be completed, said the people, who declined be identified because the discussions are confidential. A person close to JPMorgan said the bank may also be interested in buying Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds.

Dimon, whose New York-based firm has suffered fewer losses than rivals during the credit-market contraction, has said he's open to making an acquisition. The bank has plenty of capital, he told the audience at a dinner hosted by the Economic Club of Washington on March 12, the day before his 52nd birthday.

`Devastating Blow'

The Fed acted to prevent the failure of the second-biggest underwriter of U.S. mortgage bonds and forestall a potential market panic as losses by banks and brokers reached $195 billion and stocks plunged for a third day this week.

I don't think they can afford to let Bear go, said Charles Geisst, the author of 100 Years on Wall Street, referring to the New York Fed bailout. At this particular moment in time, it would be a devastating blow to the markets.

Bear Stearns, founded in 1923, acted in response to market rumors of a liquidity crisis, CEO Schwartz, 57, said in a separate statement. He said earlier this week that the company's liquidity cushion was sufficient to weather the credit-market contraction. Bear Stearns's cash shortfall began March 11 after rumors spread that it lacked sufficient access to capital, and lenders and clients began withdrawing funds, the Washington-based U.S. Securities and Exchange Commission said in a statement released late yesterday.

Shares Tumble

We have tried to confront and dispel these rumors and parse fact from fiction, Schwartz, who was named CEO less than three months ago, said in the company's statement yesterday. Nevertheless, amidst this market chatter, our liquidity position in the last 24 hours had significantly deteriorated.

The announcement caused financial shares to plunge, with Bear Stearns tumbling $27 to $30 in New York Stock Exchange composite trading. The stock has lost 66 percent of its value this year. The sinking share price has wiped out $10.5 billion of shareholder value in the last three months.

Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. also led declines as all 10 industry groups in the Standard & Poor's 500 Index fell yesterday. Lehman, the biggest underwriter of U.S. mortgage bonds, said it obtained a $2 billion, three-year credit line from 40 banks.

Bear Stearns's long-term counterparty credit rating was reduced three levels to BBB by Standard & Poor's. The rating may be cut further, New York-based S&P said. It lowered the short- term rating to A3 from A1. Moody's Investors Service also downgraded the company's long-term rating to Baa1 from A2.

Cayne's Pick

Bear Stearns, which survived the Great Depression and first sold shares to the public in 1985, helped trigger a crash in the market for home loans to borrowers with blemished credit histories after two of its hedge funds collapsed in July. The failure of the two funds, which invested in securities linked to subprime mortgages, prompted a sell-off of the assets, which in turn led investors to shun other high-yield debt.

Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James Jimmy Cayne, 74, who remains non- executive chairman of the firm. Cayne stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history.

On a conference call with analysts and investors after yesterday's announcement, Schwartz said that the company's book value was fundamentally unchanged. Clients continued to withdraw funds, he said.

For Sale

The firm has retained investment bank Lazard Ltd. to seek strategic alternatives, Schwartz said. Bear Stearns said it's also in talks with JPMorgan about long-term funding.

Steven Black, JPMorgan's co-head of investment banking, said on Feb. 27 that the bank was considering acquiring a prime brokerage that was for sale then. He didn't name the seller. Bank of America, which agreed to buy mortgage lender Countrywide Financial Corp. for $4 billion on Jan. 11, said four days later that it planned to sell its prime brokerage.

There happens to be one for sale and we are looking at it, Black said at a JPMorgan investor conference in New York.

Other potential Bear Stearns buyers include private equity firms such as J.C. Flowers & Co., the Wall Street Journal reported. HSBC Holdings Plc, Europe's largest bank by market value, also has the resources to make an acquisition.

`Good Pockets'

The London-based lender may rise 30 percent in London trading this year, outperforming other U.K. banks because of its rich capital reserves, Keefe, Bruyette & Woods Ltd. analyst James Hutson wrote in a March 13 note to investors.

Bear Stearns led Wall Street shares lower this year as the world's largest lenders and securities firms wrote down assets linked to the subprime mortgage market. Analysts in the past month have lowered expectations for earnings in the first quarter. Bear Stearns said it will report results on March 17.

JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by Citigroup, the biggest U.S. lender.

JPMorgan is not loaded up with bad mortgage debt, said Vincent Farrell, principal at Scotsman Capital Management. Bear has a couple of very good pockets that any other firm would want to have if you can clear up the balance-sheet issue.

Lewis's Bet

About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.

The future for Bear will be found in a forced marriage, said Charles Peabody, an analyst at Portales Partners LLC in New York who rates the stock a sell. Their business model is broken. They don't have the ability to go it alone.

Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn't planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, views his 9.4 percent investment as long-term, the person said.

The Fed is taking on the credit risk from collateral supplied by Bear Stearns, which approached the central bank for emergency funds, Fed staff officials said yesterday.

The Fed, under Chairman Ben S. Bernanke, voted unanimously to lend the funds through JPMorgan because it would be operationally simpler than a direct loan to Bear Stearns, the staff said on condition of anonymity. The regulator invoked a little-used law that allows it to make loans to corporations and private partnerships, which required a Board vote, according to the staffers.

U.S. Stock-Index Futures Decline; Intel, Citigroup Shares Drop

U.S. stock-index futures fell after Intel Corp. said lower chip prices will hurt earnings and a Merrill Lynch & Co. analyst predicted Citigroup Inc. may report $18 billion in first-quarter credit writedowns.

Intel, the world's largest computer-chip maker, dropped after cutting its profitability forecast because of an industry glut of flash-memory. Citigroup retreated on Merrill's forecast for a first-quarter loss at the biggest U.S. bank. Technology and financial stocks led European shares to a fifth day of declines and Asia's regional benchmark slumped for a fourth day.

Standard & Poor's 500 Index futures expiring this month decreased 8 to 1,323.9 as of 8:31 a.m. in New York. Dow Jones Industrial Average futures lost 61 to 12,191. Nasdaq-100 Index futures fell 9.75 to 1,727.

Intel is an indicator, said Franck Hennin, who helps oversee $6.1 billion at Richelieu Finance in Paris. We have to survey technology stocks today.

Futures indicated the Nasdaq Composite Index and Dow average will fall for a fourth straight day and the S&P 500 will drop for the fourth time in five days. The Nasdaq has retreated 15 percent this year, the biggest decline among the three equity benchmarks, on growing concern that profit growth at Intel, Apple Inc., Google Inc. and other technology companies will slow as $181 billion in credit losses restrain the global economic expansion.

Most U.S. stocks gained yesterday as record oil and gold prices spurred a rally in commodity producers, outweighing declines in technology and financial shares.

Intel, Micron

Intel lost 61 cents to $19.40 today. The company said gross margin, the percentage of sales remaining after deducting the cost of production, will be 54 percent, down from the 56 percent it predicted in January. Intel cited lower-than-expected prices of chips that store data in cameras and music players for the reduced forecast.

Brokerages including Goldman Sachs Group Inc. and UBS AG lowered their earnings estimates for Intel on concern flash- memory chips will undermine its main business of making computer processors.

Google, owner of the most popular Internet search engine, dropped $3.52 to $453.50. Apple, maker of the iPod media player, lost 83 cents to $120.90.

Citigroup declined 59 cents to $22.50. Merrill's Guy Moszkowski said he expects $15 billion of writedowns related to the company's holdings of subprime mortgages and collateralized debt obligations and another $3 billion from leveraged loans, bad consumer debt, real-estate lending and other investments.

Citigroup Estimates

The New York-based analyst slashed his first-quarter estimate for Citigroup to a loss of $1.66 per share from a profit of 55 cents a share and cut his 2008 profit forecast to 24 cents a share from $2.74.

Separately, the head of an investment fund controlled by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum said Citigroup may need additional capital from outside investors as losses stemming from the collapse of the U.S. subprime mortgage market increase.

Bank of America Corp. dropped 41 cents to $39.18. Wachovia Corp. declined 41 cents to $30. Merrill also cut profit estimates for the second- and fourth-largest U.S. banks.

Goldman Sachs Group Inc. and three of the securities firm's smaller rivals had their first-quarter earnings estimates cut by Wachovia analyst Douglas Sipkin on expectations the value of mortgage assets will continue to fall. Sipkin is at least the 10th analyst in the past two weeks to reduce profit estimates for the biggest investment banks.

Goldman dropped $1.09 to $163.99. Bear Stearns Cos. rose 77 cents to $78.09 in Germany. Lehman Brothers Holdings Inc. retreated 41 cents to $48.20. Morgan Stanley shares didn't trade in Europe.

Best Buy, Barnes & Noble

Best Buy Co. fell $1.27 to $42.01 after Bank of America Corp. downgraded the biggest U.S. electronics chain to neutral from buy. The absence of new television technologies in 2008 will lead to lackluster demand, analyst David Strasser wrote in a note to clients.

Barnes & Noble Inc. may be active. The biggest U.S. bookstore chain forecast profit that may miss analysts' estimates because of fewer bestsellers like J.K. Rowling's record-breaking Harry Potter and the Deathly Hallows.

Barr Pharmaceuticals Inc. rallied $4.83 to $50.50. Bayer AG, Germany's biggest drugmaker, said a federal judge in New Jersey invalidated a patent on the contraceptive Yasmin in a victory for generic-drug maker Barr.

Federal Reserve Chairman Ben S. Bernanke will speak today on mortgage foreclosures at the Independent Community Bankers of America's National Convention and Techworld, in Orlando, Florida. Fed Board Vice Chairman Donald Kohn and other regulators are scheduled to testify before the Senate Banking Committee on conditions in the banking system.

The MSCI World Index decreased 0.3 percent. Europe's Dow Jones Stoxx 600 Index lost 0.9 percent, while the MSCI Asia Pacific Index declined 0.4 percent.

U.S. Stocks Rally in Final 30 Minutes, Gain for Week, on Ambac

U.S. stocks rallied in the final 30 minutes of trading, helping the market post its second straight weekly gain, as speculation bond insurer Ambac Financial Group Inc. may be rescued overcame concern bank earnings will falter.

American International Group Inc. and JPMorgan Chase & Co. led the Dow Jones Industrial Average's 243-point turnaround. Ambac, which guarantees more than $500 billion in debt, climbed the most in three weeks after CNBC reported that the bailout to salvage its AAA credit rating may be announced next week.

This will cheer us up, if it in fact turns out to be true, said Bill Stone, who helps oversee $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. People are buying into the story.

The Standard & Poor's 500 Index climbed 10.58 points, or 0.8 percent, to 1,353.11, ending the week up 0.2 percent. The Dow average added 96.72, or 0.8 percent, to 12,381.02. The Nasdaq Composite Index increased 3.57, or 0.2 percent, to 2,303.35. About two stocks gained for every one that fell on the New York Stock Exchange.

Stocks dropped earlier, led by financial shares, on concern that profits at brokerage firms will decline and lower demand for mortgages will curb growth at Fannie Mae and Freddie Mac. Saving Ambac's AAA credit rating for the municipal and asset- backed securities guaranty units would help banks and debt investors limit losses.

Nine of 10 industry groups in the S&P 500 ended the day higher, as the rally in the final half hour reversed declines that earlier had sent every group except for one lower.

Ambac Speculation

Ambac, the second-largest bond guarantor, climbed $1.48, or 16 percent, to $10.71 after CNBC on-air editor Charles Gasparino said the bailout may be announced on Monday or Tuesday, citing bankers working on the deal. Gasparino also said the entire deal could fall apart. The Financial Times reported that banks including Citigroup Inc., Wachovia Corp. and Barclays Plc are lining up to provide $2 billion to $3 billion to Ambac.

The company is exploring capital-raising alternatives and has had discussions with various parties, Douglas Renfield-Miller, an executive vice president at Ambac, said in a telephone interview. He declined to elaborate.

AIG, the largest insurance company, added $1.29 to $48.88. JPMorgan, the third-biggest U.S. bank, climbed 86 cents to $43.93, erasing a 2.7 percent decline. MBIA Inc., the world's biggest bond insurer, gained 28 cents to $12.18 after earlier falling as much as 9.7 percent.

There's some possibility that some of the heat on the financials because of dysfunctional credit markets will be removed, David Kotok, who helps oversee $900 million as chief investment officer of Cumberland Advisors Inc. in Vineland, New Jersey, said in an interview on Bloomberg Radio.

$2.4 Trillion Insured

Speculation about whether the companies in the bond- insurance industry will maintain the AAA credit ratings they rely on to insure about $2.4 trillion in securities has contributed to larger-than-average price swings in the U.S. stock market. Intraday moves in the Dow industrials averaged 234 points this week, more than three times the average of a year ago.

The S&P 500 has lost 7.8 percent this year, while the Dow has dropped 6.7 percent on concern the worst housing slump in a quarter century will drag the economy into a recession.

Federal Reserve Bank of Dallas President Richard W. Fisher said today the U.S. will probably see slower economic growth rather than a deeper slump.

The most likely scenario is that the U.S. will avoid a prolonged period of negative economic growth, Fisher said during an interview today before a speech in Fort Worth, Texas, without mentioning the term recession. He also said he's hearing increasing expressions of concern about inflation from executives he speaks with, which has gotten my attention.

Financials Turn Around

The CNBC report sparked a turnaround in the S&P 500 Financials Index, which had dropped as much as 1.9 percent after Sanford C. Bernstein & Co. analyst Brad Hintz slashed his first- quarter profit estimates for U.S. securities firms and Merrill Lynch & Co.'s Kenneth Bruce said the worst housing market in a quarter century will stifle earnings at Fannie Mae and Freddie Mac through 2011. The financials ended the day up 1.6 percent, with 81 of its 92 members posting gains.

Goldman Sachs Group Inc., the biggest U.S. securities firm, gained $2.54 to $177.71 after earlier dropping as much as 2.2 percent. Lehman Brothers Holdings Inc. added 8 cents to $54.22, recovering from a 3.2 percent tumble. Bear Stearns Cos. increased $2.93 to $85.16.

Hintz cut his first-quarter earnings estimates for the firms by more than 40 percent, saying slumping credit markets, combined with weak revenue from underwriting and advisory fees, will hurt profits.

Fannie, Freddie

Fannie Mae slipped 27 cents to $28.72. Freddie Mac fell $1.14 to $26.61. Bruce downgraded the shares to sell from neutral and said the companies may report significant losses in their fourth-quarter results.

Discover Financial Services added 94 cents to $15.10. Morgan Stanley advised buying shares of the fourth-largest credit-card network, saying it will likely report earnings that top analysts' consensus estimates this year because of lower- than-expected credit losses.

Express Scripts Inc. gained $1.55 to $66.31. The third- largest U.S. manager of drug benefits raised its 2008 earnings forecast and reported profit that beat analysts' estimates as clients used a higher proportion of cheaper generic medicines.

Intuit Tumbles

Intuit Inc. plunged the most in the S&P 500 after the largest maker of tax-preparation software trimmed its annual profit forecast because of slowing sales growth to small companies and a higher tax rate. The shares dropped $2.74, or 9.2 percent, to $27.05 for the biggest decline since February 2006.

Makers of computer chips and related machines retreated after a trade group said North American orders for semiconductor equipment fell 23 percent in January from a year ago.

KLA-Tencor Corp., the second-largest U.S. maker of chip- manufacturing equipment, fell 41 cents to $42.54. Intel Corp., the biggest chipmaker, declined 48 cents to $19.82.

Some 1.42 billion shares changed hands on the NYSE, 11 percent less than the three-month daily average.

With no major economic reports due today, investors will look to next week for further clues on the economy. A report on Feb. 25 will probably show existing home sales declined in January, while a release on Feb. 27 is likely to show a drop in durable goods orders for the same month, according to economists' estimates compiled by Bloomberg News.

Small Caps Slump

The Russell 2000 Index fell 0.1 percent today after Credit Suisse Group said smaller companies may post bigger declines than their larger counterparts as tougher bank lending standards cut their profits.

Nicor Inc. dropped $1.04 to $36.36, the lowest price since April 2005. The Naperville, Illinois-based natural-gas utility forecast 2008 profit of as much as $2.40 per share. That compares with the $2.82 average of analysts' estimates compiled by Bloomberg.

Europe's Dow Jones Stoxx 600 Index fell 0.8 percent after RWE AG, Germany's second-largest utility, reported its first loss since 2000 and Morgan Stanley cut its profit forecast for Renault SA, a French carmaker.

The MSCI Asia Pacific Index lost 0.6 percent as Toyota Motor Corp. and Samsung Electronics Co. declined.

Treasury two-year notes posted their first weekly drop this year and the dollar fell to a three-week low against the euro.

Mortgage applications tumble

Volume of applications dropped more than 22% as most interest rates increased sharply, MBA's weekly survey says.

Mortgage application volume tumbled 22.6% during the week ending Feb. 15 as most interest rates moved higher, according to the Mortgage Bankers Association's weekly application survey.

The MBA's mortgage application index fell to 822.8 for the week, from 1,063.5 during the previous week.

Refinance volume dropped 27.9% during the week, while purchase volume fell 11.55%. Refinance applications accounted for 61.7% of total applications.

The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the housing boom.

An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA tracked application volume. A reading of 822.8 means mortgage application activity is 8.228 times higher than it was when the MBA began tracking the data.

The survey provides a snapshot of mortgage lending activity among mortgage bankers, commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.

Application volume slipped as most interest rates rose sharply. The average interest rate for traditional, 30-year fixed-rate mortgages increased to 6.09% from 5.72%. The average interest rate for 15-year fixed-rate mortgages, a popular option for refinancing a home, increased to 5.55% from 5.18%.

The average rate for one-year adjustable-rate mortgages remained steady at 5.72%.

G-7 Says Growth May Weaken, Stops Short of Remedies

The Group of Seven nations said the U.S. economy may slow further and erode global growth, while stopping short of proposing specific measures in response.

Downside risks still persist, which include further deterioration of the U.S. residential housing markets, tighter credit conditions and heightened inflation expectations in some countries, a statement by G-7 finance ministers and central bankers said in Tokyo today. They kept up pressure on China to allow the yuan to appreciate and said they'd cooperate on foreign exchange as appropriate.

The G-7 nations are at odds on how to tackle a global slowdown sparked by a U.S. housing recession. The U.S. has encouraged its counterparts to use fiscal policy to revive growth. Japan and Canada say they won't follow suit and Germany argues attention should be paid to the causes of last year's credit- market rout rather than how to limit the economic damage.

A house-price collapse has pushed the world's largest economy close to a recession and the U.S. this week urged the G-7 to follow its example and take prudent action to protect their economies. Treasury Secretary Henry Paulson has negotiated a package, including tax rebates, worth $168 billion with Congress, and the Federal Reserve last month cut its key interest rate twice in nine days to 3 percent, the fastest easing of policy since 1990.

Slowing Growth

In all our economies, to varying degrees, growth is expected to slow somewhat in the short term, the statement said. In the U.S. risks have become more skewed to the downside.

German Finance Minister Peer Steinbrueck and U.K. Chancellor of the Exchequer Alistair Darling said yesterday that scope for coordinated action to shore up the global economy is limited.

The group consists of the U.S., the U.K., Canada, Italy, France, Germany and Japan. China didn't attend the main talks at this gathering.

The G-7 agreed that China should do more to defuse global trade tensions, reflecting European and Canadian concern that their currencies are bearing too much of the burden of the dollar's slide.

While the yuan has climbed 6 percent against the dollar since the October statement, it's risen just 2 percent against the euro in the same period. French Finance Minister Christine Lagarde said today that the stronger euro continues to pose difficulties for European exporters.

China's Yuan

We welcome China's decision to increase the flexibility of its currency, but in view of its rising current account surplus and domestic inflation, we encourage accelerated appreciation of its effective exchange rate, the statement said. The language is similar to that used by the G-7 at their last meeting in October, when they singled out the yuan.

China overtook the U.K. as the euro area's biggest supplier last year. The euro has gained 11.5 percent against the dollar in the past year.

Global price pressures are making it harder for central banks to coordinate interest-rate policy. While the Bank of England this week cut its benchmark rate for the second time in three months and European Central Bank President Jean-Claude Trichet dropped a threat to raise rates, both central banks stressed inflation risks. October's statement contained no mention of global inflation risks.

May Coordinate Action

The G-7 omitted a commitment made at the last meeting in Washington to fiscal discipline. The group said it was possible they may agree to coordinate action to spur growth and ensure financial stability in the future.

The ECB and the Fed moved in concert with three other central banks in December to alleviate the credit squeeze in the biggest act of international cooperation since the Sept. 11 terrorist attacks.

Going forward, we will continue to watch developments closely and take appropriate actions, individually and collectively, in order to secure stability and growth in our economies, the statement said.

The G-7 pledged to act on the recommendations of the Financial Stability Forum of regulators, which today proposed measures to prevent a repeat of last year's credit crisis.

Italian central bank Governor Mario Draghi, who drafted the report, said banks should publish more information about their losses and improve risk management.

The report also said authorities must address potential conflicts of interest at credit-rating companies and improve understanding of banks' off-balance sheet positions, according to the statement.

The G-7 also asked the International Monetary Fund and the Basel, Switzerland-based Financial Stability Forum to report at the next meeting in April on their respective roles in identifying potential vulnerabilities and enhancing early warning capabilities, it said.

Merrill Posts Record Loss on $16.7 Billion Writedown

Merrill Lynch & Co., the biggest U.S. brokerage, reported a record loss after $16.7 billion of writedowns on assets infected by subprime mortgages.

The fourth-quarter net loss of $9.83 billion, or $12.01 a share, compared with earnings of $2.35 billion, or $2.41, a year earlier, the New York-based firm said today in a statement. Merrill fell 8 percent in New York trading, the biggest decline since the 2001 terrorist attacks, as the loss was almost three times bigger than analysts estimated and resulted in the first full-year loss since 1989.

We hope it's all written down and they've thrown in the kitchen sink, said Jeffrey Davis, chief investment officer at Boston-based Lee Munder Capital Group, which manages $4.8 billion and holds Merrill shares. Their core businesses have been impaired.

Chief Executive Officer John Thain called the results unacceptable and said on a conference call that Merrill should stop taking risks that have the potential to wipe out profit. Thain joined Merrill last month, replacing Stan O'Neal, whose gamble on building the subprime mortgage business backfired as U.S. homeowner defaults surged to a 20-year high.

Merrill follows Morgan Stanley and Bear Stearns Cos. in reporting a loss, capping Wall Street's worst quarter ever. The five biggest U.S. securities firms, which also include Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., reported a net total of $10.2 billion in losses. Thain, Goldman's former president, has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.

Shares Fall

Merrill, down 5.5 percent this year, fell $4.38 to $50.71 in composite trading on the New York Stock Exchange at 1:12 p.m.

The writedown included $11.5 billion to account for the plummeting value of subprime mortgages and related bonds called collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3.1 billion, saying provider ACA Capital Holdings Inc.'s credit rating had been slashed below investment grade, making it a less-reliable counterparty.

The firm wrote down the value of other mortgages by $949 million, leveraged loans by $126 million and commercial real estate by $230 million. Its commercial bank units took an $869 million charge for their investments in mortgages and related securities.

Thain is repositioning the firm to start fresh with a strong balance sheet, once these couple of bad quarters get out of the way, said Matthew Albrecht, an analyst at Standard & Poor's in New York who rates Merrill shares hold.

Citigroup Match

The fourth-quarter loss was the same reported earlier this week by Citigroup Inc., which took an $18 billion writedown related to its subprime-mortgage holdings and slashed its dividend 41 percent.

Merrill's fourth-quarter revenue was negative $8.19 billion, as losses in the fixed-income division wiped out all revenue at the firm's investment bank and retail brokerage. At the brokerage, the world's biggest with a network of more than 16,000 financial advisers, revenue climbed 10 percent to $3.31 billion.

Fixed-income trading revenue was negative $15.2 billion and equity trading revenue was $2.17 billion, up from $1.76 billion a year earlier. Debt underwriting generated $217 million in revenue, down 59 percent, while stock underwriting revenue dropped 21 percent to $375 million.

2007 Loss

The company's full-year loss was $7.78 billion compared with record net income of $11.6 billion at Goldman, the biggest U.S. securities firm by market value, and earnings of $3.2 billion posted by Morgan Stanley, the industry's No. 2 firm. Morgan Stanley and Bear Stearns, like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman had profits. All the firms are based in New York.

Merrill said compensation costs fell 6 percent to $15.9 billion for the year compared with 2006. Thain has reduced 2007 bonuses in some divisions and cut jobs in the fixed-income unit, where the writedowns originated.

Several executives tied to O'Neal have departed, including former U.S. brokerage chief McIntyre Mac Gardner. Thain also has recruited executives from his most-recent employer, NYSE Euronext, hiring Nelson Chai to replace Jeff Edwards as chief financial officer.

Merrill, the third-biggest U.S. securities firm, fell 42 percent last year in NYSE trading, the third-worst performance among the 12 stocks tracked by the Amex Securities Broker/Dealer Index. Goldman, which profited by betting on a decline in prices for mortgage securities, gained 7.9 percent in the same period.

Goldman Sachs

Merrill, whose market value was greater than Goldman as recently as 2006, is now worth half as much. Thain, 52, worked at Goldman from 1979 to 2004, when he left to become CEO of NYSE Euronext.

The writedowns by Merrill add to more than $100 billion of subprime-related losses reported since May by the world's largest banks and securities firms.

With its capital depleted, Merrill said Jan. 15 that it sold $6.6 billion of preferred stock to a group of investors including the Korean Investment Corp., Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as $6.2 billion in stock. Thain has freed up at least $2.1 billion in additional capital by selling assets, including Merrill Lynch Life Insurance Co. and Merrill Lynch Capital, a financer of medium-size companies.

Bloomberg Stake

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News. Thain said on the conference call that its 20 percent stake isn't for sale, as analysts including Michael Hecht at Bank of America Corp. had speculated. Thain also called the firm's investment in BlackRock Inc., the biggest publicly traded asset manager in the U.S., a core strategic asset.

Before his ouster in October, O'Neal acknowledged that Merrill held onto many of the mortgage securities it created rather than selling them to customers, as it had before the housing market started to slow. O'Neal also bought subprime lender First Franklin Financial Corp. for $1.3 billion at the end of 2006 just as the market for housing-linked securities was beginning to wither.

Thain said today on a conference call with reporters that Merrill eliminated about 1,000 jobs in the fourth quarter, most of them at San Jose, California-based First Franklin.

Merrill held $8.8 billion of subprime mortgages by June and $32.1 billion of collateralized debt obligations, or CDOs, securities packaged from mortgage bonds, loans and other debt.

Rating Downgrade

Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

Merrill's 1989 net loss of $213 million, under then-CEO William Schreyer, was the first since the firm went public in 1971. That loss works out to about $350 million in 2007 dollars.

Founder Charles Merrill, who burnished his reputation by telling customers to sell stocks just before the 1929 stock- market crash, would be appalled at the firm's bubble mentality of recent years, said Edwin Perkins, author of the 1999 biography of Merrill, Wall Street to Main Street.

Things just get out of control, and once you're involved in it, there's no way to get out of it gracefully, said Perkins, now a professor emeritus of business history at the University of Southern California in Los Angeles.

JPMorgan Fourth-Quarter Earnings Fall, Miss Estimates

JPMorgan Chase & Co., the third- biggest U.S. bank, said profit dropped 34 percent on subprime- mortgage writedowns and higher provisions for future loan defaults.

Fourth-quarter net income declined to $2.97 billion, or 86 cents a share, from $4.53 billion, or $1.26, a year earlier, the New York-based bank said today in a statement. JPMorgan rose as much as 6.8 percent in New York trading as the $1.3 billion writedown was smaller than analysts estimated.

The profit decline, the first since Jamie Dimon became chief executive officer in 2005, came as trading revenue fell and JPMorgan prepared for what it said may be a substantial weakening in the U.S. economy. The company added $2.3 billion to credit reserves, bringing the total to $10 billion. Citigroup Inc., the biggest U.S. bank, said yesterday it added $5.2 billion to cover U.S. loan losses and took an $18.1 billion writedown.

We remain extremely cautious as we enter 2008, Dimon, 51, said in the statement. If the economy weakens substantially from here -- for which, as a company, we need to be prepared --it will negatively affect business volumes and drive credit costs higher.

JPMorgan gained $1.68, or 4.3 percent, to $40.85 in composite trading on the New York Stock Exchange at 10:28 a.m.

Their diversified business model really continues to separate JPMorgan from a lot of their peers, said William Fitzpatrick, an analyst at Racine, Wisconsin-based Optique Capital Management, which oversees $1.7 billion including JPMorgan shares.

Revenue Increase

Revenue climbed 7 percent to $17.4 billion, compared with the average estimate of $17.2 billion in the Bloomberg survey. Profit fell short of the 92-cent average estimate of 17 analysts surveyed by Bloomberg. Last year's fourth-quarter earnings included a one-time gain of $622 million.

Net income at the investment-banking division tumbled 88 percent to $124 million in the fourth quarter, as credit-market turmoil reduced revenue from debt underwriting 39 percent, to $467 million. Fixed-income revenue tumbled 70 percent because of the writedown, to $615 million, and weaker trading results contributed to a 40 percent drop in equity market revenue, which fell to $578 million.

The retail bank's profit climbed 5 percent to $752 million, driven by increases in mortgage banking. Those gains were tempered by declines in the home-equity and auto-loan businesses. Charge-offs on home-equity loans totaled $248 million. Profit from auto loans was $49 million, a 25 percent drop from a year earlier.

Credit Costs

Dimon said on a conference call with analysts that he isn't predicting a U.S. recession, though credit costs will increase as the economy weakens.

JPMorgan earned 15 percent less from its card services business, as its provision for future losses rose 40 percent to $1.79 billion.

Return on equity from continuing operations, a gauge of how effectively the company reinvests earnings, was 10 percent, compared with 14 percent a year earlier.

JPMorgan lost 18 percent of its market value in the past 12 months, compared with 50 percent at New York-based Citigroup and 29 percent at Charlotte, North Carolina-based Bank of America Corp.

JPMorgan's Tier 1 capital ratio, which regulators monitor to assess banks' ability to withstand loan losses, remained unchanged from the third quarter at 8.4 percent.

Rating Downgrade

Deutsche Bank AG analyst Michael Mayo reduced his rating on JPMorgan to hold from buy yesterday due to accelerating problems in U.S. consumer banking. Losses from credit cards and mortgages are increasing as the global economy slows. Citigroup said yesterday its record $9.83 billion loss was due in part to an increase in provisions for losses on auto and credit-card loans.

We feel that JPMorgan cannot escape tougher external conditions, Mayo wrote in his research note.

Richard Bove, an analyst at Punk Ziegel & Co. in Lutz, Florida, said JPMorgan may capitalize on its relative success in protecting its capital by purchasing another bank. Bove pointed to Seattle-based Washington Mutual Inc., the biggest savings and loan, as one possibility.

Dimon said on the conference call that he's open-minded about the possibility of acquiring other banks, and the current market environment makes such a takeover more likely.

Leveraged Buyouts

JPMorgan arranged $170 billion of loans used to finance leveraged buyouts in the U.S. last year, more than any bank and representing 16 percent of the market, according to data compiled by Bloomberg. The company was also the largest underwriter of U.S. high-yield corporate debt, with $20 billion in 2007.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss tomorrow of more than $3 billion after writing down the value of mortgage-related securities. Bank of America, the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

Citigroup Posts Record Loss on $18 Billion Writedown

Citigroup Inc. posted the biggest loss in the U.S. bank's 196-year history as surging defaults on home loans forced it to write down the value of subprime-mortgage investments by $18 billion.

The fourth-quarter net loss of $9.83 billion, or $1.99 a share, compared with a profit of $5.1 billion, or $1.03, a year earlier, the largest U.S. bank said today in a statement. New York-based Citigroup also reduced its dividend by 41 percent, cut 4,200 jobs and obtained $14.5 billion from outside investors to shore up depleted capital.

The results are unacceptable, Chief Executive Officer Vikram Pandit, who was installed in December after Charles Chuck Prince stepped down amid mounting subprime losses, said on a conference call with analysts and investors. We need to do better, and we will.

Citigroup fell as much as 3.7 percent in New York trading as the writedown for subprime home loans and related securities was almost double what the company forecast in November and the loss exceeded analysts' estimates. The bank also set aside $5.2 billion to cover lending losses, including credit-card and auto loans where delinquencies increased.

The markdown on subprime securities is the biggest so far, exceeding the $14 billion reported by Zurich-based UBS AG, Europe's biggest bank. Former CEO Sanford I. Weill and Saudi Prince Alwaleed bin Talal, who is already Citigroup's largest individual shareholder, were among the investors contributing new capital to the bank.

`Deep, Desperate Hole'

They've got themselves in a deep, desperate hole and it's going to take them all of 2008 to work their way out of it, Jon Fisher, who helps manage $22 billion at Minneapolis-based Fifth Third Asset Management, said in an interview on Bloomberg TV. Fifth Third owns shares of Citigroup. There are probably issues on their balance sheet that the management team, who's only really been running the company for about a month, doesn't even know about.

The net loss exceeded analysts' estimates of 97 cents a share, according to a survey by Bloomberg. Citigroup has slumped 47 percent in New York Stock Exchange composite trading during the past year. The shares fell 92 cents, or 3.2 percent, to $28.14 in composite trading at 9:52 a.m.

Standard & Poor's lowered its long-term rating on Citigroup to AA- from AA after the earnings announcement, reflecting the severe losses and the likelihood that the bank's 2008 performance could be rocky.

Dividend Reduced

Citigroup, founded in 1812 as the City Bank of New York, cut the quarterly dividend to 32 cents a share from 54 cents. The reduction, the first since the merger of Citicorp and Travelers Group Inc. in 1998, will help save the company about $4.4 billion annually. The company said as recently as November that it had no plans to lower the payout to shareholders.

Citigroup also had to turn to outside investors for fresh capital for the second time in two months, bringing to $22 billion the total amount raised. The bank said it generated $6.88 billion by selling convertible preferred shares to an investment fund controlled by the government of Singapore. Similar shares were sold to Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Prince Alwaleed and Weill.

In November, the bank got a $7.5 billion injection from the ruling family of the Middle Eastern emirate Abu Dhabi. Alwaleed, the 52-year-old billionaire, already owns 4 percent of the company. He has been Citigroup's biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of funds.

Weill's Strategy

Weill, 74, spent 17 years building Citigroup through a series of bank, brokerage and insurance-company mergers before retiring as CEO in 2003 and naming Chuck Prince his successor.

Without a capital infusion, Citigroup's so-called Tier 1 capital ratio, which regulators monitor to assess a bank's ability to withstand loan losses, would fall below the company's target to about 7 percent, Goldman Sachs Group Inc. analyst William Tanona estimated last month.

The decision to cut about 1.1 percent of the company's 375,000 employees as of the end of 2007 follows Pandit's pledge in December to conduct a front-to-back expense review of the company. The workforce had swelled from 327,000 at the end of 2006, even as Prince and former Chief Operating Officer Robert Druskin eliminated about 17,000 jobs.

Pandit, 51, said on the conference call that the review isn't over, and today's job announcement was only a downpayment.

Investment Banking

Pandit aims to complete his cost review by April and may announce then whether to sell or spin off businesses within Citigroup, which spans 100 countries, according to two people familiar with the situation. Some analysts, including Deutsche Bank AG's Mike Mayo, have called for a breakup, saying the company is too unwieldy to manage.

The latest job cuts, scheduled to take place this month, are mostly in the company's trading and investment-banking division, which posted a fourth-quarter loss of $11 billion after earning $1.75 billion a year earlier.

Citigroup's overall revenue in the fourth quarter fell 70 percent from a year earlier to $7.22 billion, while operating expenses climbed 18 percent to $16.5 billion. The company's consumer-banking unit had net income of $756 million, down 71 percent from the prior year, and earnings at the global wealth management division, which includes the Smith Barney brokerage, rose 27 percent to $523 million.

For the full year, Citigroup had a $3.62 billion profit, down 83 percent from 2006.

Losses `Skyrocketing'

Consumer loss rates are skyrocketing at this company, Meredith Whitney, a analyst at CIBC World Markets, said in a Bloomberg TV interview. I think there are further charges in the company's future. Whitney estimated additional charges or loan losses of between $5 billion and $10 billion.

The fourth quarter may be the worst earnings period for the financial industry since the Great Depression. Analysts estimate Merrill Lynch & Co., the biggest U.S. brokerage, will report a record loss of more than $3 billion after writing down the value of mortgage-related securities, and Bank of America Corp., the second-largest U.S. bank by assets after Citigroup, may report its biggest profit decline since its formation in 1998 from the merger of BankAmerica and NationsBank.

Bank of America may report an 80 percent drop in fourth- quarter net income next week, and JPMorgan Chase & Co., the third-biggest U.S. bank, may post a 31 percent decline in earnings tomorrow.

Merrill's Infusion

Merrill, the biggest U.S. brokerage, said earlier today it raised $6.6 billion by selling preferred shares to a group including the Kuwaiti Investment Authority and Japan's Mizuho Financial Group Inc.

Two days after becoming CEO on Dec. 11, Pandit bailed out seven so-called structured investment vehicles, shifting $49 billion of assets onto Citigroup's balance sheet and obliging the company to increase its capital cushion. The decision increased the chances that Pandit would have to cut the dividend, according to CIBC's Whitney. The payouts to shareholders cost Citigroup about $2.7 billion a quarter.

Foreign investors ride in to rescue Citi

An investment of even 1 percent from Saudi Prince Alwaleed could signal confidence in the struggling bank, says The Wall Street Journal.

Saudi billionaire-Prince Alwaleed bin Talal and a team of Chinese investors may ride to embattled Citigroup's rescue, according to a report from The Wall Street Journal.

Chinese investors, including China Development Bank, will reportedly contribute around $2 billion. It was not known how much would be invested by Prince Alwaleed, but the Journal calculated that his stake in the bank would likely remain under 5 percent, but that even a 1 percent stake would be a vote of confidence.

An earlier report said that Citigroup is trying to raise an additional $10 billion, most of which would come from overseas funds. In November, Alwaleed sold a 4.9 percent stake in Citigroup for $7.5 billion to the Abu Dhabi Investment Authority.

Citigroup will reportedly reveal the investments when it reports its fourth-quarter earnings on Tuesday.

Countrywide On Clearance

Countrywide Financial may have found a white knight in Bank of America, but the mortgage lender was forced to put itself on the auction block for a steep discount.

On Friday, Bank of America confirmed that it will buy Countrywide Financial for $4.1 billion, delivering a much-needed lifeline to the embattled mortgage lender. But the deal, which values Countrywide's shares at $7.07 a share, well below Thursday's closing price of $7.76, simultaneously exposes the dire state of the nation's largest mortgage lender and the industry as a whole.

In early afternoon trading, shares of Countrywide plunged 16.3%, or $1.26, to $6.49, while Bank of America edged down 1.2%, or 47 cents, to $38.83. This deal comes together because no one wanted to see Countrywide fail; it is a win-win for everyone involved, but doesn't indicate that the mortgage problems are behind us, Stifel Nicolaus analyst Christopher Brendler told Forbes.com.

Under the deal, Countrywide shareholders will get 0.1822 of a Bank of America share for each share that they own.

The fact that Countrywide was willing to take a deal that valued it shares 8.3% below trading levels reveals just how desperate the firm was. It was certainly good news for Countrywide, Brendler said. Countrywide was going to have funding issues, liquidity had dried up for the sector, bankruptcy was a real risk.

This is not the first time Bank of America has stepped in to stabilize Countrywide. Back in August, Bank of America pumped $2 billion into Countrywide, buying up 111 million shares at $18 a share. According to Brendler, Bank of America was likely interested in buying Countrywide then, but Countrywide was hoping to go it alone. Since August, the credit and housing markets have worsened considerably, forcing many firms to take big write-downs or close their mortgage business alltogether. The rapid deterioration has pummeled Countrywide Financial, and, with Chapter 11 rumored to be at its heels, the firm likely had no choice but to accept a lowball deal.

This week, Countrywide reminded the markets that foreclosures were on the rise and said it funded just $23.5 billion in loans in December (roughly half the volume of a year ago).

Although Bank of America's stock may react negatively to the bailout news, the takeover of one of the most high-profile mortgage franchises at a bargain-basement price will be accretive in the long run. The acquisition, which will likely pass regulatory approval and close by the third quarter, will automatically turn Bank of America into the country's largest mortgage lender. As a major Wall Street player, with a huge balance sheet, Bank of America can easily absorb Countrywide's troubled portfolio. While the mortgage mess is far from over, Bank of America predicts that the takeover will be neutral to earnings in 2008 and positive by 2009.

Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers, Bank of America Chief Executive Officer Ken Lewis said on Friday.

Of course, Countrywide is no sure bet. The company still has a dicey portfolio, with $80 billion in high-risk mortgage loans. Several months ago, many of these loans were not considered high risk, but the deterioration of the markets now makes them so, Stifel Nicolaus's Brendler said. Bank of America also acknowledged the possible risk associated with Countrywide in Friday's statement: We are aware of the issues within the housing and mortgage industries....The transaction reflects those challenges.

The Countrywide deal may also be a sign that the mortgage market will continue to worsen before it improves. This is more of a negative indicator; you have a company that has tried very hard to stabilize but has clearly failed to do so, and is selling for a very depressed price, Brendler remarked.

Others may follow. The next takeover target could be Washington Mutual, which ticked up 6.1%, or 87 cents, to $15.03 in premarket trading. However, Washington Mutual is a much larger pill to swallow, with $250 billion in mortgage loans on its books and a $12.3 billion market capitalization. Despite an attractive retail deposit business, there would be a limited pool of suitors. The top candidate would likely be JPMorgan Chase, Brendler observed.

U.S. Stocks Gain, Led by Energy; Exxon, ConocoPhillips Advance

U.S. stocks rose, led by energy shares, after a gain in natural gas prices boosted the earnings outlook for the stock market's best-performing industry of 2007.

Exxon Mobil Corp., the world's biggest energy company, advanced for the seventh time in eight days. ConocoPhillips, the largest U.S. natural gas producer, rose to three-month high. Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the biggest U.S. banks, erased early gains and led financial shares to the steepest decline in the Standard & Poor's 500 Index after a report showed new-home sales fell to a 12-year low.

The S&P 500 advanced 2.12, or 0.1 percent, to 1,478.49, extending its fifth straight annual advance. The Dow Jones Industrial Average added 6.26, or 0.1 percent, to 13,365.87. The Nasdaq Composite Index decreased 2.33, or 0.1 percent, to 2,674.46. About the same number of stocks rose as fell on the New York Stock Exchange.

We don't think the prices on the energy stocks are overdone at all, said Ted Baszler, who helps manage $3 billion at Heartland Advisors Inc. in Milwaukee. They definitely have more room to run here. The long-term story for oil remains very bullish.

The S&P 500 lost 0.4 percent for the week, while the Dow slipped 0.6 percent and the Nasdaq dropped 0.7 percent.

Energy and mining companies have led the S&P 500 to a 4.2 percent advance this year as speculation the global economy will keep growing overshadowed a worsening U.S. housing slump. Oil drillers, refiners and drilling services companies have rallied 34 percent in 2007, helping the S&P 500 Energy Index more than triple in five years.

Yearly Gains

The Dow average has risen 7.2 percent in 2007, while the Nasdaq Composite has gained 11 percent.

Natural gas for February delivery rose 2.6 percent to $7.386 per million British thermal units, the highest since Dec. 12. Crude oil for February delivery touched $97.92 a barrel, rising within $1 of its record close of $98.18 on Nov. 23, before falling 51 cents to $96.11.

ConocoPhillips added 48 cents to $89.13. Exxon, also a producer of natural gas, increased $1.33 to $95. The rise in energy shares helped erase earlier losses spurred by concern falling home sales will cause a recession.

Energy is not the best leader to have because it's typically based on higher energy prices, said Richard Sichel, chief investment officer at Philadelphia Trust Co., which manages $1.5 billion in Philadelphia. You would rather see consumer and financial stocks leading the way. That would be a healthier environment.

Financial Shares

Financial shares lost 0.5 percent for their third consecutive retreat. Citigroup fell 27 cents to a five-year low of $29.29. Bank of America slid 36 cents to a three-year low of $41.10. JPMorgan Chase declined 38 cents to $43.26. Fannie Mae dropped $1.27 to $38.34.

Banks and brokerages retreated even as traders increased bets the Federal Reserve will lower interest rates at its next two meetings. The odds of a quarter-point cut to 4 percent at the Jan. 30 meeting increased to 90 percent from 76 percent, and the chances of a reduction to 3.75 percent on March 18 rose to 58 percent from 44 percent, future contracts indicate.

Purchases of new homes slid 9 percent to an annual pace of 647,000 in November and October sales were revised down to a 711,000 rate, the Commerce Department said. Last month's sales were weaker than the lowest forecast in a Bloomberg survey.

The market has been slow to grasp just how bad things were going to be for housing, said Doug Peta, market strategist at J.&W. Seligman & Co. in New York, which manages $20 billion.

Source - Bloomberg

U.S. Economy: Sales of New Homes Tumble 9% to 12-Year Low

By Bob Sales of new homes in the U.S. fell to a 12-year low in November, pointing to bigger declines in construction that will hinder economic growth in 2008.

Purchases dropped 9 percent to an annual pace of 647,000 and October sales were revised lower, the Commerce Department said today in Washington. Last month's sales were weaker than the lowest forecast in a Bloomberg News survey of economists.

Treasury notes extended their rally and traders added to bets that the Federal Reserve will cut interest rates again in January to prevent a recession. New-home sales are down 25.4 percent so far this year, heading for the biggest annual decline since at least 1963.

This gives a dire picture of the U.S. housing market, said Dana Saporta, an economist at Dresdner Kleinwort in New York. The weakness of the housing industry does raise the risk of recession.

A separate report showed the National Association of Purchasing Management-Chicago's index of American business activity rose this month as new orders increased. The group's index climbed to 56.6, from 52.9 the previous month.

The deepest housing recession in 16 years will worsen as discounts fail to lure buyers and mounting foreclosures swell the glut of unsold properties, economists said. Falling property values may cause consumer spending to cool, increasing the odds the expansion will falter in 2008.

The most important implication of this is it's going to drive down construction outlays and that's a direct effect on GDP, said Neal Soss, chief economist at Credit Suisse Group in New York.

Yields Retreat

The yield on the benchmark 10-year note fell 9 basis points to 4.11 percent at 10:21 a.m. in New York. The dollar weakened against the euro and stocks pared their advance. The Standard & Poor's Supercomposite Homebuilding Index, which includes KB Home, Pulte Homes Inc. and D.R. Horton Inc., declined 2.8 percent to 306.44.

A Bloomberg survey of 68 economists forecast sales would fall to an annual pace of 717,000 from a previously reported 728,000 rate in October, according to the median estimate. Economists' forecasts ranged from a low of 685,000 to a high of 750,000. Government records only go back to 1963.

Sales of new homes were down 34 percent from the same time last year, the biggest 12-month drop since January 1991. The median price fell 0.4 percent from November 2006 to $239,100.

The number of homes for sale at the end of November decreased 1.8 percent to 505,000, the fewest in two years. Still, because sales dropped even more, the inventory of unsold homes at the current sales pace jumped to 9.3 months from 8.8 months in October.

Regional Picture

Purchases fell in three of four regions, led by a 28 percent plunge in the Midwest. Sales dropped 19 percent in the Northeast and 6.4 percent in the South. They rose 4 percent in the West.

The housing recession has deepened since the August turmoil in subprime mortgages led to a worldwide credit shortage. Stricter borrowing standards and a freeze on lending to borrowers with poor credit put mortgages out of reach for more potential buyers. That's driving home prices lower, weakening sales as people hold out for even bigger reductions.

Sales of new houses will probably tumble 8.9 percent in 2008 after a 25 percent drop this year, according to a Dec. 13 forecast from Fannie Mae, the largest mortgage buyer. Sales of new homes in November were 53 percent down from their July 2005 peak.

Prices Decline

Home prices in 20 metropolitan areas fell 6.1 percent in the 12 months to October, the most in at least six years, according to a report this week by S&P/Case-Shiller. The decline raises the risk that more Americans will walk away from properties that are worth less than they owe, economists said.

Lehman Brothers Holdings Inc. is forecasting prices will fall at least 15 percent from peak to trough. By that measure, the S&P/Case-Shiller index is down 6.6 percent so far.

With sales and prices falling, foreclosures rose 68 percent in November from a year earlier. They may continue surging in 2008 as mortgages for some subprime borrowers with adjustable rates reset.

As foreclosures throw more homes onto the market, homebuilders such as Hovnanian Enterprises Inc., New Jersey's largest, are scaling back.

Hovnanian plans to pare down our inventories in virtually all our markets, Chief Executive Officer Ara Hovnanian said on a conference call Dec. 19. It will be a difficult year.

Construction

Housing starts are near a 14-year low and have fallen 48 percent since their January 2006 peak. Declining home construction has subtracted from economic growth for the last seven quarters, and economists are expecting the drag to continue in 2008.

The weaker housing market is also forecast to undermine consumer spending, which makes up two thirds of the economy, as falling property values leave owners feeling less wealthy and with less equity to tap for extra cash.

The odds of recession have increased since the credit markets froze as a result of the subprime crisis. The economy will expand at a 1 percent annual pace in the fourth quarter after growing at a 4.9 percent rate from July through September, according to the median forecast of economists surveyed this month by Bloomberg News.

`The probability of recession is 50 percent for next year at some point, Martin Feldstein, head of the National Bureau of Economic Research, which determines when contractions start and end, said in a Dec. 14 interview. We could see a downturn starting sometime in the spring or the second quarter of next year.

Source - Bloomberg

Morgan: New $5.7B writedown

Wall Street firm suffers loss in the quarter, takes another big hit from mortgage problems; CEO John Mack accepts blame.

Morgan Stanley reported a worse-than-expected quarterly loss Wednesday and said it would take an additional $5.7 billion mortgage-related writedown in the fourth quarter.

The Wall Street firm said its net loss was $3.59 billion, or $3.61 a share, for the period ending Nov. 30. A year ago the firm posted a profit of $2.21 billion or $2.08 a share.

Analysts polled by Thomson Financial were anticipating a loss of 39 cents a share.

The company also said it would take an additional $5.7 billion in writedowns during the quarter, on top of $3.7 billion already announced.

John Mack, Morgan's chairman and chief executive, called the quarter "deeply disappointing" and took full responsibility for the results, adding that he would not accept a bonus for 2007.

"The writedown Morgan Stanley took this quarter is deeply disappointing - to me, to our colleagues, to our Board and to our shareholders," said Mack.

"Ultimately, accountability for our results rests with me, and I believe in pay for performance, so I've told our compensation committee that I will not accept a bonus for 2007."

Housing Crash Deepens in 2008 as U.S. Realtors See Record Drop

For U.S. homeowners, builders, bankers and realtors, the crash of 2007 will only get worse in 2008.

Everyone from mortgage-finance company Fannie Mae to Lehman Brothers Holdings Inc. expects declines next year. Existing home sales will drop 12 percent and existing home prices will fall 4.5 percent, Washington-based Fannie Mae says. Lehman analysts estimate almost 1 million mortgage loans will default in 2008, up from about 300,000 this year.

We're only halfway through the housing shock, said Ethan Harris, chief U.S. economist at New York-based Lehman, the fourth-biggest U.S. securities firm by market value. It's just a matter of time before the weakness spreads to the rest of the economy.

The housing market collapse has been anything but the soft landing that Federal Reserve Bank of San Francisco President Janet Yellen and David Lereah, former chief economist at the National Association of Realtors in Chicago, predicted for real estate at the start of 2007.

Median home prices declined in the U.S. this year, the first annual drop since the Great Depression, according to forecasts from the National Association of Realtors.

I'm not going to sit here and tell you it's going to turn real strong next year, said Jim Gillespie, chief executive officer of Coldwell Banker Real Estate LLC, the largest U.S. residential brokerage, according to Franchise Times. It's not going to turn real strong next year.

`Let the House Go'

Analysts at New York-based CreditSights Inc. predict housing won't rebound until 2009, at best. Moody's Economy.com Inc., the economic forecasting unit of Moody's Corp. in New York, says home sales will hit bottom next year, declining 40 percent from their peak. And U.S. Treasury Secretary Henry Paulson's plan to slow foreclosures won't help those who already are facing the loss of their homes, like C.W. and Sandy Hicks of Las Vegas.

The Hickses refinanced the mortgage on their four-bedroom, 1,300-square foot home two years ago. Their $237,000 adjustable- rate loan resets every month, and now their monthly payment has jumped 50 percent to $2,700. The couple can't afford it.

Source - Bloomberg