The banks continue to struggle as they attempt to rebuild capital after losses incurred in the credit derivative markets continue to climb. With the Basel 2 regulations now in full flow banks can no longer gloss over such issues and wait for profits to make up a shortfall. Action is required immediately to repair the accounts. Hence the banks offering to sell some of the family silver by going cap in hand to shareholders, Sovereign Wealth Funds and private funds to raise cash.

Now it’s the turn of Wachovia Corp to try and underpin the cracks in the balance sheet by issuing what amounts to junk status debt. Still, they did save some costs by using their own capital markets division to place the sale. Wachovia (WB) is selling $3.5Bn of preferred stock that pays an annual dividend of 7.98% for 10 years and then goes to a floating rate of 3.77% above LIBOR. The stock is being offered to 80 or so major investors in fixed income. WB has the option to buyback the stock after 10 years. This of course is on the heels of a $2.3Bn sale made in December and $800mn in September last year. So in a very quiet way WB has raised $6.7Bn – as much, if not more, than certain Investment Banks that have been earmarked for oblivion.

If you look at the 4Q earnings call for WB, you wonder why they need the cash, everything seems to be under control with comments like “very solid assets” being used to describe some of the credit derivatives. So solid in fact that they “moved” $3.1Bn of loans to their Loan Portfolio. In other words they couldn’t sell them so decided to adopt a buy and hope strategy. At the 4Q earnings call 2 other figures came to light.

WB has mark to market exposure of $1.9Bn funded and $7.2Bn unfunded commitments to the leveraged finance market. That exposure is what forced the issuance of that near junk debt. Or was it?

Within the Call this came to light:

 “We have $4.178 billion of the super senior ABS CDO exposures, hedged with financial guarantees, of which $2.2 billion is hedged with mono-lines and $2 billion with AA-rated financial companies with market caps in excess of $80 billion each. We currently hedge our exposures to mono-lines through CDS markets, and believe we would loose about $400 million on these assets, if the mono-line protection was assumed to be worthless, and that prior to the hedges we hold against those mono-lines.”

Looking at what has been happening since 22nd of January to the Monolines and that half the hedge is with AA rated companies (forget the mkt cap, that can change very suddenly) maybe WB is getting ready for the inevitable? Quite possibly it is – the cash raised has been lumped into it’s tier 1 (best) assets, improving the capital ratio to 7.9%. Now, what was that Basel 2 requirement?

Turning to IAC we see further confirmation of the downturn in housing. It announced losses of just under $640mn in the 4Q. It attributed the loss to costs of spin offs, higher taxes and trouble with its mortgage referral division.

It’s the mortgage referral, Lending Tree, that looks shaky. It also gives us a look at how the mortgage business is doing. Its not pretty.

Lending Tree revenue dropped by over half, down 55% to just over $52mn giving an operating loss of $508mn compared to a profit of just over $7mn in the 4Q ’06. Most of the damage was done by the write-down of intangible assets. Over half of their business disappeared. I wonder if anyone will want to buy it if it’s spun off?

The results also showed how out of touch analysts are with the current situation. For instance AP reported this about IAC:
“For the full year, the company reported a net loss of $144.1 million, or 50 cents per share, versus a profit in 2006 of $187.1 million, or 59 cents per share. Revenue in 2007 was up 8 percent to $6.37 billion from $5.91 billion a year ago. Analysts had expected full-year earnings per share of $1.55 on revenue of $6.41 billion.”

Maybe it’s time to look at the shares in your portfolio and draw up your own analysis?

Market Snippets

Macy’s Inc. said Wednesday it sees a “continued challenging economic environment” through nearly all of 2008 with a modest improvement expected by the fourth quarter. Macy’s also expects its same store sales to be in the -1% to 1.5% range. It has stopped giving quarterly guidance from 2008 onwards.

ML economist David Rosenberg says the abruptness and depth of the ISM decline, collapse in Jan auto sales and credit tightening all “add to our concern that we are facing a much deeper downturn than we saw in 2001. In our view, this keeps the Fed in aggressive rate cutting mode with a strong chance of an inter-meeting move possible before the March 18 FOMC meeting.”

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. The views in the article are for informational purpose only.