WCI shares plunge on liquidity concerns; financials mixed as Countrywide jitters linger

By Paul A. Harris

St. Louis, Jan. 9 - The financial and housing sectors continued to command attention during Wednesday's rollercoaster session in the equities markets.

One trader said that the market continues to keep a weather eye on Countrywide Financial Corp. (NYSE: CFC).

"Most of the news in the financial sector seems to hinge on macroeconomic numbers and on what will be the ultimate fate of Countrywide," the source said.

"When they sneeze everyone else catches cold."

During the Wednesday session Countrywide shares, which plunged Tuesday on rumors - denied by Countrywide - that the company might file for bankruptcy protection, continued to give up ground.

Countrywide shares closed at $5.12, down $0.35 (6.40%) on the session.

In an 8-K filing with the Securities and Exchange Commission Countrywide stated that the pending foreclosure rate on its mortgages doubled, year-over-year, in December to 1.44% from 0.7% in December 2006.

WCI shares drop 53%

Shortly after the close another trader said that shares of WCI Communities Inc. (NYSE: WCI) closed sharply lower on rumors that bank negotiations are not going well.

WCI's shares closed at $1.50, down $1.69 (52.98%) on the day, on volume of nearly five million shares versus a daily average of nearly 1.3 million over the past three months.

The trader said that Standard & Poor's had noted in a Wednesday report that if WCI can't negotiate longer-term financial flexibility with its lenders, which could prompt secured creditors to foreclose on collateral, the company's unsecured debt could be accelerated.

Rollercoaster ride

The major U.S. stock indexes took a rollercoaster ride during the midweek session, amassing gains in the morning, giving them up - and then some - in the mid-afternoon before closing smartly higher on the session.

Shortly after 10 a.m. ET, the Dow Jones Industrial Average was up over 87 points. However by 2:15 p.m. ET Wednesday afternoon the Dow was down nearly 80 points, whereupon it rocketed up to close at 12,735, up more than 146 points (1.16%) on the day.

The Nasdaq ended the day up 1.39%, and the S&P 500 closed 1.36% higher on the session.

Court date in Russia

One trader who focuses on the financial sector asserted that the market may be overlooking liabilities stemming from a lawsuit that Russia's Federal Department of Customs filed last Spring against The Bank of New York, now The Bank of New York Mellon Corp. (NYSE: BK).

The $22 billion-plus lawsuit alleges misdeeds on the part of the bank, including money laundering, according to reports.

In a Wednesday email message the trader said that no one seems concerned about the liability the company has in suit, even though court proceedings in Russia are expected to commence next week.

This trader stated in the message that he had spent time on the telephone with a Russian government attorney who led him to believe that the Bank of New York Mellon Corp.'s attitude is that they have no assets in Russia.

However, the trader is inclined to think that Russian judgments are enforceable in the United States and worldwide.

Further, the trader added, the company has made assertions that the suit is frivolous and ridiculous, winning very few Russian friends in the process.

"The stock is a strong sale-risk," the trader wrote, adding that it's "too high!"

Nevertheless The Bank of New York Mellon Corp. shares closed Wednesday at $47.79, up $0.79 (1.68%) on the day.

E*Trade higher

E*Trade Financial Corp. (Nasdaq: ETFC) reported initial progress of its turnaround plan on Wednesday.

Trailing its November sale of $3 billion of mortgage-backed securities the New York-based financial services company sold an additional $3 billion of mortgage-backeds and municipal bonds, realizing a loss of less than $5 million. A portion of the transactions settled prior to Dec. 31, 2007, and the remainder will settle in January and February.

The company also announced that its home equity loan portfolio continued to run off as anticipated, ending the year with under $12 billion in balances.

E*Trade also reduced wholesale borrowing levels in its banking business by eliminating approximately $3.5 billion in Federal Home Loan Bank advances and repurchase agreements quarter over quarter. E*Trade Bank ended the year with $10.5 billion of excess borrowing capacity from FHLB. The company expects 2007 year-end tier I and risk-based bank capital to be equal to or better than 5.9% and 11.1% respectively, as reported on Nov. 29.

"We have taken important steps in the execution of our turnaround plan by reducing balance sheet-related risk and maintaining strong bank capital levels," said R. Jarrett Lilien, acting chief executive officer and president, in a news release.

The company also announced its decision to fully exit the institutional trading business by closing its remaining institutional trading desk. The move follows the decision to exit the international institutional business, which was disclosed on Sept. 17. In the Wednesday press release E*Trade commented that the business does not align with its core retail business and has not met the company's financial expectations.

Management also reported Wednesday that it continues to see turnaround momentum with regard to customer behavior. Total client assets ended the year at $190 billion, with $33 billion in cash. This compares to $192 billion and $33 billion, respectively as reported on Nov. 29. E*Trade announced that 87,000 new accounts opened in December.

The company also announced the formation of a special committee tasked with reducing the risk of its real estate portfolio.

The committee will be led by Robert V. Burton, who recently was appointed E*Trade Bank's chief operating officer.

The shares ended the day at $2.40 per share, up $0.15 (6.67%) on the day on volume of slightly more than 69.5 million shares, versus the three month daily average of nearly 48 million.

MBIA lower

Also on Wednesday, MBIA Inc. (NYSE: MBI) announced a plan to strengthen its capital.

As part of MBIA's plan to raise capital to meet or exceed the rating agencies' triple-A requirements, its primary insurance operating subsidiary, MBIA Insurance Corp., intends to issue $1 billion of surplus notes due 2033, callable at par in five years.

The company also reduced its quarterly shareholder dividend to $.13 per share from $0.34 per share, a move expected to preserve approximately $80 million in capital per year.

MBIA chairman and CEO Gary C. Dunton stated: "We are committed to the successful implementation of this comprehensive plan to significantly strengthen our capital position and secure our triple-A ratings without qualification.

"We are confident that the additional capital, together with the steady cash flows generated by our large embedded book of business and the opportunity to grow our business profitably in the current market environment, will enable us to continue to serve the needs of our marketplace, and build long-term value for our shareholders."

The company's chief financial officer, C. Edward Chaplin commented: "We believe that the outlined capital plan allows MBIA to meet its obligations, support our customers and continue profitable growth going forward. While the volatility in the mortgage market and non-cash GAAP accounting standards will negatively impact our financial results this quarter, we are quite enthusiastic about future prospects." Speaking to the announced dividend reduction, Chaplin added: "The announced change in our dividend rate significantly enhances our financial flexibility."

MBIA also changed its mark-to-market valuations and provided information on related CDO impairments.

The Armonk, N.Y., financial services company estimates that it will incur a total of $737 million in loss and loss adjustment expenses for the fourth quarter of 2007. These expenses consist of fourth quarter case loss activity of approximately $614 million and $123 million in unallocated loss reserve activity. The approximately $614 million case loss activity is principally related to MBIA's insured securitizations of prime home equity lines of credit and prime closed-end second-lien mortgages.

The company also estimates that it has sustained $3.3 billion of mark-to-market losses related to certain MBIA-insured CDO tranches in the fourth quarter of 2007.

MBIA shares closed Wednesday at $13.40, down $0.58 (4.15%) on the day, on massive volume of more than 32.6 million shares versus a daily average of 9.8 million.

Sallie Mae up 7.75%

Meanwhile shares of SLM Corp. (NYSE: SLM) closed at $18.64, up $1.34 (7.75%) on the day.

A trader, who was scratching his head about the upward movement of Sallie Mae's shares told Prospect News that the only news came regarding the lawsuit the company filed in early October 2007 against the buyer group, which includes J.C. Flowers & Co., JPMorgan Chase, and Bank of America.

The lawsuit seeks a declaration that the group repudiated the LBO deal, that no material adverse effect has occurred and that the company may terminate the agreement and collect the $900 million termination fee.

Subsequently Sallie Mae requested an expedited trial which the buyer group opposed.

The trial is now expected to commence on an undetermined date after Thanksgiving 2008, rather than in mid-July 2008.

The trader told Prospect News that he was at a loss to explain how the court delay spells good news for the company.

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