JPMorgan, Credit Suisse hit hard; Freddie Mac pressures mortgage lenders; Magna falls; Dynegy off

By Ronda Fears

Memphis, Feb. 27 - Rumors of an impending bankruptcy by one of the largest subprime mortgage lenders, although a private company, put extreme pressure on the sector as well as large banks Tuesday in addition to tighter lending standards announced by giant mortgage underwriter Freddie Mac as a means to limit its future exposure.

Closely held Ameriquest Mortgage Co., based in Orange, Calif., was widely rumored to be on the verge of bankruptcy, and its biggest bankers - JPMorgan Chase & Co. and Credit Suisse Group - saw a huge pullback in the market on heavy volume as a result, one trader said. Calls to Ameriquest were unreturned; JPMorgan and Credit Suisse declined to comment about the market rumor.

JPMorgan (NYSE: JPM) lost $1.59, or 3.13%, to $49.22 while Credit Suisse (NYSE: CS) fell $3.65, or 4.97%, to $69.81.

"Ameriquest, a private company but one of the largest subprime ones, is about to fail I am told," one trader said. "We hear JPM and Credit Suisse have exposure."

Outside of the mortgage banking sector, traders said there was considerable focus on the auto group and power sector. Players continue to speculate about the fate of DaimlerChrysler AG's divestiture of the Chrysler unit, including Magna International Inc. as a possible buyer. And power names were taken down in the wake of the big TXU Corp. buyout as Dynegy Inc. said it may auction off three plants.

In terms of the broader market's focus in bringing valuations down, metals and the airlines marked a massive portion in the session, which marked the largest one-day decline since 2001 for the Dow Jones Industrial Average with a loss of 416.02 points, or 3.29%. The Nasdaq fell as well, plunging 96.65 points, or 3.86%.

Otherwise, one trader remarked that investors are eager to glean some insight going forward as Warren Buffett, chief of Berkshire Hathaway Inc. and better known as The Oracle of Omaha for his homeplace of Omaha, Neb., releases his 2006 shareholder letter on Thursday.

In addition to recounting how Berkshire Hathaway fared over the past year, Buffett typically spends several pages sharing his broader views. The insurance holding company stock - the most expensive in the U.S. markets - however, was lower Tuesday with the market, (NYSE: BRK-A) losing $1,700, or 1.59%, to settle at $105,100.

Investors particularly want to know more about what Buffett plans to do with the $42.25 billion cash Berkshire had on hand at the end of the third quarter, the trader said. He also noted that the market will be scrutinizing Berkshire's position in Wells Fargo & Co., which was among the banks sliding Tuesday amid the renewed pullback in mortgage banking stocks.

Wells Fargo (NYSE: WFC) lost $1.28, or 3.59%, to $34.39.

Mortgage bankruptcy risk high

Bankruptcy risk in the mortgage lender group elevated considerably Tuesday with the Ameriquest rumor, but until mid-afternoon, Novastar Financial Corp. was getting bites from so-called bottom feeders even though traders and onlookers were very leery of calling a bottom. Then, when the Ameriquest rumor began circulating, Novastar quickly moved into negative territory.

"We saw some people thinking that with the stock in single digits it must be near a bottom; they thought they were looking pretty smart this morning," one trader said.

"As the day wore on, though, they lost their nerve. There is huge bankruptcy risk in all these subprime lenders, huge."

Novastar (NYSE: NFI) was higher by more than 2% at one point of the session, gaining to $8.45 before a slide in the late afternoon to $7.75 before the stock settled at $7.81 to mark a 15-cent loss for the day, or 1.88%. Since the big crunch in the mortgage stocks began in November, Novastar has fallen from the $30 area.

New Century Financial Corp. was one of the subprime mortgage lenders extending declines and is probably the one many see as the bigger bankruptcies looming in the sector, the trader said. New Century (NYSE: NEW) closed the session lower by 25 cents, or 1.64%, at $14.99.

Bigger lenders were feeling more of the pinch, though.

In addition to the Freddie Mac news pressuring the group, the other big government-backed mortgage lender, Fannie Mae, also got hammered Tuesday after revealing further details on its restatements back to 2001 that has rocked the company since 2004, but Fannie Mae said it does not have big exposure to subprime mortgages. Fannie Mae (NYSE: FNM) fell $2.13, or 3.91%, to $56.83; Freddie Mac (NYSE: FRE) dropped $1.23, or 1.89%, to $63.70.

Countrywide Financial Corp., which last month was rumored to be a takeover target by Bank of America Corp. although a deal never surfaced, was another big decliner in the group. Another trader said many players are just "cutting their losses here," as credit default swaps in the lending sector become more and more expensive.

Countrywide shares (NYSE: CFC) lost $1.14, or 2.94%, to close at $37.58. Just in the past month, the stock has dropped from a 52-week high of $45.26 hit on Jan. 26.

Consolidation risk looms

But expectations of consolidation in the industry loom large.

Outside of bankruptcy risk in the subprime mortgage group, banking analyst Matt Howlett at Fox-Pitt Kelton said he expects there to be massive consolidation in the industry this year as a result of the current crisis. There have been several big and controversial mergers announced in the sector recently, but the trend is expected to escalate.

"There's really no bottom here. Fundamentals continue to deteriorate, spreads continue to widen. This is an extremely distressed environment. We have a mini-liquidity crisis going on," Howlett told Prospect News.

"This will spell the end to the small independent mortgage company. This is the year of massive consolidation where a lot of these companies will be bought, or they will just go away" by means of bankruptcy.

In addition to New Century and Novastar as takeover candidates by necessity, he said there are a few that are likely to be snapped up early in the trend. His best pick along those lines is San Diego-based American Home Lenders Holding Co., which he sees as a well-run firm with a "cleaner side" to the subprime market.

American Home Lenders shares (Nasdaq: LEND) were lower with the market Tuesday, dropping 55 cents on the day, or 2.44%, to 21.95.

MGIC Investment Corp. and Radian Group Inc., which put a merger on the table earlier this month, were both lower Tuesday with the sector, as well as Fieldstone Investment Corp., which inked a deal 10 days ago to be acquired by Credit-Based Asset Servicing and Securitization LLC, or C-Bass, which is a unit of MGIC and Radian. The Fieldstone transaction in particular, at $5.53 per share, has been criticized because the stock is so sharply off the 52-week high of $12.64.

MGIC shares (NYSE: MTG) lost $2.23, or 3.55%, to close Tuesday at $60.60. Radian (NYSE: RDN) dropped $1.80, or 3.02%, to $57.75.

Fieldstone shares (Nasdaq: FICC) fell 11 cents, or 2.15%, to close at $5.01 but were seen in after-hours trade, at 4:50 p.m. ET, losing another 16 cents to $4.85.

Magna reverses, buyers at hand

Canada's biggest auto parts maker, Magna, emerged as a surprise candidate among the speculated buyers for Chrysler during its earnings call Tuesday. Magna chief executive Vince Galifi said on the company's earnings call that the company is definitely looking for deals and might look at Chrysler.

Magna shares were pressured by a cut in its dividend and lower earnings, a trader in Canada said, but he said there were "lots of buyers on the cheap." He said he sees the stock as a good buy on the weakness, in Canada or the United States, noting it is sitting about halfway between its 52-week range.

In the United States, Magna shares (NYSE: MGA) plunged $4.55, or 4.71%, to $75.08. They fell similarly in Canada where two classes of common stock trade. The class A shares (Toronto: MG-A) lost C$5.10, or 5.51%, to C$87.42, while the class B shares (Toronto: MG-B) gave up C$5, or 51.5%, to C$92.

"If Magna is serious about buying Chrysler, that would be a very interesting play," the trader said.

"It is a nice buy in any event, and actually I am not sure the purchase would be prudent unless they negotiated a great price [for Chrysler]."

Magna reported a sharp drop in profits and halved its dividend on Tuesday, which was the chief reasons for the stock's decline, he said. The company posted fourth-quarter profits of $29 million, or 26 cents a share, down from a profit of $83 million, or 75 cents a share, a year earlier, while sales rose 8.8% to $6.4 billion. For 2007, the company expects consolidated sales of between $22.9 billion and $24.2 billion, based on light vehicle production volumes of about 15.4 million units in North America and about 15.5 million units in Europe.

As for the dividend cut, on the earnings call, Galifi said the company's directors felt it currently is "more prudent to review all uses of cash with an eye to maintaining our strong financial position in light of continuing industry challenges."

To that end, he said the company is preparing for deals to stimulate growth. Because Magna is a key supplier to Chrysler and other automakers, Galifi said Magna was closely following the events at DaimlerChrysler.

"I think it's open discussion on a lot of topics, including Chrysler right now," Galifi said.

DaimlerChrysler is actively seeking bids for the U.S.-based unit, and GM is still included in the chatter speculating potential buyers. DaimlerChrysler (NYSE: DCX) fell $3.27, or 4.63%, to $67.30. GM shares (NYSE: GM) lost $1.81, or 5.33%, to 32.16.

Dynegy sale zaps power group

In utility and power stocks, the market was still reacting to the TXU takeover but also a swing into losses at Dynegy, which also said it is exploring the sale of three natural gas-fired power plants in Kentucky, Georgia and Texas through an auction by JPMorgan.

Dynegy shares (NYSE: DYN) plunged 49 cents, or 5.77%, to $8.

Dynegy chief executive Bruce Williamson said on the company's earnings conference call that if the company sold all three plants, he would expect its 2007 net earnings to exceed its forecast of 25 to 34 cents a share. For fourth quarter, the company posted a net loss of $58 million, or 12 cents a share, compared with a profit of $293 million, or 74 cents a share, a year ago, as sales fell 36% to $397 million.

One trader said Dynegy mostly fell victim to the pressures of the broader market, however, along with the pack of power stocks that gained Monday on the record $45 billion buyout of TXU. TXU also slid. But he saw some "smart money" buying on the weakness, as the group is still seen ripe for takeover deals.

"The fund money managers aren't selling out right now. They've been buying big all weak," the trader said. "I don't think Dynegy's earnings today really caught them off-guard. They're loading up for the rest of this year and beyond."

Dynegy itself is considered a nice takeover target, he said, along with Reliant Energy Inc., NRG Energy Inc. and Mirant Corp., which were widely tossed around Monday as possible takeover targets on the TXU news. He said there were "lots" of buyers for the other three power names on the weakness, too.

Reliant (NYSE: RRI) fell 44 cents, or 2.54%, to $16.87. NRG (NYSE: NRG) dropped $1.50, or 2.21%, to $66.25. Mirant (NYSE: MIR) slid 89 cents, or 2.33%, to $37.30.

TXU shares (NYSE: TXU) retraced Monday's gain with a loss of 90 cents, or 1.32%, to $67.03 on anxiety about the $69.25-per-share offer passing muster with regulators, the trader said.

Additionally, bankrupt independent power producer Calpine Corp. was retreating from gains Monday when the TXU event rekindled speculation that a private equity buyout will be the capstone of its reorganization plan. Those shares (Pink Sheets: CPNLQ) were off by 9 cents, or 5.73%, to $1.48.

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