GMAC Posts $724 Million Loss as Home Loans Sour

(Bloomberg) -- GMAC LLC, the auto and mortgage lending company once owned by General Motors Corp., posted a $724 million loss in the fourth quarter as home buyers fell behind on their mortgage payments.

The net loss compares with a profit of $1 billion a year earlier, the Detroit-based company said in a statement today. GMAC said it's talking to buyers for parts of the Residential Capital mortgage unit, which recorded a $921 million quarterly loss.

GMAC vowed today to make money in 2008 after falling home prices and record U.S. foreclosures led to a $2.3 billion companywide loss for 2007. Provisions for bad mortgages probably will decrease this year, GMAC predicted. The auto finance unit remained profitable, overcoming a 6.1 percent decline in GM's North American auto sales last year.

``While results were weak, we suspect investors will take some encouragement from GMAC's expectation of profitability in 2008,'' said Himanshu Patel, an analyst at JPMorgan Chase & Co.

ResCap's future may include acquisitions, sales, alliances and joint ventures, GMAC said. Discussions are in various stages and GMAC said it's unclear whether any transaction will result. The unit lost $4.3 billion for the full year.

GMAC said it bought $740 million of ResCap debt during the quarter to bolster the unit's capital. ResCap ended the period with equity of $6 billion, which GMAC said exceeded requirements set by lenders and ``the amount needed to support its ongoing operations.''

Auto Finance

Profit at GMAC's auto finance unit declined 77 percent to $137 million because of reduced gains from the sale of contracts signed with car buyers. Income at the insurance business dropped 91 percent to $68 million because of lower capital gains and higher losses on customer claims. GMAC's auto finance business had its lowest net quarterly profit in more than two years.

Moody's Investors Service downgraded ResCap's senior debt today to B2 from Ba3 and dropped the senior unsecured rating of GMAC to B1 from Ba3, with a negative outlook for both firms. The ratings company's statement cited lower liquidity, ``the risk that ResCap's net worth could fall below its minimum net worth covenant if GMAC doesn't provide more support, and ``Moody's belief that ResCap's franchise is impaired.''

ResCap's loss stemmed from a higher provision for bad loans, fewer new mortgages and markdowns on the value of securities and loans held for sale. ResCap was the eighth- biggest mortgage originator last year with $94 billion in loans, according to a preliminary tally by trade journal Inside Mortgage Finance.

 

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CDO Ratings to Fall as Losses Trigger Fitch Overhaul

(Bloomberg) -- Fitch Ratings may downgrade $220 billion of collateralized debt obligations as mortgage-related losses increase.

The New York-based company may lower the securities by as much as five levels after failing to accurately assess the risk of debt that packages other assets. CDOs with AAA grades that are based on credit-default swaps and aren't actively managed may face the steepest reductions, according to guidelines proposed by Fitch today.

Ratings firms are responding to criticism that they failed to react quickly enough as rising defaults on subprime mortgages in the U.S. caused a plunge in the value of CDOs. Fitch, a unit of Fimalac SA in Paris, lowered $67 billion of mortgage-linked CDOs in November, slashing some AAA debt to speculative grade, or junk.

``Fitch is acknowledging that it was overly optimistic in its default rate and other assumptions in its original CDO methodology,'' said Christian Stracke, an analyst at bond research firm CreditSights Inc. in London.

Moody's Investors Service last year downgraded $76 billion of CDOs and began this year with $185 billion of deals under review. The New York-based company said yesterday that it may overhaul its system for evaluating structured-finance securities, proposing options including a numerical scale and a designation of ``.sf'' to differentiate a structured-finance ranking from a corporate credit grade.

Ratings Challenge

Standard & Poor's, the New York-based unit of McGraw-Hill Cos., downgraded or placed under review $98.3 billion of CDOs last month, citing ``stress in the residential mortgage market and credit deterioration.''

Fitch's review of 600 CDOs referencing company debt and derivatives doesn't cover structured-finance notes, which package asset- and mortgage-backed securities. It plans to introduce the new criteria by the end of March after seeking feedback.

Fitch wants to ``challenge existing CDO rating assumptions,'' John Olert, head of global structured credit at the ratings firm in New York, said in a statement. The company wants to ``produce ratings that perform similarly in terms of default risk and ratings migration with the market's expectation for other asset classes,'' he said.

CDOs are securities that repackage pools of bonds, loans and credit-default swaps and slice their cash flow into notes of varying risk and returns that are sold to investors. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.

 

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U.S. Economy: Service Industries Unexpectedly Shrank in January

(Bloomberg) -- U.S. service industries unexpectedly contracted in January at the fastest pace since the 2001 recession as the housing slump deepened and consumer spending cooled.

``This is a stunning fall,'' said Michael Moran, chief economist at Daiwa Securities America Inc. in New York. ``If accurate, it's dire news on the economy.''

The Institute for Supply Management's non-manufacturing index, which reflects almost 90 percent of the economy, fell to 41.9, from 54.4 the prior month, the Tempe, Arizona-based ISM said. A separate report today by Royal Bank of Scotland Group Plc showed Europe's service industries grew in January at the slowest pace since 2003.

Stocks fell and Treasury notes rallied as traders added to bets that the Federal Reserve will cut its benchmark rate by another half a percentage point at or before its March meeting. Today's reports also show the economic slowdown that began with a U.S. housing downturn is jeopardizing Europe's expansion and increasing pressure on the European Central Bank to follow the Fed and cut rates.

The ISM published the data, which assesses retailers, banks and construction companies, more than an hour earlier than scheduled. The release time was changed because of concerns about a ``breach'' of embargoed information, ISM spokeswoman Andrea Waas said in a telephone interview.

``The possible breach was very general information disclosed during a private conversation by someone who is normally not involved in the report process but was involved this month due to unique circumstances,'' Waas wrote later in an e-mailed response to questions. ``It was an innocent slip of the tongue.''

Worse Than Anticipated

The index was projected to fall to 53, the median forecast in a Bloomberg News survey of 65 economists. Estimates ranged from 51 to 55. A reading of 50 is the dividing line between growth and contraction, and the index has averaged 57.6 since its inception in July 1997.

``The economy is shrinking,'' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. ``How much is still uncertain.''

The yield on the benchmark 10-year Treasury note fell to 3.54 percent at 10:31 a.m. in New York, from 3.64 percent late yesterday. The Dow Jones Industrial Average dropped 1.5 percent to 12,449.9. Equities also retreated in the U.K., Germany, France and Italy.

Royal Bank of Scotland said its purchasing managers' index for services dropped to 50.6, the lowest since July 2003, from 53.1 in December. Retail sales in the euro region declined 2 percent in December from a year earlier, a record, the European Union's statistics office in Luxembourg said today.

European `Shocker'

The services data are ``a shocker,'' said Holger Sandte, chief European economist at WestLB in Dusseldorf. ``The ECB certainly wants to see more evidence for a marked slowdown, but the data will give them pause for thought on interest rates.''

Today's U.S. services report included a new composite index to reflect changes in current measures of business activity, new orders, employment and supplier deliveries. The contribution from each sub-index is equal.

The new composite index was 44.6 in January. It would have been 53.2 in December, according to Bloomberg calculations based on a formula provided by ISM.

The ISM group's index of new orders for non-manufacturing industries fell to 43.5 from 53.9 the prior month.

An index of employment dropped to 43.9 from 51.8, and a gauge of supplier deliveries decreased to 49 from 52.5.

A measure of prices paid also dropped to 70.7 from 71.5.

Payrolls Drop

The housing recession is hurting other parts of the economy. Employers in January reduced payrolls for the first time in more than four years, the Labor Department reported last week. Service providers added 34,000 workers to payrolls after an increase of 143,000 in December. Builders trimmed staff by 27,000 workers.

``Risks to growth remain,'' Federal Reserve policy makers said Jan. 30 when they cut the benchmark interest rate by a half point. The action followed an emergency three-quarter-point reduction the prior week. Investors are betting policy makers will lower the rate by another half point next month, according to futures trading.

Manufacturing, which accounts for about 12 percent of the economy, unexpectedly expanded in January, showing business investment is holding up even as other areas weaken, according to a report from ISM last week.

 

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Excel to Purchase Rival Quintana for $2.45 Billion

(Bloomberg) -- Excel Maritime Carriers Ltd. agreed to buy larger rival Quintana Maritime Ltd. for $2.45 billion, including debt, to become the largest dry-bulk shipper listed in the U.S.

Excel will pay $13 in cash and 0.4084 share for each Quintana share. That equals about $26.48 a share based on yesterday's closing price, Hamilton, Bermuda-based Excel said today in a statement. The price is 57 percent above Quintana's close yesterday.

Quintana in the third-quarter operated 29 ships and is awaiting delivery of eight more over the next two years, which will increase its capacity by 55 percent. Today's purchase will make the combined entity the fourth-largest Panamax-size carrier company in the world, according to Lloyd's Register-Fairplay. Panamax usually haul 75,000-ton cargoes.

``From a strategic standpoint, we like it,'' said Doug Mavrinac, a Houston-based Jeffries & Co. analyst who has a ``buy'' rating on both companies. ``It increases the size of Excel's fleet significantly, lowers its average age, and it increases time-charter coverage, and therefore their cash flow visibility''

Quintana rose $4.78, or 28 percent, to $21.67, at 12:12 p.m. in Nasdaq stock market composite trading. Excel fell $1.20, or 3.6 percent, to $31.80 in New York Stock Exchange composite trading.

 

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Bank of America Affirms Plan to Acquire Countrywide

(Bloomberg) -- Bank of America Corp. said its purchase of Countrywide Financial Corp. is proceeding and the bank doesn't need more capital after last week's preferred stock sale raised almost $13 billion.

``Everything is a `go' to complete this transaction,'' Bank of America Chief Executive Officer Kenneth Lewis said at an investor conference today, referring to Countrywide. The Calabasas, California-based mortgage company rose as much as 8.6 percent today in New York Stock Exchange composite trading.

Chief Executive Officer Angelo Mozilo agreed Jan. 11 to sell Countrywide, the biggest U.S. mortgage lender, for about $4 billion in stock to Bank of America, the nation's second- biggest bank by assets. Investors have speculated the bid might be revised if Countrywide didn't fulfill Mozilo's October vow to restore profit by year-end.

Countrywide posted a fourth-quarter net loss of $422 million, or 79 cents a share, compared with a profit of $621.6 million, or $1.01 a share, in the year-earlier period, the company said in a statement today. The loss was more than twice the 28 cents predicted in a Bloomberg survey of analysts.

The home lender rose 20 cents to $6.15 in 12:03 p.m. composite trading on the New York Stock Exchange as investors concluded Bank of America won't renege on the purchase. Bank of America, based in Charlotte, North Carolina, added 67 cents, or 1.6 percent, to $41.87.

Bank of America could have raised 2 1/2 times as much as it sought in last week's share offerings, Lewis told the New York investor conference today. The sale came with some of the highest yields in 15 years.

 

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U.S. Stocks Rise After Earnings, Durable Goods Top Forecasts

(Bloomberg) -- U.S. stocks rose for a second day, led by telephone companies and utilities, on better-than- forecast durable goods orders and earnings that topped estimates at two dozen members of the Standard & Poor's 500 Index.

Dow Chemical Co., American Electric Power Co. and Valero Energy Corp. led gains among the 30 companies in the S&P 500 that reported results since markets closed yesterday. Boeing Co. and Caterpillar Inc. climbed after the Commerce Department said orders for U.S. durable goods rose the most since July.

The S&P 500 added 1, or 0.1 percent, to 1,354.97 at 1:06 p.m. in New York. The benchmark for U.S. equities is still down 7.6 percent in 2008 on concern the collapse of the subprime mortgage market will drag the economy into recession. The Dow Jones Industrial Average rose 25.04, or 0.2 percent, to 12,408.93. The Nasdaq Composite Index decreased 6.52, or 0.3 percent, to 2,343.39, dragged down by a 2.1 percent drop in Google Inc.

``When you see a durable goods number like this and then earnings outside of the financial sector doing quite well, people are beginning to realize that perhaps the contagion effect may be somewhat limited,'' said Damon Barglow, who helps oversee $1.9 billion at Eastern Investment Advisors in Boston, in an interview with Bloomberg Radio.

Durable Goods

Index futures doubled their advances after the 5.2 percent gain in durable goods orders last month highlighted how growing overseas demand may spur manufacturing as the U.S. economy slows. The Federal Reserve is to expected to cut interest rates tomorrow in an effort to spur growth.

The S&P 500 has gained 3.5 percent from its 16-month low on January 22 after falling as much as 15 percent from its Oct. 31 record.

Fourth quarter earnings advanced 20 percent on average for the 155 non-financial companies in the S&P 500 that have reported results so far, according to data compiled by Bloomberg. Analysts expect the entire index to post an 18 percent average decline in profit.

Dow Chemical rose 43 cents to $38.02. The maker of 3,200 products ranging from synthetic latex to pesticides posted profit excluding some restructuring costs and other items of 84 cents, topping the 80-cent average estimate of 14 analysts surveyed by Bloomberg.

Valero, American Electric

Valero Energy Corp. climbed $5.22 to $60.12. The largest U.S. refiner posted fourth-quarter profit of $1.02 a share, topping the 59-cent average analysts' estimates compiled by Bloomberg. Earnings were buttressed by a cut in Valero's tax rate and increased use of low-grade crude oil.

Sunoco Inc., the largest oil refiner in the U.S. East, added $2.20 to $63.35. Tesoro Corp., the largest refiner in the U.S. West, gained $2.90 to $41.29. ConocoPhillips, the nation's second-biggest refiner, increased $1.18 to $77.59.

American Electric Power Co. gained 59 cents to $42.82. The biggest U.S. producer of electricity from coal said fourth- quarter profit rose 28 percent on higher power sales and a gain from the sale of a stake in a power plant. Sales rose 10 percent to $3.3 billion on higher utility rates and colder weather that increased use of electricity for heating.

Boeing, the world's second-biggest commercial airplane maker, climbed $2.34, or 3 percent, to $79.94. Caterpillar, the largest maker of bulldozers and excavators, added 72 cents to $68.93.

The dollar strengthened and yields on Treasury notes rose after the durable-goods report. Economists had forecast orders would increase 1.6 percent in December, according to the median of 64 estimates in a Bloomberg News survey.

Eli Lilly & Co. rallied 94 cents to $52.34. Excluding certain items, Lilly earned 90 cents a share, a penny higher than the average estimate of 17 analysts surveyed by Bloomberg.

 

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Durable goods orders jump, house prices slump

(Reuters) - Stronger-than-expected orders for U.S.-made durable goods in December suggested the economy retained some life and might not need a heavy dose of interest-rate cuts, even though house prices fell a record amount in November.

New orders for long-lasting goods rose 5.2 percent last month, a Commerce Department report showed on Tuesday, well above the 1.5 percent increase forecast by economists in a Reuters poll.

The surprise surge in durable goods orders helped offset a report that showed home prices in 10 major metropolitan areas fell a record 8.4 percent in the year through November.

U.S. Treasuries fell after the durables report, which contradicted weakness in other areas of the economy and undermined the argument for more aggressive interest rate cuts by the Federal Reserve. Stocks rose.

A consumer sentiment survey, meanwhile, showed confidence fell in January but by slightly less than economists had expected. The Conference Board's index of consumer sentiment fell to 87.9 from an upwardly revised 90.6 in December.

"Consumers are on the edge but haven't packed it in yet. They are worried about the up-and-down stock market, falling house value and high gasoline prices. But they still have jobs," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania.

 

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