All You Need to Know About Financials

How much do you really know about the latest financial sector news?

The following are key insights from TheStreet.com.

From Wachovia Shares Plunge on Credit Hits:

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"These bottom-line results are disappointing and unacceptable," said Wachovia Chairman Lanty Smith. "While to some degree they reflect industry headwinds and weaker macroeconomic conditions, they also reflect performance for which we at Wachovia accept responsibility. Our company is facing up to these issues, is addressing the challenges head-on and has redirected near-term strategic priorities."

To preserve capital, Wachovia plans to reduce its headcount by 6,350 employees, or roughly 5% of its workforce. The bank said it has already reduced its mortgage employee headcount by 2,000 through June, and plans to cut 4,400 employees in its mortgage segment over the next year, according to presentation slides Wachovia once again reduced its dividend by 86% to 5 cents a share, which will conserve roughly $700 million of capital each quarter. It also has decided to exit the wholesale mortgage origination channel, it said Tuesday.

"In the short term, the entire organization is focused on protecting, preserving and generating capital, reinforcing Wachovia's strong liquidity position, and reducing risk," CEO Robert Steel said in his first public comments as head of Wachovia.

Read the full article.

From Cramer: JP Morgan Can Save Banks (Video, Jul. 22):

Cramer: "I think the central quandary that this market is saying is, 'How can the banks go up again?' And the answer is... the deposit bases of these banks are huge and they are generating real revenue growth. Now, Wachovia took a lot of actions this morning that were very dire... but the deposit base is showing that there's money to be made. We saw that with Citigroup (C). Particularly saw that with JPMorgan (JPM). I think that you can say we definitely saw that with Bank of America (BAC). We saw that with USBU.S. Bancorp (USB), which is my favorite... It is very clear that there will be other banks for sale. If you can break banks into good banks and bad banks... the good banks will be purchased by JPMorgan or USB or Wells Fargo (WFC)."

To watch the video, click the player below:

Plus, don't miss this related "Wall Street Confidential" video: Cramer: Nice Work, Bank of America (Jul. 21).

From BofA Profit Slides, But Beats Expectations:

Bank of America shares surged Jul. 21 as much as 12% after the Charlotte, N.C., bank beat Wall Street's expectations for second-quarter earnings, despite a 41% decline in profits from a year earlier.

The bank recorded profit of $3.41 billion, or 72 cents a share, in the three months ending June 30. That compares to $5.76 billion or $1.28 a share, a year earlier, but up from $1.2 billion or 23 cents in the first quarter. Revenue rose slightly to $20.3 billion.

BofA's second-quarter profit including a pre-tax merger restructuring costs of $212 million. BofA closed its purchase of Countrywide Financial on July 1.

It now expects the Countrywide deal to be accretive this year, where previously it had said the deal would be neutral to earnings in 2008.

Read the full article.

From Citi's Pandit Consolidating Power:

The departure of Citigroup Michael Klein is the latest piece of evidence CEO Vikram Pandit is consolidating power at the troubled bank.

Klein, a 23-year veteran of the bank and one of its highest-paid executives, will leave the bank "to pursue other opportunities," Citi said in a statement Monday Jul. 21. Pandit stripped Klein of his management responsibilities after he became CEO, though he was complimentary of the departing executive in the bank's official statement.

Klein's departure hardly comes as a surprise. His role at Citi had become increasingly vague during Pandit's tenure. He had been in charge, directly or indirectly, of nearly all of Citigroup's client relationships, prior to a reorganization in March. Pandit redefined that job, essentially giving Klein's duties to John Havens, one of his top deputies. Havens is CEO of the institutional clients group, which was Pandit's job before he took Citi's top job.

Klein was among the contenders for Citi's CEO post after the resignation of Charles Prince last year, according to reports in The Wall Street Journal -- although others believed the 44-year-old was too young to be considered for such a lofty position. Still, his presence may have posed a potential problem for Pandit.

Read the full article. Plus, don't miss Citi Earnings Beat Spurs Optimism.

From JPMorgan: Prime Loans Form Dark Cloud:

The banking titan JP Morgan Chase (JPM) said Thursday Jul. 17 that it could see losses as high as $300 million a quarter by sometime in 2009 in its $47 billion prime loan portfolio, triple from current levels.

CEO Jamie Dimon attributed the rise in prime loans written off to a surge in high loan-to-value jumbo loans gone bad as a result of the poor housing markets.

"We started doing more jumbo mortgages in '07 and part of that is '07 vintage... and we were wrong. We obviously wish we hadn't done it," Dimon said in a conference call to discuss earnings results this morning. "Prime looks terrible."

The New York-based bank posted a net profit of $2 billion, or 54 cents a share, vs. $4.2 billion, or $1.20 a share, in the year-ago period... The 55% slide in profit was due in part to a $540 million after-tax loss related to the acquisition of Bear Stearns completed in May. Excluding the loss, JPMorgan earned $2.5 billion.

Read the full article.

From Merrill Sheds Profits, Bloomberg (Update):

MerrillLynch (MER) reported a loss of $4.7 billion, or $4.97 per share... It is the firm's fourth consecutive quarterly loss.

Merrill posted $9.4 billion in writedowns and impairment charges, with negative net revenue of $2.1 billion. That figure compares with a positive $9.5 billion a year earlier.

Merrill lost $3.5 billion on U.S. super-senior asset-backed collateralized debt obligations CDOs, as well as $2.9 billion on credit-valuation adjustments, much of which was related to hedges on those CDOs. It also lost $1.7 billion from investments in U.S. banks and $1.3 billion from residential real-estate exposures.

Read the full article.

From Don't Bank on More Dividend Boosts:

Wells Fargo made a bold move in a shaky market by boosting its dividend by 10% Wednesday Jul. 16, but observers say few banks will follow suit amid a still-stressed housing and credit environment.

Wells Fargo shares surged more than 30% Wednesday, after the San Francisco-based bank declared a quarterly common stock dividend of 34 cents a share, up from 31 cents a share. Wells' second-quarter profit of $1.75 billion, or 53 cents a share, beat earnings estimates by 3 cents share, despite a 23% drop from a year ago.

By raising the dividend, Wells wanted to accomplish two things, says Cassandra Toroian, president and chief investment officer of Bell Rock Capital: to "restore confidence in their company/balance sheet" and provide an impetus for short-sellers to move along and target someone else.

Read the full article.

Cramer: How I'd Save the Banks (Video, Jul. 16)

Wells Fargo will be at the center of the survival plan, says Cramer.

To watch the video, click the player below:

Plus, don't miss this related "Wall Street Confidential" video: Cramer: I See Banks' Future (Jul. 15: Cramer has one crucial thing he does not want you to do right now and has targeted the one bank he sees as a power in the future.)

From Schwab Shares Rise on Profit Growth:

Charles Schwab received $26 billion in net new assets, which stood at $1.4 trillion on June 30, a 1% gain from a year earlier. It had 5% more active brokerage accounts and 13% more retirement plan participants, while banking accounts more than doubled to 355,000.

Despite lower short-term interest rates and a challenging stock-market, the firm limited expense growth and drove pre-tax profit margins up to 39.3% from 35.2%.

Charles Schwab also kept itself largely isolated from direct exposure to subprime housing issues that have plagued other financial firms. CFO Joe Martinetto noted that mortgage delinquencies at the company's Schwab Bank division were 0.33% of outstanding balances at the end of June, much lower than the national average.

Read the full article.

From U.S. Bancorp Weathering the Credit Storm:

While headlines this morning Jul. 15 are bemoaning US Bancorp's drop in year-over-year earnings, at this point in the credit cycle it is silly to dwell on comparison to much better times.

The company posted a 7.5% increase in net revenue year-over-year, as it grew its balance sheet 11% and improved its net interest margin to 3.61% for the second quarter, compared to 3.55% last quarter and 3.44% in the second quarter of 2007.

That's rather impressive. At least through the first quarter of 2008, many large regional holding companies reported narrowing net interest margins over the past year.

Also, so far, US Bancorp has set itself apart from many other regional holding companies by keeping well ahead of nonperforming loans and charge-offs, while maintaining decent earnings performance.

Read the full article.From Fannie, Freddie Plan Staves Off Housing Disaster:

On Sunday Jul. 13, the U.S. Treasury temporarily increased the department's lines of credit for the two companies Fannie Mae and Freddie Mac. The plan will also give the Treasury temporary authority to purchase equity in the two companies to increase their capital. Fannie and Freddie also now have access to the Federal Reserve's emergency lending window.

The increased federal role may spell long-term trouble for the U.S. dollar, since taxpayers or increased budget deficits are likely to fund any bailout of the mortgage giants.

Nonetheless, saving the housing market from further short-term pain clearly remains a priority among government officials. Housing prices continue to fall across the country due to meager demand and almost record high inventories.

Read the full article.

From Cramer: What a Fannie/Freddie Recovery Means to You (Video, Jul. 14):

Giving these mortgage backers money is no solution to the housing mess, says Jim Cramer.

Cramer: "The civilization, as we know it, is fighting for its solvency. The banking industry -- with the exception of Hudson City Savings Bank (HCBK)... and somewhat, Goldman Sachs (GS) -- all seem to have these subprime mortgages, and the mortgages are defaulting. And they're defaulting so quickly and they're in so many difficult financial instruments that they are just magnified... Maybe a severe recession should be taken... Maybe we need to start over again... There's no light here at the end of the tunnel... It's great for people who want to buy homes... Everybody else is worse."

To watch the video, click the player below:

Plus, don't miss these related videos: Cramer: Fannie and Freddie's Best-Case Scenario and Cramer: It's a Mess Out There.

From IndyMac Insurance Tab Could Hit $8B:

IndyMac (IMB) is not likely to be the last bank to go under amid the current crisis. BankUnited (BKUNA) and Downey Financial (DSL) are both on very thin ice... and while it is not in immediate danger, Washington Mutual (WM), which raised $7 billion from a group of investors led by private equity firm TPG during the second quarter, will be watched very closely when it reports results on Thursday Jul. 17.

Unwinding IndyMac

When a depository institution is shut down, insured funds in retail deposit accounts are made available almost immediately by the FDIC. While the FDIC usually starts selling off assets immediately when regulators close a bank or thrift, IndyMac was so big that the agency established a successor institution, IndyMac Federal Bank FSB, which will temporarily operate to "maximize the value of the institution for a future sale."

The FDIC said uninsured deposits totaled approximately $1 billion, and were held by about 10,000 depositors.

Depositors with uninsured deposits in a failed institution become creditors to the receivership or conservatorship, and receive "dividends" out of proceeds from asset sales. In the case of IndyMac, these creditors have received an advance dividend of 50 cents on the dollar. They may receive more, but that seems doubtful at this stage. IndyMac's mortgage loans are very difficult so sell in this environment.

Read the full article. Plus, don't miss this related story: Jim Cramer's 'Stop Trading!': Indy Was Doomed.

From Lehman's Got a Reluctant Safety Net in Uncle Sam:

Lehman Brothers (LEH) is now considering a strategic partnership, buyback plan or asset sale to boost its shares, the Journal said, citing sources familiar with the situation.

Regardless of what steps Lehman ultimately takes to right itself, Brad Hintz says the government will not allow Lehman or its peers to go under, because of the sheer complexity of assets and the effect it would have in the greater capital markets. As with Bear Stearns, Lehman's trades are intertwined with a number of other banks, and federal regulators stepped in not just for Bear but to support the broader financial system.

Joseph Lynyak, a partner in the bank regulatory practice at law firm Venable LLP, says Ben Bernanke and Henry Paulson are talking tough to avoid giving the impression that the feds will step in to heal the wounds of every community bank that lent millions to subprime homebuyers.

Instead, they are trying "to strike the right balance in their remarks to the public," says Lynyak, a onetime honors fellow at the FDIC. "They're concerned about conveying a false impression to the marketplace that they would bail out every institution in every situation."

Read the full article.

From Goldman Cashes In on Banks' Misery:

Goldman Sachs has grown adept at making lemonade out of the lemon that is today's financial services industry.

Wachovia (WB) recently disclosed that it hired Goldman to help it figure out what to do with its giant portfolio of troubled loans. The firm also has also been the go-to advisor when it comes to helping struggling banks raise equity, working with banks like Wachovia, Royal Bank of Scotland (RBS) and State Street (STT) to raise money amid the stubborn housing and credit slump.

Goldman, already standing out by continuing to earn quarterly profits while its main rivals are bleeding from wounds inflicted by the U.S. mortgage market, appears to be doing an exceptionally good job of making money by helping financial companies dig out of the mess they've found themselves in.

Read the full article.

From M&T Bank CFO: 'We're Slogging Through':

Non-performing loans and foreclosures contributed to a 25% drop in net income for M&T Bank (MTB).

The Buffalo, N.Y.-based bank, which posted second-quarter results Monday Jul. 14, is the first in a line of regional banks reporting and its report could serve as an indicator of what's to come from the sector during the earning's season.

M&T Bank also recorded significant late loans, which jumped to $587 million from $296 million a year ago. The bank insisted that the numbers grew as a result of an accounting change that makes the bank recognize non-performing loans as those that are 90 days late as opposed to waiting until the loans were 180 days past due. But it did concede that loans to residential builders that were late in making payments also contributed. M&T also has had to digest some $53 million in assets taken in foreclosure, a huge increase over last year's $18 million, also attributed to residential real estate loan defaults. The provision for credit losses increased to $100 million in the second quarter of 2008, from $30 million in the year-earlier quarter.

Read the full article.

From Fannie, Freddie Media Panic Overblown:

Fannie Mae and Freddie Mac are dominant players the bond market. Not only are they the biggest non-Treasury issuers of straight-debt securities, mortgage-backed bonds guaranteed by the two giants represent over 30% of the total taxable bond market. Therefore, the problems at the GSEs probably touch just about every investor directly in a way few other companies would.

While delinquencies on their guarantee portfolio remain relatively small (0.81% for Freddie Mac and 1.22% for Fannie Mae), the fact is that both companies employ tremendous leverage, and therefore, losses even mildly above historic norms are likely to put huge pressure on the company's equity.

In addition, Freddie Mac has yet to complete the $5.5 billion capital raise they promised in May, and given market conditions, this will be all but impossible without government intervention. So I'm not here to challenge the plunging share price of either Fannie Mae or Freddie Mac.

But there are three really silly things being reported in the media right now that need clearing up.

Read the full article.

From Cramer: Blame the Mortgage Insurers:

The big problems that everyone has from Fannie Mae to Freddie Mac to Bank of America (BAC) to Washington Mutual, frankly, aren't the defaults. The default rate for FNM Fannie Mae mortgages is amazingly low, around 1%.

But it is the personal insurance behind those mortgages -- made by PMI (PMI) and MGIC (MGIC) -- that may not hold up, and that's the layer of help that allowed Fannie and Freddie to be so thinly capitalized. We saw the same thing happen throughout Wall Street and with many banks. The insurance may not hold up, so the reserves are therefore way too low.

A few months ago, we were fretting that the collapse of these monolines could put everything in jeopardy. Somehow, because they haven't "collapsed" per se, we thought we had skated by this issue. We haven't. The unwinding of these two companies and the reserves that must be boosted -- because they can't be counted on -- is behind a lot of these capital raises and behind the lack of belief in anything any financial says.

Read the full article. Plus, don't miss these related stories: Jim Cramer's 'Stop Trading!': Bush Changes Tune on Fannie and Freddie, Jim Cramer's 'Stop Trading!': Avoid Financials, Cramer: Poole's Not All Wet, Cramer: Feds Step Up to the Plate and Cramer: An Elegy for Fannie and Freddie.

From Cramer: Fannie and Freddie, Game Over (Video, Jul. 10):

Jim Cramer: "One of the things that we learned in 1990 was insolvent does not mean bankrupt. When a company's equity is no longer representative of an entity, that does not mean the entity is vanished. What it means is that there is a recapitalization, where the company goes to the bond holders. In this particular case, because of the companies' Fannie Mae and Freddie Mac quasi nature -- a government-sponsored enterprise -- we don't really know what will occur."

To watch the video, click the player below:

Plus, don't miss these recent financial sector-focused videos on TheStreet.com TV