1. BK still a possibility

Most of the agreements needed to keep Chrysler out of bankruptcy are close to final approval but there remains some risk that the troubled automaker will be forced into a bankruptcy filing this week. The Obama administration has indicated it is ready to put Chrysler into bankruptcy unless a group of hedge funds and banks holding the company’s debt give their unanimous approval to the government’s plan for retiring the debt. The government anticipates that Chrysler would spend a fairly short time in bankruptcy protection, principally to resolve the debt issue.

2. Citi and BofA plan for more capital raising efforts

The U.S. government’s stress tests found that Citigroup and Bank of America both need to raise capital, prompting discussions between the banks and regulators about how they plan to raise the funds. Citigroup said it is in the midst of selling assets and could encourage more investors to convert preferred stock into common stock. Both banks are said to be challenging some of the stress test results.

3. Something in the way of Lehman’s cleanup

The bankruptcy of Lehman Brothers could be held up for years if a legal dispute sparked by the company’s U.K.-based division goes unresolved. The battle is whether all Lehman units around the globe will work together to unwind the company’s financial obligations or whether each division will be on its own. “The position that’s being taken by [Lehman Brothers International Europe] appears to be getting in the way of a global initiative,” said Southern District Bankruptcy Judge James Peck, who is presiding over the case.

4. No matter how small you cut it

Supposedly heading toward a day when a smaller, leaner, less-debt-laden American International Group can return to profitability, the once-mammoth insurance company is liquidating its best assets to pay off a mountain of debt. Analysts increasingly say that by the time the process is finished and the government has been paid off, it is unlikely what is left of AIG can survive on its own.

5. Could it be true?

While house prices are still falling, the rate of the drop is becoming less severe, with the S&P/Case-Shiller Index showing that prices in 20 big cities declined 18.6% in February compared with the same month in 2008, slightly less than January’s 19% year-over-year decline. The chairman of the index committee at Standard & Poor’s, David Blitzer, said the statistic marked “the first month since October 2007 where the 10- and 20-city composites did not post a record annual decline.”

6. EU proposes a direct oversight of PE and HF

The European Commission is expected to issue legislation as early as today that aims to regulate and impose reporting requirements on hedge funds and private-equity companies. Also, Charlie McCreevy, the EU’s top financial regulator, will likely advocate enhanced rules for executive compensation at banks. The European Parliament as well as finance ministers from the 27 EU nations would need to approve the legislation before it would take effect.

7. Shift in bank regulation is coming…possibly

Supreme Court justices on Tuesday heard arguments in Cuomo v. the Clearing House Association, which could shift oversight of banks from federal to state regulators. Four years ago, New York’s then-attorney general, Eliot Spitzer, questioned the disproportionately high number of high-interest mortgages made by national banks to Hispanic and black borrowers. He tried to enforce the state’s anti-discrimination laws, but was shut down by the Office of the Comptroller of the Currency, which regulates national banks.

8. IMF stronger ties with Latin America

After decades of vilifying the International Monetary Fund as a ruthless tool of Washington-based imperialism, Latin America’s leaders are starting to warm to the IMF’s revamped programs and new management. Brazil’s president is making conciliatory gestures and Ecuador is holding informal talks with the IMF, while still officially rejecting formal ties with the multinational organization.

9. Ireland might nationalize their banks

Alan Barrett, a professor at the Economic and Social Research Institute, said that to stop uncertainty about the banking industry in Ireland, the country should nationalize its banks instead of purchasing their real estate loans. Ireland’s finance minister, Brian Lenihan, plans to help rid banks of troubled loans to property developers through the National Assets Management Agency. “From my point of view, the aim is to end the uncertainty. Nationalization would do that, while NAMA won’t, and the banks may end up being nationalized anyway,” Barrett said.

10. Thanks for reading!!

Merrill May Get $5 Billion Investment From Temasek, WSJ Says
By Kelly Riddell and Jean Chua

Dec. 21 (Bloomberg) — Merrill Lynch & Co., reeling from the biggest loss in its 93-year history, may receive a cash infusion of as much as $5 billion from Singapore’s state-owned Temasek Holdings Pte., the Wall Street Journal reported.

Temasek’s board has given preliminary approval for the investment, the Journal said, citing people it didn’t identify. Merrill Chief Executive John Thain, who took over Dec. 1, would join Citigroup Inc., Morgan Stanley and UBS AG in tapping a sovereign wealth fund to shore up capital.

Government funds “are making use of the crisis to buy some of these banks on the cheap,” said Nicholas Yeo, who helps manage more than $40 billion in Asian equities at Aberdeen Asset Management in Hong Kong. “Whether they’re buying cheaply enough is hard to say.”

Merrill, the world’s biggest brokerage, on Oct. 24 announced $8.4 billion of writedowns on mortgage-related investments and corporate loans. The firm, which ousted Stan O’Neal as CEO in October, may report an additional $8.6 billion writedown for the fourth quarter, according to David Trone, an analyst at Fox-Pitt Kelton Cochrane Caronia Waller.

Governments in the Middle East and Asia have agreed to invest about $25 billion in Wall Street firms since banks began to disclose subprime losses. Merrill’s shares slumped 42 percent in New York this year, cutting its market value to $46.7 billion. The firm reported a $2.2 billion loss for the third quarter.

Rob Stewart, a Hong Kong-based spokesman for Merrill, declined to comment. Temasek, the biggest shareholder of Standard Chartered Plc and DBS Group Holdings Ltd., also declined comment. Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Citi, Morgan Stanley

Set up in 1974 to run state assets, Temasek now manages a portfolio of more than $100 billion that includes controlling stakes in seven of Singapore’s 10 biggest publicly traded companies. It holds 17 percent of Standard Chartered and 28 percent of DBS, Singapore’s largest bank.

Temasek, owned by Singapore’s finance ministry, has notched up an 18 percent average annual return since its inception. It raised more than $800 million in the past month selling part of its stakes in China Construction Bank Corp. and Bank of China Ltd., the nation’s second- and third-largest lenders.

Citigroup Inc., the biggest U.S. bank by assets, said Nov. 27 that Abu Dhabi would invest $7.5 billion in the New York-based company. State-controlled China Investment Corp. is buying an almost 10 percent stake in Morgan Stanley for $5 billion after the second-biggest U.S. securities firm reported a loss of $9.4 billion from mortgage-related holdings on Dec. 19.

`Good Things’

Government of Singapore Investment Corp., along with an unidentified Middle Eastern investor, agreed this month to inject 13 billion Swiss francs ($11.2 billion) into UBS, the biggest Swiss bank. The government fund manager known as GIC manages more than $100 billion of the nation’s foreign reserves.

Investments by sovereign funds may give some respite to banking stocks battered by more than $80 billion of credit- related related losses at the world’s biggest financial institutions.

“These things tend to be good signs for the market,” said Masafumi Oshiden, a Tokyo-based fund manager at BlackRock Japan Co., whose parent company manages $1.1 trillion. The investments help “take away the fears and concerns, and lack of clarity going forward, so generally, it’s positive.”

Bear Stearns Cos., the securities firm that helped trigger the collapse of the subprime market, struck an agreement in October with China’s government-controlled Citic Securities Co. for a $1 billion cross-investment. The New York-based company announced a $1.9 billion writedown on mortgage losses yesterday, sending the firm to its first quarterly loss since it went public in 1985.

Government agencies “may feel there are bargains out there,” said David Cohen, an economist at Action Economics in Singapore. “They can write big checks and these banks appreciate that.”

Great Wall Street of China

Morgan Deal Underlines
The New Capital Flow;
Who’s Playing Whom?

By RICK CAREW in Beijing, LAURA SANTINI in Hong Kong and JAMES T. AREDDY in Shanghai
December 20, 2007; Page C1

Beijing’s plan to invest $5 billion in Morgan Stanley caps a milestone year for China’s deal makers: For the first time, Chinese companies and the government bought more overseas than foreign buyers have invested in China.

Chinese buyers have spent $29.2 billion acquiring foreign companies so far this year, while investors from the rest of the world have bought $21.5 billion of Chinese companies, according to Thomson Financial.

The investment in Morgan Stanley will give state-run China Investment Corp. — a sovereign-wealth fund, essentially the government’s money pile — as much as 9.9% of the Wall Street giant.

It is the latest in a string of bailouts of financial giants by foreign investors as the firms struggle with souring mortgage-related investments. Indeed, yesterday Morgan Stanley reported a $9.4 billion write-down for its fiscal fourth quarter on its U.S. subprime and other mortgage investments. (See related article¹.)

Citigroup Inc. and UBS AG received sizable help from Middle Eastern and Singaporean investors in recent weeks. Wall Street firm Bear Stearns Cos. agreed in October to swap $1 billion investments with China’s Citic Securities Co.

The question now is, are these investors the smart or the dumb money? Historically, foreigners are the suckers who allow the locals to sell out at the market’s peak.

Already, the Abu Dhabi Investment Authority, which invested $7.5 billion in Citigroup, told executives at the bank that it wasn’t pleased by Citigroup’s move to bring $49 billion in assets onto its balance sheet, people familiar with the matter said. The investor also expressed concern that Citigroup might have to raise more capital, potentially diluting its investment.

A person aware of the matter said Citigroup’s relationship with Abu Dhabi remains good and that Abu Dhabi officials didn’t disagree with the bank’s actions.

And there has been a political backlash in China against the government fund’s $3 billion investment in Blackstone Group LP’s initial public offering, a high-water mark for the private-equity boom. Since then, Blackstone shares have lost more than a fifth of their value, erasing $633 million in the paper value of China’s investment.

Consequently, CIC’s senior managers emphasized they were looking to take a slower, more passive approach. Only last week, CIC started the selection process for money managers to funnel some of the $67 billion they have allocated from the $200 billion fund for overseas investment into global equity markets.

But then, the fund seized the opportunity to make the Morgan Stanley investment, an aggressive move at a time when Wall Street banks look more like distressed assets.

“This deal is a big surprise,” said Stephen Green, a senior economist at Standard Chartered in Shanghai. “The U.S. subprime crisis created an opportunity, and they jumped at it.” For CIC, the deal with Morgan Stanley, its second-largest overseas investment, could provide access to expertise the giant fund is keen to acquire.

Following widespread domestic criticism over the Blackstone loss, CIC characterizes itself as a “passive investor” and will have no representation on Morgan’s board. That is likely meant to address concerns over political sensitivities surrounding China’s investment in a blue-chip Wall Street firm.

Two years ago, strong political opposition in Congress derailed a bid by Chinese oil company Cnooc Ltd. for Unocal Corp., of California. Since then, Chinese firms have shied away from efforts to buy majority stakes in big U.S. companies.

Still, the sheer size of China’s investment in Morgan Stanley will likely give it clout.

Days before Charles Prince decided to step down as Citigroup CEO amid massive credit-market losses, he had lost the support of a longtime backer, Saudi Prince Alwaleed bin Talal, described similarly as a passive investor in Citigroup.

China made its biggest overseas foray to date in October when its biggest bank, Industrial & Commercial Bank of China Ltd., announced the purchase of a $5.6 billion stake in Africa’s largest lender, South Africa’s Standard Bank Group Ltd.

China has the money to spend because of its ballooning trade surplus with the rest of the world, as well as a local stock-market boom that has raised tens of billions of dollars for giant state-owned firms. China’s foreign reserves rank as the world’s largest at more than $1.4 trillion.

The terms of the Morgan Stanley deal guarantee CIC a 9% annual return, well above the fund’s 5% cost of funding until it converts its investment to shares in 2010.

For Morgan Stanley, the deal could offer it some measure of goodwill in a country that has remained elusive to Wall Street.

In the 1990s, Morgan Stanley formed the first onshore investment-banking joint venture, China International Capital Corp., with a Chinese state bank. That venture later suffered from disagreements between the two partners, and Morgan Stanley became a passive investor, still holding a 34% stake.

Reaching out to Chinese money is a natural move for Morgan Chairman and Chief Executive John Mack, perhaps the top U.S. financial executive left with deep ties to China.

Since returning to Morgan Stanley from Credit Suisse in the summer of 2005, Mr. Mack has pushed his China team to build a broader platform in China. He recently signed a deal to re-enter the Chinese domestic markets, while Morgan Stanley has also bought a small Chinese bank and a stake in a fund-management venture.

All of those deals beef up the bank’s China presence at a time when Morgan Stanley, like most of its rivals, still does most of its China business out of Hong Kong by linking Chinese companies to global capital markets.

Still, striking deals in China has become increasingly difficult, as Beijing fears some Chinese assets have gone to foreign investors too cheaply in the past. Skyrocketing stock prices have contributed to this feeling and prompted regulators to scuttle deals by Western firms.

Though China continues to attract the world’s highest levels of foreign direct investment — $61.68 billion in the first 11 months of this year, an increase of 14% on the year — the size of the biggest outbound investment deals have this year far exceeded inbound investments.

The top five outbound investments from China were for an average of $3.1 billion, according to Thomson Financial, while the top inbound deals were for an average of $202 million.

Shares in embattled lender Countrywide Financial Corp. gained ground early Tuesday after the company said that big losses at Freddie Mac are unlikely to significantly dent its lending business.The Calabasas-based lender doesn’t believe the loss at Freddie will have a “material impact on its ability to fund loans,” company spokesman David Bigelow said at an investor conference. He also added that Countrywide is strong enough to withstand the current housing slump and credit crunch.

Last week, Freddie Mac, which is a crucial source of funding for mortgage lenders like Countrywide, reported a $2 billion loss, making investors nervous that it may not buy many loans from Countrywide and other lenders. Shares in Countrywide have plunged nearly 80 percent this year and rumors of impending bankruptcy have constantly circled the company.

Complicating matters, Sen. Charles Schumer (D-N.Y.), pressed regulators Monday to look into a rise in Countrywide’s borrowing from certain regional banks in the Federal Home Loan Bank system because of potential risks to the system.

“We are very familiar with FHLB collateral requirements and we are in full compliance with them,” Bigelow added, pointing out that Countrywide has “adequate liquidity to fund … growth and operating needs.”

Shares in Countrywide gained 3.7 percent to $8.95 in early trading Tuesday on the New York Stock Exchange.

Venture capital firms invested $677m across 59 deals in Mainland China during the third quarter of 2007. This is a five per cent increase over the $645m (invested in 76 deals) during the same period last year, according to the China Quarterly Venture Capital Report released by Ernst & Young and Dow Jones VentureOne.

With $432m invested - nearly 64 per cent of all capital invested in the third quarter, the business/consumer/retail industry category set a new quarterly record. The category’s previous quarterly record of $242m was set in the second quarter of this year. Deals in this category were up to 28 from 17 in Q2 2007.

The bulk of investments in this category went to consumer/business services companies, which garnered a record $335m in 14 deals.

This brings the year-to-date investment total for the business/consumer/retail category to $710m, besting the annual record of $676m set in 2006.

‘What we are seeing in Mainland China is a continuation of a global trend for venture capital investors to back service-focused deals, reflecting the fast growth in China’s middle class, which increasingly consumes more services,’ said Bob Partridge, Ernst & Young’s China and Far East Venture Capital Advisory Group leader. ‘Moreover, venture capitalists are attracted to this area by the relatively low capital requirements of services companies, their ability to acquire customers rapidly, and the strong exit valuations they are receiving in both IPOs and M&A transactions.’

Mainland China’s healthcare industry accounted for four deals and $19m worth of venture capital. IT investments stood at $217m with 24 deals.

By ALLEN P. ROBERTS Jr.

Shares in Fremont General Corp. got a big boost Wednesday after the lender-turned savings and loan drew a sizable investment from a group led by an investor who saw the subprime slide coming.The fund, Harbinger Capital Partners, is a New York-based hedge fund that specializes in investing in distressed companies. It is run by former Barclays Capital junk-bond trader Philip Falcone, who earlier had bet against subprime-backed bonds.

Harbinger said in a filing Wednesday that it controls 7 million shares, or 9 percent, of Fremont as of the end of September.

“The risk/reward ratio with this move is pretty favorable given where the stock sits now,” Theodore Kovaleff, an analyst with New York-based Sky Capital LLC, said. “This is an opportunistic move on Falcone’s part.”

Shares in the Santa Monica-based company have plunged more than 70 percent this year – started by the subprime slide and made worse after U.S. regulators told the company to stop taking new loan applications due to improper mortgage-lending practices.

The plunge continued after Texas billionaire and former Chief Executive of Golden State Bancorp., Gerald Ford, reneged last month on a proposed rescue plan for Fremont, which was announced in May. Ford has a respected reputation in the banking industry for resuscitating troubled banks.

Last year Fremont was the fifth-largest subprime lender in the nation and ran a budding commercial lending arm. It has since exited both industries and said it was going to focus on its retail banking business – which runs 22 retail locations in the state.

Shares in Fremont surged 17 percent in afternoon trading to $4.38 Wednesday.

By ALLEN P. ROBERTS Jr.

Shares in Fremont General Corp. plummeted nearly 20 percent Wednesday after billionaire banker Gerald Ford reneged on a rescue plan for the troubled lender announced earlier this year.The Texas-based banker and former chief executive of Golden State Bancorp told the Santa Monica-based lender that he was “not prepared to consummate” the $80 million investment under terms the sides agreed to back in May, Fremont said in a statement Wednesday.

Fremont said it does “not necessarily agree with the factual positions” taken by Ford and is in talks with him about revising the terms. Fremont also said it can offer “no assurances” that a new deal will be reached.

The initial agreement between Fremont and Ford came after Fremont exited the residential lending business following an order from the Federal Deposit Insurance Corp. in March that mandated the company stop making home loans to unqualified borrowers.

Shares in Fremont soared after the agreement was announced in May, fueled by rumors that Ford was going to take the helm of the company. Fremont fanned the rumors when it later sold its commercial lending business to iStar Financial Inc. for $1.9 billion in a move to pay debt and to focus on expanding its retail banking business with 22 branches in the state.

Shares in Fremont tumbled 19.7 percent, or $1.01, to $4.12 in afternoon trading Wednesday on the New York Stock Exchange. Shares have lost 69 percent since the deal with Ford was announced at the end of May.

Signs repeated attempts to cool economy have had little effect

The Associated Press

Updated: 4:50 a.m. PT Sept 14, 2007

BEIJING - China raised interest rates Friday for the fifth time this year amid signs that repeated attempts to cool the sizzling economy so far have had little effect.

The interest rate on a one-year loan will rise by 0.27 percent, to 7.29 percent, as of Saturday, the Central Bank said. Rates paid on bank deposits also will rise by a similar margin, to 3.87 percent.

A rate hike was widely expected after the government said this week that inflation rose to an 11-year high of 6.5 percent in August, driven by a surge in politically sensitive food prices.

“China is ratcheting up the pace of its monetary tightening,” Jing Ulrich, chairwoman of China equities for JP Morgan, said in a report to clients.

“We expect at least one more rate increase in the next six months,” Ulrich said. “Inflation risks are on the rise in China, sparked by structural changes in the demand-supply situation for foodstuffs, as well as excess liquidity on the back of the widening trade surplus.”

Chinese leaders want to maintain high growth to reduce poverty but worry that the current boom, fueled by exports and investment, could push inflation to dangerous levels or ignite a financial crisis.

The economy has powered ahead despite repeated rate hikes, investment curbs and measures to shrink credit, as well as global worries about the U.S. economy.

The economy grew by 11.9 percent in the last quarter, and the World Bank this week raised its forecast for the full year’s expansion by almost a full percentage point to 11.3 percent.

Also Friday, the government said spending on factories, real estate and other urban assets in the first eight months of the year rose 26.7 percent from the same period last year.

“This round of macroeconomic controls has continued for over four years. The relevant agencies have introduced many policy measures. But the effects haven’t been obvious,” the main Communist Party newspaper People’s Daily said Friday.

The last rate increase was Aug. 22. The communist government also has tried to shrink lending by repeatedly raising the amount of money banks must set aside in reserves.

But economists question whether such small increases in interest rates will have any impact. Many Chinese companies finance investments out of revenues rather than with bank loans, so interest rate changes have no direct effect on them.

The reserve rate rises are more than offset by the torrent of new deposits pouring into banks as booming exports send cash flooding through the economy.

The country’s swollen trade surplus jumped nearly 33 percent in August to $24.97 billion, its second-highest monthly level on record, according to the government.

© 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Their branches may be far from Wall Street, but some regional banks may be exposed to the same kinds of issues that are causing headaches for the world’s largest financial institutions.

Hungry for growth in recent years, regional banks have pumped up their traditional investment portfolios by buying loans that have financed the leveraged-buyout boom. And like their larger brethren, some also have formed off-balance-sheet vehicles that issue commercial paper — short-term debt that many companies use as an alternative to bank loans.

Those strategies worked well when markets were flowing and credit quality remained unusually pristine. But that might not be the case for long amid concerns of a slowing economy and as investors shy away from markets that have suffered in the wake of the subprime-mortgage fallout.

Cleveland-based National City Corp., Zions Bancorp of Salt Lake City and Comerica Inc. of Dallas are among a number of banks that could see the value of their loans fall if the economy worsens, analysts say.

The potential exposure isn’t a serious threat to the overall financial health of these institutions for now. But the banks may well need to address these issues in coming months by boosting reserves — which cuts into earnings — cutting back lending or scaling back some other operations.

As a result, investors and analysts are scouring financial filings to determine regional-bank exposure to the market’s turmoil. In recent days, a number of banks have disclosed additional details about their exposure.

David Konrad of boutique financial-services firm Keefe, Bruyette & Woods says that a number of regional banks will have plenty to lose if the leveraged buyout boom continues to dry up. And if the companies being acquired run into trouble in a slowing economy, banks could be forced to write down those loans, which would cut into earnings.

Although large banks typically lead the massive financings that accompany leveraged buyouts, they often syndicate those loans to other investors, including regional banks. Those other buyers of the loans typically don’t receive any of the fees that big banks receive from putting the deals together, but share in the risk of default.

In a weakening credit environment, “it really makes it hard for a reasonable return if you are just a participant” in the loans, Mr. Konrad says.

Mr. Konrad recently examined the number of syndicated loans that banks were involved with last year, as well as the percentage of them in which they were only a participant — meaning they weren’t generating any additional fees from the deal. Among the banks he cites as being most at risk to a market downturn is National City, which last year was involved in 532 syndicated loans and was a participant-only in 63.9% of them.

Last week, National City provided some additional information for investors, saying that it is sitting on $4.4 billion of highly leveraged loans from 582 customers. Some 13% of the total came from private-equity deals, the company said.

Mr. Konrad also cited Comerica, which participated in 446 syndicated loans last year, of which 76.2% were on a participant-only basis.

In a speech to investors and analysts yesterday, Comerica Chairman Ralph Babb stressed that the bank regularly seeks to develop revenue-generating relationships from companies involved in syndicated deals, such as cash management, foreign exchange or bond issuance. “We typically allow up to two years to obtain these additional products and services or we exit the credit,” he said. “We don’t compromise our credit standards, return expectations or exposure guidelines in order to participate in a syndicated facility.”

Off-balance-sheet commercial-paper conduits have proved another source for investor angst in recent weeks. That is because banks often agree to provide emergency funds to the vehicles if they can’t resell their short-term notes when they come due. When that happens, banks are essentially forced to lend the conduits money. That can constrain the banks’ lending ability and prospects for growth.

Like the leveraged-loan exposure, the biggest conduit exposures and commitments to provide backstop funding — in terms of absolute dollars — are at the major, international money center banks, like Citigroup Inc., J.P. Morgan Chase & Co. and Bank of America Corp.

But a handful of regional banks have exposures that, although small in dollar terms, are sizable when measured as a percentage of total assets.

Zions, for example, is affiliated with a conduit that has about $3.44 billion in assets, according to materials handed out in advance of a presentation that Chairman and Chief Executive Harris Simmons is expected to give today at a Lehman Brothers financial-services conference in New York. That would be equal to about 7% of the bank’s assets, according to a recent research report by Bank of America. The Zions presentation added that the bank hasn’t had to provide funding through liquidity-backstop agreements to the conduit.

Among other banks with conduit exposure, Pittsburgh-based PNC Financial Services Group Inc. says it has liquidity commitment to conduits of $4.5 billion, which is equal to about 3.5% of assets. “Economically, it’s not something we are worried about,” said William Demchack, vice chairman at PNC. “These are good clients.”

So far, investors’ fears about banks having to bail out conduits on a large scale haven’t materialized.

Still, even smaller banks’ conduit exposure can be chunky when looked at as a percentage of assets. Colonial BancGroup Inc., Montgomery, Ala., has liquidity-backstop agreements for conduits that are less than $1 billion. But those commitments are equal to 4.1% of assets, according to Federal Reserve data.

In a statement, Colonial Chairman and Chief Executive Robert Lowder said: “Our liquidity position is strong, best it has been in years. Our partner in the commercial-paper vehicle isn’t experiencing any problems selling commercial paper on the assets.”

Countrywide to cut as many as 12,000 jobs

“Lender cites conditions in mortgage industry, expected drop-off in loans”

LOS ANGELES - Struggling mortgage lender Countrywide Financial Corp. will cut as many as 12,000 jobs in a bid to slash costs and cope with soaring foreclosures and defaults, the company said Friday.

The cuts, amounting to as much as 20 percent of its work force, are needed because the company expects new mortgages to fall about 25 percent in 2008 from this year’s levels, Countrywide said.

In a letter distributed to employees, Countrywide Chief Executive Angelo Mozilo called the current market cycle “the most severe in the contemporary history of our industry.”

“During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction,” Mozilo said in the letter.

In recent weeks, Countrywide borrowed $11.5 billion and sold a $2 billion stake to Bank of America so it could keep operating its retail banking and mortgage lending businesses.

The job cuts planned during the next three months are expected to center primarily on the company’s production divisions and its general and administrative support areas.

Actual reductions could be lower if interest rates and other market conditions improve, Countrywide said.

The latest cuts followed the elimination of about 900 positions earlier this week and 500 others last month.

The Calabasas-based company employed more than 61,000 people as of July 31, with about 34,000 working in loan production.

Earlier Friday, IndyMac Bancorp Inc. announced plans to eliminate as many as 1,000 jobs, citing difficulties from the mortgage lending and housing market downturns.

The Pasadena, Calif.-based mortgage lender and bank said it expects its loan production volume to decline by roughly half in the fourth quarter.

Countrywide said it intends to keep transferring its residential lending business into its Countrywide Bank unit as a way to strengthen its access to funding.

Almost all of its residential lending activity will be originated through the bank by the end of this month, the company said.

Countrywide has also shifted its loan production guidelines and now only makes loans that can be sold on the secondary market to government-backed enterprises such as Fannie Mae or Freddie Mac or that qualify under investment requirements for its banking unit.

Countrywide has been struggling as the housing slump led to a sharp rise in mortgage defaults and foreclosures, particularly among borrowers with subprime loans.

The mortgage fallout has left many lenders strapped for money to fund new loans.

Lenders that relied on selling loans on the secondary market to fund their operations have been particularly hard hit, with dozens going out of business or forced into bankruptcy this year.

That has resulted in tens of thousands of jobs being lost industrywide.

Like other lenders, Countrywide has tightened its credit guidelines and stopped selling some types of adjustable rate loans.

In the letter to employees, Mozilo outlined additional steps the company is taking to shore up its operations.

Among the changes, the company is consolidating its sales force and plans to keep targeting borrowers who now have adjustable rate subprime loans with offers to refinance with prime loans that carry more stable payments.

Mozilo noted some 75 percent of the company’s Full Spectrum Lending Division’s loans this year have been prime loans, many sold to borrowers who refinanced from subprime loans.

Despite the layoffs, Mozilo said in the letter that Countrywide’s consumer markets division would keep expanding its sales force.

Last month, the division hired nearly 1,000 sales people, a record for the unit, he said.

“As we carry out our plan, the company’s overarching focus is exactly where it has always been: to remain an industry leader in the U.S. residential lending business,” Mozilo said in a prepared statement issued to the media.

The company declined further comment.

Countrywide shares fell 27 cents to $18.21 on Friday. In after-market trading, shares rose to $18.48. Shares of IndyMac fell 25 cents, or 1.1 percent, to $21.41.