Financial Sector Notes: Cash Desperation
Capital One has announced a 20% cut in their profit outlook for 2007 due to escalating loan losses. I suspect that their Auto Loan unit will show another loss for Q4 and that their credit card unit will start to show weakness as well. After all, this is a company that stepped up their marketing efforts towards subprime credit card borrowers in the midst of the credit crunch and mortgage crisis, it stands to reason that they’re going to see increased losses. Don’t be surprised if you see a couple of more announcements like this from COF.
Both Citibank and Merrill Lynch are looking for funds to cover their mortgage losses, rumors floating around that C is scheduled to receive $10 billion and ML $3-4 billion, both from foreign investors. How long is it before we see a major U.S. financial institution either bought out by a foreign concern or having sold a majority stake to one? These institutions are desperate for cash and if the loan loss situation continues to get worse, it’s just a matter of time before someone has to sell themselves to a foreign concern to stay alive.
Speaking of cash desperation it’s not just C and MER, as WAMU and E-Trade are both paying rather high rates for CDs and Money Market deposits (as is Citibank) and have been going back to ‘06/’05. At the moment you can get deposit accounts from these institutions that pay above Fed’s target rate: E-Trade pays 5.05% on a money market, WAMU 4.75% and Citibank 4.5%. In fact, their rates have barely changed from a year ago (E-trade’s is exactly the same) from when the Fed’s target rate was 5.25%, but the rates were at least lower than the Fed’s rate at that time.
Seeing as how these banks aren’t low cost “Direct” institutions like ING Direct, the high rates may have been a warning that the banks were in the hunt for cheap cash to ward off future or current problems.
Subscribe to Analytical Wealth
