bizzXceleration: Performance, Value and Profit

General

How Banks Lost So Much So Quickly Earlier this week, I asked a senior executive of one of the world’s most troubled investment banks when he had first grasped the meaning of the phrase “super-senior.” Sheepishly, he admitted that the moment was last August. It is a telling admission. As the credit turmoil rumbles on, the largest investment banks are continuing to make writedowns on an ever more eye-popping scale. One example is UBS, which has admitted it is now likely to have incurred more than $35bn losses from the credit crunch – in a matter of months. But as the zeros mount up, what is still baffling – at least to anyone who is not a banker – is how these institutions could lose quite so much quite so fast. In fact, key buyers for super-senior in recent years have been banks such as Merrill Lynch and UBS. Most notably, as these banks have pumped out CDOs, they have been selling the other tranches of debt to outside investors – while retaining the super-senior piece on their books. Sometimes they did this simply to keep the CDO machine running. But there was another, far more important, incentive: regulatory arbitrage. Most notably, because super-senior debt carried the AAA tag, banks were only required to post a wafer-thin sliver of capital against these assets – even though this debt has typically offered a spread of about 10 basis points over risk-free funds. Thus, banks such as UBS and Merrill have been cramming their books with tens of billions of super-senior debt – and then booking the spread as a seemingly never-ending source of easy profit.

Insight: Darker days lie ahead but no depression The Federal Reserve has belatedly recognised that investment banks, hedge funds and other non-deposit-taking financial institutions are as vital as banks to both the financial and “real” economies. The Fed is lending them massive amounts of capital through newly created facilities. It is right that central banks should be able to do so; NDFI’s create more “asset money” than banks but are much riskier institutions. What is wrong is that the Fed is doing so without having oversight or supervision of the borrowers. Investment bank, hedge fund and broker balance sheets are about half the size of the commercial banks in the US and about one-quarter the size in Europe. So the balance sheets of NDFIs are highly geared to asset price cycles. They act in a pro-cyclical manner, reinforcing bull and bear market cycles and through them economic cycles. So the effect on “asset money” is greater than that of deleveraging by banks, which lend for a wider range of purposes than NDFIs. There has been little deleveraging among NDFIs until recently, for three reasons.  The non-bank sector has the potential to inflict more damage on the system than banks because it has a much smaller capital cushion for a more volatile and risky balance sheet. We estimate that non-financial corporate debt will have to shrink by 11-12 per cent. This will generate a decline of 5 percentage points of real US GDP growth and push the US into recession. Europe will contract by 2 percentage points of real GDP growth. Globally, total credit losses of $1,400bn will cause a contraction in world GDP of  2.5 percentage points, or half the present rate of global growth. So the global economy will become a grey, dull world of semi-recession and sticky inflation that will last a long time — but it will not be a 1929-style depression.

How to ride the boom-panic cycle Soon the financial markets will return to normal. That's the current prayer on Wall Street. The Federal Reserve will flood the market with cash -- and lower interest rates -- on Sept. 18. The Japanese and European central banks will call off plans to raise interest rates. Banks will resume lending to buyout and hedge funds. Overseas investors will again buy bundles of mortgage- and loan-backed securities. And the Dow Jones Industrial Average ($INDU) will resume the kind of steady march that took the index to 14,000 in July from 12,000 in March. But what if the August panic isn't abnormal? What if a panic that threatens to shut down buying and selling is instead a part of the normal pattern of the financial markets?  The current panic is, by my count, the fourth of the past 10 years. On that evidence it's at least worth considering that "normal" now consists of a recurring pattern of market booms driven by

Finance Industry

Financial Giants Split on Whether the Worst is Over Is it time to jump back into beaten-down financial stocks--or is it still too early? Even the financial giants themselves can't agree. Goldman Sachs said Tuesday that it has selectively upgraded shares of financial services companies as well as the brokerage and asset manager sectors.  But the firm remains cautious on stocks of regional banks, mortgage and specialty finance companies and real estate investment trusts. Meanwhile, Merrill Lynch chief investment strategist Richard Bernstein warns against the dangers of "bottom-finishing" in financial stocks.

• Goldman's Hardest-to-Value `Level 3' Assets Increase 39% in First Quarter
• Goldman sells $500 mln of Chrysler debt at very deep discount

·         Merrill Expected to Write Down Up to $6.5 Billion Unlike earlier writedowns at Merrill and other Wall Street investment banks, the latest round of writedowns is not solely tied to subprime loans, but instead is linked to commercial real-estate debt exposure and other types of loans, these people said.

• Moelis Says Wall Street Investment Banks May Be Forced to Cut 35% of Jobs

Weekend Roundup: The First Step Is Admitting You’re Addicted to Cash Infusions a news roundup from the WSJ’s Deal Journal highlighting the amount of cash raising, fire sales and related activities across multiple firms and industries.

• CIT Plans $1 Billion Stock Offering Commercial lender CIT Group plans to offer $1 billion in common and convertible preferred shares, in a move that will seriously dilute current shareholders' holdings.
• National City May Be Followed by 23 Banks Seeking $12.4 Billion of Capital

How Long Will Bailouts Last? Firms such as E*Trade, Countrywide and Citigroup have all found ways to avoid calamity amid the credit crisis. But as more firms need capital the Fed may need to change some rules to open the way for hedge-fund and bank investments. The news is harrowing and unrelenting. Huge write-downs, hitting everyone from UBS to National City to tiny Colonial BancGroup. Before it's over, the IMF predicts a mind-boggling $945 billion of credit-related losses. But what if you looked at the crisis in a different way. That the mind-boggling part isn't so much the losses, but what's come after: That there has been enough capital to save dozens of banks and brokers from the brink of disaster. Would this breadth and speed been available in the last crisis? Absolutely not, say people involved in the NatCity deal. In these unsettling months of crisis, that should be some reason for hope. It shouldn't be blind hope. There's no guarantee that the capital will be there for the next round of infusions. In other words, sovereign-wealth funds were willing to plow money into brand names like Merrill Lynch and Citigroup. Private-equity firms are willing to inject capital into Washington Mutual, the nation's largest thrift, and into the 10th-largest bank, National City. A Keefe, Bruyette & Woods report identified at least 42 banks, brokers, REITs and other finance companies that it expects to search for more capital. Will there be enough capital for the 40th or 41st bank that needs capital?

Bankruptcies Rise as Credit Runs Out for Firms `That Should Have Failed' U.S. corporate bankruptcies are accelerating as the economic slowdown compounds the end of easy credit. The filing by Frontier Airlines Holdings Inc. April 11 followed those of three other airlines and companies in restaurants and retailing this year. Increased levels of distressed corporate debt signal that failures will accelerate, says Lynn LoPucki, a professor at the University of California, Los Angeles law school who studies bankruptcies. The amount of distressed corporate bonds jumped to $206 billion April 11 from $4.4 billion in March 2007, according to a Merrill Lynch & Co. index of bonds yielding at least 10 percentage points more than Treasuries. The share of leveraged loans considered distressed was 16 percent at the end of March, the highest since 1997, says Standard & Poor's, based on loans trading below 80 percent of their face value. The wave of defaults on subprime mortgages, loans made to the least creditworthy home buyers, is spilling into the lower tiers of corporate credit, said Anders Maxwell, managing director of New York-based investment bank Peter J. Solomon Co., speaking at a Feb. 28 conference on distressed investing in New York. ``Subprime was just a paradigm for the credit markets overall,'' Maxwell said. ``Now in the corporate market, the shoe is just beginning to fall, and we're poised for a major correction that has been coming for at least a decade.'' Bankruptcy filings have just begun to increase.

The Rise and Rise of Analyst Meredith Whitney: Michael Lewis Whitney has become, in a matter of months, a woman who moves markets. It all started back on Oct. 31, 2007, when she published her now-legendary report on Citigroup Inc. In it, she pointed out that the company's dividend now exceeded its profits -- the bank was handing money back to its investors faster than it was taking it in from its customers. The U.S.'s biggest bank was being managed to ensure only its bankruptcy. Citigroup would need either to raise capital, sell assets or slash its dividend -- possibly all three. Most recently, for instance, Whitney pointed out that Wall Street firms were now brutally exposed to the whims of the ratings companies: Every time Moody's Investors Service and Standard & Poor's downgrade subprime mortgages, the Wall Street banks that own them are required to reserve more capital against the securities -- which both raises their cost of capital and dilutes the value of their existing shares. Her point about the ratings companies is one example; another is her argument that Wall Street firms will drift to their tangible book value -- or what you'd get for them if you sold them off, position by position. Several (Citigroup is still the prime example) still have huge amounts of goodwill built into their share price. Goodwill, Whitney argues, will vanish. If you want to know the value of Citigroup, or any other big Wall Street firm, estimate what you'd get if you liquidated its assets. Citigroup's tangible book value she estimates at $10 a share. (Which means it's still got some way to fall.)

A Way Charges Stay Off Bottom Line Outsize losses reported last week by Citigroup Inc. and Merrill Lynch & Co. could have been a lot worse except for a quirk in the way companies account for different types of securities. Citigroup took $15 billion in write-downs and credit charges, leading the big bank to report a first-quarter loss of $5.1 billion. But $2.3 billion in other write-downs didn't hit the company's income statement. The same was true at Merrill. The broker had $6.6 billion in write-downs, leading to a loss of $1.9 billion. But Merrill took at least $3.1 billion in other write-downs that didn't count toward its loss. So, where did those other charges go? Into a special bucket in shareholders' equity called "other comprehensive income." The beauty of this bucket is the charges land on the balance sheet, but don't dent the companies' bottom line. It all gets down to how a company classifies a security. A company can say it plans to hold a security until it matures, that it is available for sale or that it is being actively traded. Securities being held to maturity are held at their original cost and their value is written down only if they are deemed to be impaired. Securities that are traded are always marked to market, and gains or losses immediately hit profit. The available-for-sale category is a middle ground in which the value of the securities is written down or up depending on market prices, but the loss or gain ends up in the "other comprehensive income" bucket. It stays there until the change in value is considered more permanent. At that point, a company finally takes the losses out of the bucket, and they hit the bottom line. Graphic Link.

Goldman, Morgan Stanley Hit `Level 3' Jackpot: Jonathan Weil For months, we've seen a growing parade of executives and politicians complain that fair-value accounting rules are to blame for financial institutions' imploding balance sheets. Even the International Monetary Fund got in on the act in an April 8 report, suggesting the need for ``some latitude in the strict application of fair value accounting during stressful events.'' There has been no commensurate outrage about fuzzy mark-to- market accounting that lets companies post unrealized gains on illiquid balance-sheet items. Yet if it weren't for large non- cash profits on hard-to-value holdings, Goldman Sachs Group Inc. wouldn't have had much profit last quarter. Lehman Brothers Holdings Inc. would have had significantly less. And Morgan Stanley wouldn't have had any. You wouldn't have known those things from the earnings press releases the three investment banks issued in mid-March. Investors had to wait until a few weeks later to find out. That's when the banks filed their quarterly financial statements, including footnotes showing changes in their so-called Level 3 assets and liabilities. The rules allow such delays. What's amazing is that the banks' investors aren't demanding to get this information sooner.

New Threat: Loan Losses Until now, losses at many banks have come from multibillion-dollar write-downs on toxic debt. But analysts believe the costs of building bad-loan reserves could cause just as much pain -- and for a lot more banks. The next earnings nightmare for banks has begun. Until now, losses at many banks have come from multibillion dollar write-downs on toxic debt. But analysts believe the costs of building bad-loan reserves could cause just as much pain -- and for a lot more banks. Banks establish bad-loan reserves as a cushion against expected losses on defaulted loans. Additions to these reserves, called "provisions," get booked as an expense in a bank's income statement and reduce earnings. Now, as the economic downturn starts to bite, rising defaults are prompting banks to add larger sums to the reserves, a development that has hurt first-quarter earnings at some lenders. To be sure, investors have been expecting bank earnings to get whacked by bad-loan reserves. But, as Bank of America's first-quarter numbers show, that expense can cause a lot more pain than the market anticipates. And, if defaults continue to rise, banks may have to make large, earnings-depleting additions to their reserves for several quarters.

Finance Sectors

LBO Freeze Slashes First-Quarter Banking Fees to Securities Firms by 75% The freeze in leveraged buyouts is slashing fees for investment banks by more than 75 percent as Blackstone Group LP and Kohlberg Kravis Roberts & Co., the industry's two biggest firms, put takeover plans on hold. Private-equity companies paid $1 billion to securities firms in the U.S. and Europe during the first quarter, down from $4.3 billion a year earlier, data compiled by New York-based research firm Freeman & Co. and Thomson Financial show. Revenue from loan underwriting plunged more than 91 percent, and fees from advising on takeovers dropped 51 percent. The crisis in the debt markets that started with the collapse of the subprime mortgage market in the U.S. shows no sign of abating. No buyout firm has announced a deal worth more than $3.1 billion since borrowing costs started climbing last July, according to data compiled by Bloomberg. Banks are now in the process of clearing about $230 billion of loans that they committed to finance acquisitions, sapping their interest in funding new deals.

Bondholders Lucky to Get 10 Cents on a Dollar in Looming LBO Bankruptcies The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame. Rather than receiving the historical average recovery of 42 cents on the dollar in a default, owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents, according to New York-based Fitch Ratings. About 22 percent are likely to get 11 cents to 30 cents.

Restoration The kings of capitalism want their thrones back. SOVEREIGN-WEALTH funds did not do it. Joe Lewis, the billionaire investor who bet and lost on Bear Stearns, definitely did not do it. Will private-equity firms be any more successful at calling the end of the credit crunch? They seem ready to do so. The transactions highlight two things. One is the changed environment in which private-equity firms are operating. Frothy markets, public-to-private deals and easy lending terms have given way to distressed prices and lesser degrees of leverage: TPG is using $2 billion of its own cash to take a minority stake in WaMu, which will remain firmly listed. The other is that the industry still has lots of capital to put to work, no small matter in the current environment. Distressed debt is one of the areas taking up the slack left by shrinking volumes of splashy leveraged buy-outs. Buy-out firms have to bring more to the table than a keen eye for value, however. True, they can sometimes benefit from inside knowledge. It may even suit private-equity firms to buy the debt of companies that then default, in order to gain control of them cheaply. But picking the bottom of falling markets is something that investors can do for themselves without paying hefty fees. With financial engineering a fading memory, the real value of private equity lies in improving the performance of portfolio companies.

Hedge Funds Come Unstuck on Truth-Twisting, Lies: Matthew Lynn Has the hedge-fund industry been built on a series of lies? For the past decade, its explosive growth has been based on a simple claim: that skilled money managers, motivated by high performance fees, could outperform the market when it was going up -- and sidestep the trouble when it was going down. And yet the credit crunch has shown that to be a myth. Although a few hedge-fund managers have done brilliantly, far more have come unstuck. Now it looks as if the industry might be based on a more systematic falsehood. Two recent academic studies suggest that hedge funds have been routinely dishonest, or at least economical with the truth. If that's right, then it is worrying for alternative-asset managers. As the idea gets out that hedge funds can't deliver the kind of guaranteed returns they promised, a lot of money is heading for the door marked exit. There is nothing about those conclusions that will surprise anyone who has followed the hedge-fund industry. The deal was that in return for high fees, which in effect gave the managers a stake in the fund, investors would get above-average returns.Yet, it appears many funds have just been relying on a rising market and sitting back and collecting 20 percent -- the typical performance fee on a hedge fund -- of the profits. The conclusion? The promise on which the industry was built looks to be largely a false one.

New 'Best Practices' Urged for Giant Hedge Funds Two advisory groups assembled by the Bush administration proposed new "best practices" Tuesday for the hedge fund industry, designed to improve and clarify the operations of the giant pools of capital. The guidelines call on hedge fund managers to improve their operating procedures in such areas as disclosure, valuation of their assets, risk management and guarding against conflicts of interest. One set of the recommendations was prepared by hedge fund managers and the other was put together by investors who use the funds. Treasury Secretary Henry Paulson said the recommendations would send "a strong message that heightened vigilance is necessary and appropriate and that all stakeholders have an important role to play."

Bad loans paint grim landscape for regional banks -- Several of the nation's major regional banks, from the Deep South through the Midwest, said on Tuesday that plummeting housing prices and other financial strains on borrowers are forcing large loan write-offs and provisions for bad loans, undermining quarterly profits. They said that people are continuing to succumb to financial pressure as unemployment rises, and they are becoming unable or unwilling to pay off loans as they lose equity in their homes. They also said they expect the pain to continue through 2008. In one bright spot, the banks reported meaningful gains from Visa Inc. and the credit-card giant's recent initial public offering. Credit Problems Only Beginning for Regional Banks

• Ross Says U.S. Regional Banks to Be Next `Problem Area'  -- Billionaire investor Wilbur Ross talks with Bloomberg's Rebecca McLaughlinduane about the potential for losses at U.S. regional depositary banks. Ross, who made his fortune turning around distressed steel and textile companies, said April 16 he will seek $4 billion from investors to buy regional U.S. banks after the surge in U.S. subprime-mortgage defaults left many trading at bargain prices. He speaks at a conference in Abu Dhabi.

Smaller Banks Begin to Pay Price for Expansion Many smaller banks moved into unfamiliar markets or products during the boom. Now the slowing economy is exposing blunders, and regulators are bracing for a surge in bank failures. Similar troubles are echoing through small and midsize banks across the U.S. In a bid to expand during the recent boom, many set up operations in unfamiliar markets or started pitching new products. Others, aiming to stave off encroachment by huge U.S. financial institutions, boosted their lending by offering easy terms or lower rates. Now the slowing economy is exposing bad timing and blunders. Big U.S. banks have received the lion's share of attention since the crisis began, due to their exposure to housing-related woes. Some analysts and investors are betting that those larger banks have gone a long way toward cleaning up their books. But there's a growing sense that there's another shoe to drop: losses at smaller banks. Regional and local institutions mostly dodged the initial wave of troubles because many weren't exposed to the complex mortgage-backed securities that slammed the behemoths. As housing prices continue to erode and the economy weakens, they're taking their lumps now, too. Regulators are bracing for a surge in bank failures, especially among smaller lenders that often lack the diversification to absorb steep losses in one area. Those banks are also less appealing to the sovereign wealth funds and other big investors that have poured billions into larger banks.

From Bankers Ball to bankers bawl An unfunny thing happened on the way to the Bankers Ball, the Website "where investment bankers come to party." Everyone lost their job or came pretty close. Wall Street's bleak employment outlook has cooled the cockiness that marked the site's content. Out, are the colorful stories that poke fun at mostly male life deep in the trenches at an investment bank. In, are tips on how to spruce up a resume, network and make the adjustments necessary to live in Dubai or Hong Kong. The job cuts may be welcomed with glee by vengeful Main Street Americans who feel the financial industry is responsible for the credit crisis, the market's failings and the Memphis Tigers' inability to hit free throws. But most of the people losing their jobs are not the ones who were hauling in multi-million dollar pay packages. They are clerks, traders, analysts, back office workers, accountants, secretaries, assistants and poor performers. Though the pay ranges greatly, you can bet that the majority of these jobs paid in the high five figures, maybe low six figures. No one is suggesting that jobs don't have to go. Business is business, after all. So, if bankers want to stay on Wall Street in the post-Bear era, there is opportunity. There are fewer plum jobs, big paydays, guaranteed money and blue-chip names but there's work. Welcome to the downturn, kids. They may call it the Bankers Ball, but everyone else knows it as the dance of life.

Companies

UBS May Have No Second-Quarter Profit, Breakup to Take Years, Lehman Says UBS AG's 22 percent gain this month in Swiss trading may be unwarranted as profit estimates for the bank may disappoint and any breakup of the business would take as much as three years, Lehman Brothers Holdings Inc. said. Jon Peace and Chintan Joshi, London-based analysts at Lehman, cut their share-price estimate for Switzerland's largest bank to 36 francs from 40 francs and maintained their ``underweight'' recommendation. UBS declined 50 centimes, or 1.4 percent, to 35.14 francs by 9:10 a.m. in Zurich today. Net income in the second quarter ``could be close to zero due to a combination of any further writedowns, reversals of gains in own debt and investment bank restructuring charges,'' wrote the Lehman analysts in a note to investors dated today.

·         UBS's Mea Culpa Supports Case for Bank's Breakup: Matthew Lynn Investment banks are known for their extravagant pay packages and big skyscrapers. But contrition and self-flagellation? They aren't usually on the menu. That's what makes the mea culpa published this week by UBS AG so extraordinary. In 50 grim pages, the Zurich-based bank lays bare the managerial myopia and mismanagement that caused the company to write down $38 billion in subprime-related holdings. UBS is to be commended for its honesty. The trouble is, the bank has just signed its own death warrant. In effect, UBS has conceded the case pressed by former President Luqman Arnold for a management overhaul and a breakup of the wealth-management and investment-banking units. After all, once you admit it was the combination of those businesses that created the crisis, it will be hard to keep them together. UBS's report, a summary of the review submitted to Switzerland's federal banking commission, will be studied in business schools for years as a study on how not to run a bank. The management ``did at no stage conduct a robust independent assessment of its overall subprime exposures,'' it says. The risk controls weren't tough enough to prevent the damage caused by subprime securities. Even worse, UBS managers paid staff in such a way that it encouraged excessive risk-taking by bankers when they weren't really doing anything clever at all.

Wealth Mismanagement, and How UBS Went Wrong HOW did UBS, a Swiss bank whose core business is the staid one of wealth management, manage to lose $38 billion betting on American mortgage-backed assets, battering its core capital and share price in the process? On Monday the bank released a summary of an internal investigation into the causes of the write-downs that had been demanded by the Swiss Federal Banking Commission. The 400-page report is now being chewed over by the regulator. Rivals should read it too. The report gives three broad explanations for the bank’s woes. The investment-banking arm’s preoccupation with growth, the reliance of the control team on flawed measures of risk and the culture of the bank.

Confidence in Thain Turnaround Deteriorates as Merrill Bonds Show Distress While shareholders await first- quarter results from Merrill Lynch & Co. later this week, the bond market already has given new Chief Executive Officer John Thain a report card. And there isn't much to get excited about. Since he joined the world's third-largest securities firm Dec. 1, the relative value of Merrill's debt has deteriorated, showing a loss of confidence that Thain can make things better anytime soon. Prices for Merrill credit-default swaps, used to insure its bonds, climbed to 210 basis points from 131, indicating risk has increased. That price is almost as high as for Lehman Brothers Holdings Inc., which last month had to deny rumors that it faced a funding shortage. Thain, hired to rebuild New York-based Merrill after a record 2007 loss of $7.8 billion, spent his first four months overhauling risk-management practices and selling more than $12 billion of equity to bolster capital. That hasn't satisfied investors, who are focused on the risk of asset writedowns beyond the more than $20 billion already announced, a drop in investment-banking fees to the lowest level since 2003, and the departures of a dozen senior executives and traders. The company's shares have fallen 27 percent since Nov. 30. Merrill Lynch posts steep first-quarter loss on write-downs

Wachovia Corp., the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend and said it will raise about $7 billion in a share sale to replenish capital. Chief Executive Officer Kennedy Thompson said he was ``deeply disappointed'' as Wachovia posted its first quarterly loss since 2001. The company's market value has now dropped by half after the ill-timed $24.6 billion takeover of Golden West Financial Corp. in 2006 at the peak of the housing boom, and the bank said today the trough may not come until next year. ``They obviously didn't take a close enough look at Golden West,'' said Andrew Seibert, a portfolio manager at Nextier Wealth Management in Pittsburgh, which oversees $400 million in assets. The lender's adjustable-rate mortgages, which let borrowers skip payments and add the unpaid interest on to the principal, were ``a formula for disaster by anyone's standard.''  Profit at the general bank, which includes retail, small business and commercial customers, fell 17 percent to $1.2 billion. Wachovia set aside $422 million more for credit losses because of ``rapid deterioration'' in consumer real estate and auto loans, especially in California and Florida, where prices are falling and foreclosures are increasing. Those factors, along with ``unprecedented consumer behavior,'' prompted Wachovia to increase its assumptions about how many of its option-ARM home loans will go bad. The corporate and investment bank lost $77 million, the second consecutive deficit after a $431 million loss in last year's fourth quarter. The unit earned $550 million a year earlier. Wachovia cited $1.6 billion in writedowns of securities that included subprime and consumer home loans, commercial mortgages, consumer mortgages and leveraged buyouts. Revenue at the unit declined 54 percent from the year-earlier period. Wachovia's subprime nightmare

·         Wachovia shows credit crunch isn't over Wachovia's dour numbers should end any fantasies that the credit crunch is almost over. The Charlotte, N.C., bank delivered a big dose of bad news to investors Monday. Wachovia (WB, Fortune 500) swung to a surprise first-quarter loss and set plans to raise $7 billion in capital by selling common and preferred stock. Wachovia also cut its quarterly dividend by more than 40%, just two months after executives made a point of saying the payout was safe. But most jarring was Wachovia's decision to boost its reserves for future loan losses by billions of dollars. Just as another big mortgage lender, Washington Mutual (WM, Fortune 500), did last week, Wachovia is finally confronting the steep price it will have to pay for the excesses of the housing boom. Expect other big banks to do the same in coming weeks.

National City Drops After Slashing Dividend, Selling Stake at 40% Discount -- National City Corp., Ohio's biggest bank and subprime lender, slumped in New York trading after it slashed the dividend and agreed to sell a $7 billion stake to a group of investors led by Corsair Capital LLC at a 40 percent discount to last week's closing price. National City, led by Chief Executive Officer Peter Raskind, posted three consecutive quarterly losses as homebuyers struggle to repay loans. About one-third of the bank's branches are in Ohio and Michigan, and the lender pushed deeper into Florida with two acquisitions announced in 2006. All three states had foreclosure rates among the 10 worst in the U.S. last month, data compiled by research firm RealtyTrac Inc. show.

Saving Societe Generale The inside story of how 31-year-old trader Jérôme Kerviel nearly destroyed French giant Société Générale, bank CEO Daniel Bouton's dramatic rescue, and the surprising aftermath of the affair. The world soon will know exactly how - and perhaps why - Kerviel took risks that nearly destroyed 144-year-old Société Générale. Prosecutors expect to conclude their investigation into what happened at the bank by summer's end, and Kerviel should go to trial next year. His popularity may wane as the process drags on- the public is fickle, after all- but his place in history is secure: His name, along with those of Barings rogue Nick Leeson and Kidder Peabody's Joe Jett, will without doubt surface next time a trading scandal erupts. Less certain is Bouton's legacy. Despite the beating he has taken in the French press, Bouton is as confident as ever. The bank is doing "just fine," he told the French Parliament's finance committee this month. "There has been no loss of confidence with the hundreds of financial operators we work with."

Credit Suisse May Post First Quarterly Loss in Five Years After Writedowns

Jamie Dimon's shopping list Buying Bear Stearns is apparently not enough to sate JPMorgan Chase CEO Jamie Dimon's appetite for beaten down financials. Apparently, Dimon also approached struggling savings and loan Washington Mutual (WM, Fortune 500) about a takeover as well. But WaMu spurned Dimon, according to a story in the Wall Street Journal. Instead, WaMu accepted a $7 billion loan investment from private equity firm TPG. So what's next for JPMorgan Chase (JPM, Fortune 500) now that WaMu has said, "Thanks, but no thanks?" Dimon is probably going to target other banks whose stock prices have crumbled as a result of the mortgage meltdown and credit crunch.