Money Talks and...

Throughout this year, Wall Street's so-called experts have argued that the subprime problem was "contained," or have repeatedly called for a bottom, or have suggested that the Federal Reserve would wave its magic wand and somehow make America's myriad financial problems disappear.

Meanwhile, the shares of most financial firms have been sliding, both in absolute terms and relative to the overall market, as investors discounted all sorts of bad news to come. That was real money being wagered on what would happen next, unlike the rose-colored fantasies being spun by analysts, strategists, and pundits who haven't quite figured out how things work in the real world.

In "E*Trade, Bank of America Forecast Damage From Subprime Fallout," Bloomberg reports on developments that lend some credence to the idea that the flow of money out of (or into) a sector often provides a far better guide to the future than anything the paid prognisticators have to say.

E*Trade Financial Corp. slashed its profit forecast by 25 percent and Bank of America Corp. warned that market turmoil will have a ``meaningful impact'' on earnings, as fallout from the subprime-mortgage crisis spread further into the nation's financial system.

Bank of America's trading revenue has been hurt by ``unprecedented dislocations'' in leveraged finance, subprime mortgages and commercial paper, Chief Financial Officer Joe Price told investors at a conference in San Francisco. E*Trade, which last month defended the quality of its mortgage portfolio, now said it expects losses on those loans. The New York-based online brokerage also said it's exiting the wholesale mortgage business.

The forecasts suggest that banks and securities aren't yet benefiting from the recovery in stock prices and signs that access to credit may be easing. Investors will get a clearer picture of the damage when Wall Street's third-quarter earnings reports start tomorrow with Lehman Brothers Holdings Inc.

``Each week we're uncovering more and more data and stories that are framing for people how large the overall scope of this credit-market problem is,'' said Michael Barron, who manages about $1 billion as chief executive officer of Knott Capital Management in Exton, Pennsylvania.

Earlier today, National City Corp., Ohio's largest bank, said it expects a $160 million loss at its mortgage business.

Merrill Lynch & Co. said last week that ``challenging'' conditions in fixed-income markets required ``fair value adjustments'' to certain investments and financing commitments, and any losses will be reflected in third-quarter earnings. Today, the New York-based firm said its First Franklin subprime- mortgage unit is cutting jobs.

Lehman, Merrill's Wall Street rival, is eliminating more than 2,000 positions as it scales back mortgage lending.

Fed Cut Probability

The U.S. Federal Reserve in August cut the interest rate it charges banks to inject capital into credit markets. The Fed may also ease the nation's benchmark borrowing cost tomorrow. Options on fed funds futures show there's a greater-than 50 percent chance that the Fed will reduce its target rate for overnight loans between banks by a quarter-point to 5 percent.

``Even if the Fed cuts rates tomorrow, you have to question whether the actions are going to have the intended stimulative effect,'' Barron said. ``We've binged on debt from a personal balance sheet point of view and cutting interest rates isn't going to cure the problem.''

NovaStar Financial Inc., the real estate investment trust that ranked 19th in U.S. subprime lending last year, today scrapped plans to pay a dividend for 2006 and will forfeit its preferential tax status as a result. The company, which ran short of cash for the dividend earlier this year, said there isn't enough value left in its stock to proceed with a plan to make the payment in convertible preferred stock.

E*Trade's Losses

E*Trade increased its allowance for losses on mortgage and home-equity loans, reduced the value of its asset-backed securities and collateralized debt obligations and announced plans to exit the business of lending through independent brokers. The company now expects net income of $450 million to $500 million in 2007, down from $628.9 million last year.

Earnings per share will be $1.05 to $1.15, compared with a previous forecast of $1.53 to $1.67, E*Trade said.

Charlotte, North Carolina-based Bank of America, the second- largest U.S. bank after Citigroup Inc., didn't quantify the impact of credit-market turbulence on its third-quarter profit. The company is scheduled to report earnings next month.

Comments

[Peter of Lone Tree]

"Petroleos de Venezuela to Convert Accounts Away From Dollars"
Into what? Why Euros of course.
http://www.bloomberg.com/apps/news?pid=20601086&sid=aGBuWpZJ9cPI