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Bought shares of National City this morning at $2. Here is why.

National City has said it has no exposure to adjustable rate mortgages and exposure to residential market is substantially less than Wachovia (WB) and Washington Mutual (WM).

Q2 results (ending 6/30) were as follows:
* Net Loss of $1.8 Billion Driven By Actions to Increase Loss Reserves on Liquidating Loan Portfolios; Includes $1.1 Billion After-Tax Non-Cash Goodwill Charge Related to Previous Acquisitions — No Effect on Regulatory Capital

* Excluding Unusual and Non-Operating Items, Pre-Tax Pre-Provision Operating Earnings Were $610 Million, Up 19%

* Tier 1 Capital $7 Billion over Well Capitalized Minimum; 11.1 % Tier 1 Capital Ratio Highest of All Major U.S. Banks

* Net Charge-Offs of $740 Million, Predominantly in Liquidating Loan Portfolios Versus $1.6 Billion Provision for Loan Losses; Nonprime Delinquencies Down

* Solid Progress in Actively Managing Liquidating Loan Portfolios, Which are Isolated, Contained, and Performing in Line with Expectations

* Aggressively Re-Focusing on Core Businesses, Which Remain Profitable; Deposits Continue Solid Growth Trend

* Enhanced Leadership Team Intensely Focused on Managing Risk, Controlling Expenses and Improving Profitability

Chairman, President and CEO Peter E. Raskind commented at the time,“We believe we have clearly identified and segregated our portfolio of non-core assets and have much better visibility regarding loss estimates than we did earlier this year. As a result, we expect the provision for loan losses to decline in the second half of 2008. Our liquidating portfolios are isolated and contained, and are performing in line with expectations. More importantly, we are making progress in reducing the size of the liquidating portfolio and mitigating associated losses,” continued Raskind. “National City was among the first in our peer group to raise capital and build reserves. Our strong capital position not only enables us to fully address the ongoing challenges in the credit and housing markets, but also allows us to continue investing in and growing our core businesses, which continue to be profitable.”

Here is the management discussion on Mortgages from the 8-K:

Mortgage-backed securities are collateralized primarily by prime residential mortgage loans. At June 30, 2008, approximately $124 million of the mortgage-backed portfolio represented securities collateralized by Alt-A first mortgage loans. Asset-backed securities are primarily collateralized by nonmortgage assets, principally bank and insurance company subordinated debt. The asset-backed portfolio also included $39 million of securities collateralized by home equity loans and lines to nonprime borrowers.

Management values the securities portfolio using observable market prices, when available, or a third-party pricing service or market-maker to determine fair value based on trade activity for the same or similar securities. At June 30, 2008, the securities portfolio had net unrealized losses of $119 million, comprised of gross unrealized gains of $113 million and gross unrealized losses of $232 million. Gross unrealized losses increased from $79 million at December 31, 2007 due to declines in the value of mortgage and asset-backed securities. During the first half of 2008, the value of these types of securities decreased due to an increase in credit spreads and a lack of liquidity in the capital markets. Total unrealized losses at June 30, 2008 on mortgage- and asset-backed securities collateralized by Alt-A first mortgage loans and nonprime home equity loans were $15 million and $4 million, respectively. The remainder of the losses related primarily to investment grade securities secured by prime residential first mortgage loans.

Management evaluates the available-for-sale securities portfolio for possible other-than-temporary impairment on a quarterly basis. During this review, management considers the severity and duration of the unrealized losses as well as its intent and ability to hold the securities until recovery, taking into consideration balance sheet management strategies and its view of the market. Management assesses the nature of unrealized losses taking into consideration factors such as changes in the risk-free interest rate, general credit spread trends, market supply and demand, creditworthiness of the issuer, credit enhancements and the quality of the underlying collateral. Other-than-temporary impairment losses of $29 million and $45 million were recognized on certain asset-backed securities and nonprime mortgage-backed securities during the second quarter and first half of 2008, respectively. There were no other-than-temporary impairment losses recognized in the second quarter or first half of 2007.

Excluding these impaired securities, there have been no recent credit downgrades of any mortgage or asset-backed securities with a material unrealized loss in the portfolio by either Standard & Poors or Moody’s Investors Service. For certain securities, management also reviewed the performance of the underlying collateral and considered the securitization structure, but did not find any indication of any security-specific credit concerns. Management believes the primary reason for the unrealized losses on securities is general credit spread trends caused by market concern over the credit quality of residential mortgages, an imbalance between market supply and demand for these securities, and in some instances, an increase in the risk-free interest rate at June 30, 2008 compared to the risk-free rate at the security’s acquisition date. Management has the intent and ability to hold these securities to recovery. Therefore, management concluded that none of the remaining unrealized losses on the securities in the available-for-sale portfolio represented an other-than-temporary impairment as of June 30, 2008.

Regarding credit risk:

During the second quarter of 2008, core commercial and retail credit quality was stable and loss rates remained low. Commercial real estate, in particular loans to residential real estate developers, has been affected by the continued weakness in the housing markets. Residential real estate and home equity lines of credit have also been adversely affected by declining housing values and pressures on consumers from rising fuel and food prices. Management expects that the weakness in the housing markets will continue to adversely affect the credit quality of the residential real estate portfolio through 2008 and into 2009.

During 2007 and 2008, the Corporation curtailed certain mortgage and home equity products and exited broker and correspondent origination channels. These portfolios of broker-sourced nonprime mortgage loans, broker-sourced home equity lines and loans, construction loans to individuals, and indirect automobile, marine and recreational vehicle loans are liquidating. Management has chosen to limit future lending to direct relationships with consumers. Mortgage offerings now consist substantially of loans that are readily salable to government sponsored entities. Home equity products are now limited to loans and lines originated throughout the bank branch network, which have historically been of high credit quality.

I spoke to a National City spokesperson today and gleemed the following information:

My concern about NCC was that a Washington Mutual (WM) or Wachovia (WB) scenario would unfold in which depositors withdrew funds and caused capital ratios to plummet, then forcing a liquidation. While not giving exact numbers, we get those 10/21 I believe, she did say that “National City has a stable, diverse and growing deposit base”. In other words, a WaMu or Wachovia event at NCC just isn’t happening.

I was also told, regarding the $20 billion “liquidation portfolio” referred to in Forbes yesterday that is was a portfolio they would sell if an attractive offer came in but that 90% of the loans in it were performing (on time and full each month).

Regarding the Washington plan? It “could provide additional options for such disposition opportunities, however, we are not reliant upon a plan”. Among all large US banks NCC is tops with an 11.1% Tier 1 Capital Ratio. Better than Wells Fargo (WFC), JP Morgan (JPM), and Citigroup (C).

After the recent convertible conversion, NCC has 2.1 billion shares outstanding. What about earnings. NCC does not give guidance but if we got back before the housing boom sent earnings to about $2 billion a year, we can see from 1999 to 2002 (including the 2001 recession) NCC earned about $1.5 billion a year. That would give us roughly 75 cents a share at a PE of 12 and a price of $9 a share.

When? Who knows. It depends on what comes out of Washington, how it is implemented and how things shake out. It is clear though that NCC has ample earnings power once the present malaise is cleared. I think patience will be rewarded big here.

Most recent 8-K


Disclosure (“none” means no position):Long WFC, NCC, C, none
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Some interesting statements about Fannie Mae (FNM) and Freddie Mac (FRE) from late 2004 from Democrats and Republicans.

What did we do before we could catch these guys on YouTube

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“It was 9 years ago today, Sergeant Clinton told the banks to lend” ” that this all began..

From the NY Times, 9-30-1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation (FNM) is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

Under Fannie Mae’s pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 — a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990’s. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University’s Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae’s and Freddie Mac’s portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups. sergent

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Hat Tip to Trading Goddess for finding this

Disclosure (“none” means no position):none
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I have been nailing the “books for the times” lately.

Last week I reviewed “Once in Golconda” about the 1920’s and 1930’s on Wall St. If you haven’t read it, do it.

Now I have been given an advance copy of “Mr. Market Miscalculates” by James Grant.

Essentially it is a collection of essay’s written in Grant’s Interest Rate Observer.

About 1/4 of the way through it and already wishing I had subscribe to Grant’s years ago, as the current conditions were almost expected by the author. More when finished. You can pre-order the book here

Disclosure (“none” means no position):
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NY Times, SEC, Bloomberg, Blackberry

– Once again, serious flaws in a story

– Missed a host of red flags at Bear Sterns

– FDIC corrects “erroneous” story

– The latest model

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CNBC’s Charlie Gasparino this morning called the merger “like two ugly girls kissing”.

Press Release

The WSJ Reports

Citigroup Inc. agreed to acquire Wachovia Corp.’s banking operations in another deal orchestrated by the federal government — this time by the Federal Deposit Insurance Corporation and one in which the agency could be on the hook for loan losses.

The Federal Reserve and Treasury Department were also part of the effort, another sign of how proactive the government has been in preventing ailing financial firms from failing and instead pushing for stronger firms to acquire some assets of the weaker companies.

Citigroup also said it plans to sell $10 billion of common stock and slash its quarterly dividend in half to 16 cents a share to maintain a strong capital position, in the wake of its takeover of Wachovia’s banking operations.

They continued:

Over the past year, Citigroup has racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown. The company was a leader in creating and marketing some of the exotic securities that have been at the heart of the credit crunch. Its stock price has shriveled to less than $20, compared to more than $50 early last summer.

Citigroup is buying what the FDIC said is “the bulk of” Wachovia’s assets and liabilities, including five depository institutions, and assumes the company’s senior and subordinated debt. Not being sold are the A.G. Edwards brokerage division and Evergreen Investments operations.

The FDIC also has entered into a loss-sharing arrangement on a pre-identified pool of loans under which Citigroup will absorb up to $42 billion of losses on a $312 billion pool of loans, with the FDIC covering anything beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing the risk.

Citi, like JP Morgan (JPM), got a lot for almost nothing. Citi was desperate to expand its deposit footprint and this deal does it, very cheaply.

Now that we look at these recent deals, it does appear more evident every day that Ken Lewis and Bank of America (BAC) vastly overpaid for Merrill Lynch (MER). Assets are being had at “give away” prices currently and Lewis did pay a huge premium to the then Merrill price when he agree to a deal. He reasoned at the time the price was cheap and wanted to snap it up. But, the questions needs to be asked, snap it up from whom?

Merrill was not actively being pursued by other institutions. I think no one could argue Lewis did not grossly overpay for Countrywide (CFC) when he both made his first investment and finally when he purchased the rest of it, he could have bought it out of bankruptcy had he waited.

Lewis has the deposit base to absorb the deal without hurting shareholders badly, the problem it that the upside to both deals is limited at best.

Disclosure (“none” means no position):Long C, none
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Here is an article from 1932 from “Colliers”. You could simply change the date to 2008. Funny how things really do not change that much.

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