Subprime hits another German bank

Owners of SachsenLB hope to sell the bank quickly after suffering losses from U.S. mortgage crisis.

FRANKFURT (Reuters) -- The owners of stricken state lender SachsenLB aim to sell the German bank quickly after its near collapse under heavy losses from U.S. subprime mortgages and other risky debt, sources familiar with the matter said.

Last week a group of state banks said they would rescue SachsenLB, the second German casualty, after the subprime mortgage crisis led to difficulties in world credit markets.

In return for a 17 billion euro ($23.1 billion) credit line to keep SachsenLB afloat, its owners - the eastern state of Saxony and local community savings banks - were forced into agreeing to its sale.

Subprime on the Rhine

At least four regional state lenders, or Landesbanks, are interested - WestLB, LBBW, NordLB and BayernLB, one source familiar with the matter said on Friday.

SachsenLB's owners will decide on a buyer over the weekend, he said, adding that Stuttgart-based LBBW was the favorite. A second source said LBBW, Germany's biggest Landesbank, was primed to buy as long as the risks were ring-fenced.

The sale is a milestone in Germany, where few state-owned banks are ever put up for auction. It also is an indication that the subprime mortgage crisis may ultimately loosen the German government's dominance of the country's banking industry.

Landesbanks such as SachsenLB were traditionally an arm of local government used to influence economic development. Their owners are reluctant sellers, fearing a loss of this influence.

But the Landesbanks have been among the hardest hit by the subprime crisis. Many had entered this risky territory in a bid to shore up profits after much of the support they had received from government was outlawed by the European Union.

Battered image

Germany has taken the brunt of the European fallout so far from problems stemming from subprime home loans as two of the country's banks have almost collapsed, requiring high-profile industry bailouts.

The lifeline to SachsenLB came hot on the heels of the near collapse of small-company lender IKB. It was also saved by a group of banks including state-owned lender KfW, its biggest shareholder.

Earlier on Friday, another Landesbank - BayernLB - acknowledged it too had invested in subprime U.S. home loans but did not say how much it had tied up in the risky mortgages.

BayernLB's announcement further dents the image of German banks abroad.

Foreign banks had already been growing wary of lending to them as the casualty toll from subprime problems rises. Earlier this week, the head of state bank WestLB said the country's banks faced a crisis because foreign banks were reluctant to lend to them.

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Alexander Stuhlmann told journalists the sector was in a "not uncritical situation," adding that German banks had created the impression abroad that the whole sector had a problem by rescuing IKB.

Germany's central bank and government have repeatedly called for calm over the credit spasms unleashed by the uproar.

Government involvement in banking has made Europe's biggest economy one of the continent's most overbanked, squeezing profits and forcing lenders to look abroad for new ways to bolster profits. As a result, German groups invested heavily in packets of debt that included risky U.S. home loans, racking up profits as the market boomed.

But slowing house prices and higher interest rates sparked defaults on subprime mortgages - given to people with a weak credit record - and left those banks facing heavy losses

Bonds keep climbing on credit fears

Investors continue to pour into Treasurys in a flight to quality, while investors bet on fed funds rate cut.

The dollar retreated against the euro and the yen.

The 10-year note rose 11/32, or $3.44 on a $1,000 note, to yield 4.58 percent, down from 4.65 percent late Monday.

Panic eases, credit woes persist

The 30-year note gained 11/32 to yield 4.94 percent, down from 4.98 percent in the previous session. Bond prices and yields move in opposite directions.

Shorter-term debt continued to post big gains as the five-year gained 9/32 to yield 4.23 percent. The two-year note rose 5/32 to yield 4.01 percent.

Investors again sought shelter in Treasurys amid worries that more credit market troubles were forthcoming.

Last week, the Federal Reserve tried to allay those fears by cutting the discount rate 50 basis points. The move provided temporary support to the battered stock market, but investors continued to bet during Monday's session that more troubles were ahead.

But with evaporating credit conditions, much of Wall Street believes that the central bank will have to take additional action, including cutting the key federal funds rate, which directly impacts consumer loan rates. That rate remains at 5.25 percent.

"There is a huge liquidity crisis that has not gone away despite the Fed's efforts of last week," David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Conn., told Reuters late Monday.

In related news, the Chinese central bank raised interest rates in an effort to stabilize inflation expectations.

In currency trading, the dollar retreated versus the yen, trading at ¥114.60, down from ¥114.96 Monday, while the euro bought $1.3510, up from $1.3485.

Stocks soar into the weekend

Wall Street rallies, with the Dow spiking 230 points as Fed discount-rate cut soothes credit market worries. Yet investor fears persist.

NEW YORK (CNNMoney.com) -- Stocks surged Friday after the central bank cut its mostly symbolic discount rate, easing worries about the credit and mortgage markets that have roiled Wall Street for weeks.

The Dow Jones industrial average (up 233.30 to 13,079.08, Charts) jumped 233 points, or 1.8 percent, after soaring more than 300 points earlier in the session. The tech-fueled Nasdaq composite (up 53.96 to 2,505.03, Charts) index rose 2.2 percent. Both the Dow and Nasdaq snapped 6-session losing streaks.

The broader S&P 500 (up 34.67 to 1,445.94, Charts) index climbed nearly 2.5 percent, clawing back into positive territory for the year.

The gains were broad based, with 25 out of 30 Dow components rising. Banks, energy, steel, retailers, telecom and technology led the charge.

However, early-week losses left the markets lower for the week, with the Dow down 1.7 percent, the S&P 500 down nearly 1 percent and the Nasdaq down 1.9 percent.

Fed cuts discount rate

Stocks got pummeled in the first three days of the week and looked like they were heading for another battering Thursday. But investors staged an impressive comeback, with the Dow bouncing back from a 342-point loss to end that session down by just 15 points. That recovery extended to Friday's session, thanks to the move by the Fed.

Although it did not cut the more widely-watched fed funds rate, which affects consumer loans, the central bank did cut the discount rate, which impacts banks and other lenders. The Fed cut the discount rate by a half-percentage point to 5.75 percent, taking Wall Street by surprise and raising bets that it will cut the fed funds rate at the Sept. 18 policy meeting.

"A sense of calm has come over investors, supported by the actions of the Fed," said Art Hogan, chief market strategist at Jefferies & Co.

The move, while largely symbolic, was an attempt by the central bank to "promote the restoration of orderly conditions in financial markets," the Fed said in a statement.

It did the trick, at least on Friday, cooling investor jitters after a period of great uncertainty about how the subprime mortgage and credit market problems will hit the broader economy.

Although the problems in those markets remain, "just knowing that the Fed is ready to assist is reassuring," Hogan said.

Whether that translates to further stock gains remains to be seen.

"We'll have to wait and see how the market reacts to the next piece of negative news," Hogan said, referring to ongoing troubles with risky U.S. mortgages and the credit market.

Next week is light on market-moving economic news, highlighted by the July leading economic indicators report, due Monday, and July readings on durable goods orders and new home sales, expected Friday.

On the corporate front, earnings are due from home improvement retailer Lowe's (up $0.06 to $26.87, Charts, Fortune 500) on Monday and Staples (down $0.02 to $23.25, Charts, Fortune 500), Target (up $1.43 to $61.18, Charts, Fortune 500) and other retailers later in the week.

Investors will also be looking to see if the Fed infuses more money into the U.S. banking system, as it has been doing lately.

Senator pushes for ratings agency review

Senator Dodd of Connecticut urges examination of ratings agencies' high assessment of mortgage-related assets.

WASHINGTON (Reuters) -- U.S. Senate Banking Committee Chairman Christopher Dodd on Friday called for an examination of the credit rating agencies' role in valuing the subprime mortgage securities market.

Dodd, a Connecticut Democrat and presidential candidate, also urged federal regulators to raise the investment portfolio cap by 5 percent for mortgage finance companies Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500).

During a conference call with reporters, Dodd expressed "great concern" about how credit rating agencies assessed and rated packages of mortgage-related assets, which include collateralized debt obligations.

"Clearly there was other information that should have warranted something else," he said. "We need to have a thorough examination of that."

Banks, Wall Street firms lead stock charge

His remarks to reporters came one day after a European Commission official announced a review of the code used by the raters in a probe that could be critical of the industry.

EU Internal Market Commissioner Charlie McCreevy said the crisis in the subprime mortgage sector has highlighted apparent failings in the voluntary code now used by the raters.

The three largest U.S. raters are Moody's Corp.; Standard & Poor's, a unit of McGraw Hill Cos. Inc.; and Fitch, a unit of France's Fimalac SA.

Moody's (Charts) shares closed 78 cents higher at $49.98 and shares of McGraw-Hill (Charts, Fortune 500) finished up 29 cents at $49.14 on the New York Stock Exchange on Friday.

Barney Frank, chairman of the House of Representatives Financial Services Committee, has said he would hold a hearing this autumn to examine how credit ratings agencies contributed to a collapse of the subprime mortgage market.

In May, the U.S. Securities and Exchange Commission adopted new rules to foster competition in an industry dominated by three companies. The rules also cover record-keeping requirements and financial reporting standards.

Cliff Hyatt, a former SEC enforcement attorney now with law firm Pillsbury Winthrop Shaw Pittman, said credit rating agencies are historically difficult to examine. But, he said, that would not stop Congress from asking rating agencies tough questions about how they operate.

Dodd and other congressional Democrats have called on the Office of Federal Housing Enterprise Oversight (OFHEO), which regulates Fannie and Freddie, to temporarily lift the portfolio cap so the government-sponsored companies can buy more mortgages.

Frank said Friday the Senate should raise the limit on the size of loans that can be bought by Fannie and Freddie past its current level of $417,000 when lawmakers take up reform legislation.

"It now is clear we underestimated in the House bill how far we should raise the conforming loan limit, and the current crises in the mortgage market demonstrate we should raise it to a higher level," the Massachusetts Democrat said in a statement.

Fannie and Freddie are the nation's two largest sources of mortgage financing and have a combined $1.4 trillion investment portfolio of mortgages.

Fannie asked to lift the cap to allow for additional 10 percent investments to its portfolio, but OFHEO denied that request for the moment.

A higher cap is also opposed by the Treasury Department, the Federal Reserve, and President George W. Bush, who say their holdings are dangerously bloated.

Sen. Charles Schumer, a New York Democrat, said this week that he plans to introduce legislation to temporarily lift the cap between 5 percent and 10 percent if OFHEO fails to do so.

Dodd said the move was urgently needed in financial markets and could not wait for Congress to pass legislation.

"There's enough authority with existing law today ... to allow this portfolio cap to go up 5 percent," Dodd said. "The idea that we have to wait and do the reforms first before they can respond to this is not a legitimate answer to the question."

GM chief says sales are holding up

CEO Rick Wagoner is feeling positive about U.S. auto sales despite the tough market.

ROYAL OAK, Mich (Reuters) -- The top executive at General Motors Corp (Charts, Fortune 500) said on Friday that U.S. consumers appeared to be holding up well despite the recent credit crisis that roiled world markets and prompted the U.S. central bank to cut rates.

Rick Wagoner, the automaker's chief executive, also said that the crisis hadn't had any big impact on auto sales. He said pickup sales so far this month were doing "better" but that the overall market remains tough.

Wagoner said that ResCap, GMAC's home lending unit, was also weathering the current market volatility.

Asked about the company's negotiations with the United Auto Workers, Wagoner said it was too early to speculate whether they would reach a deal before the contract expires on Sept. 14.

Bulls charge on Fed move

Stocks remain sharply higher heading toward the closing bell after the Federal Reserve cuts discount rate, but credit fears persist.

NEW YORK (CNNMoney.com) -- Stocks posted significant gains Friday afternoon but remained off session highs, as the Federal Reserve's decision to cut a little watched interest rate helped soothe ongoing credit market worries.

The Dow Jones industrial average (up 170.14 to 13,015.92, Charts) gained about 180 points, or 1.4 percent, with an hour left in the session, after soaring more than 300 points at the open.

The broader S&P 500 (up 26.89 to 1,438.16, Charts) climbed nearly 1.9 percent while the tech-fueled Nasdaq composite index (up 42.68 to 2,493.75, Charts) rose about 1.8 percent.

"A sense of calm has come over investors, supported by the actions of the Fed," said Art Hogan, chief market strategist at Jefferies & Co.

Fed cuts discount rate

"Just knowing that the Fed is ready to assist is reassuring," Hogan said. Going forward, however, "we'll have to wait and see how that market reacts to the next piece of negative news," he added referring to ongoing troubles with risky U.S. mortgages and the credit market.

"Volatility is going to be the norm for a while."

All three major gauges soared out of the gate on news that the Fed cut the discount rate, which the central bank charges qualified lenders - mainly banks - for temporary loans, by half a point to 5.75 percent, taking Wall Street by surprise.

The move, while largely symbolic, was an attempt by the central bank to "promote the restoration of orderly conditions in financial markets," the Fed said in a statement.

While the Fed did not cut its more closely watched Fed funds rate, the action did soothe nervous investors who have been gripped by uncertainty about how hard the subprime mortgage and credit market problems would hit the broader economy.

The move provided a big lift to the financial sector. Shares of Wall Street banks Goldman Sachs (up $3.78 to $173.63, Charts, Fortune 500) and J.P. Morgan Chase (up $1.92 to $47.39, Charts, Fortune 500) climbed 2 percent and 4 percent respectively, while the AMEX Securities Broker/Dealer index (up $7.67 to $220.94, Charts) gained nearly 4 percent.

Even the troubled mortgage lender Countrywide Financial (up $2.07 to $21.02, Charts, Fortune 500) rebounded nicely from Thursday's losses on the news, climbing more than 10 percent.

Wall Street had been bracing for another bumpy session Friday, just a day after the Dow and the other major gauges fell enough during the session to be down 10 percent from the highs hit just a month earlier, a sign of a market correction.

But stocks made a stunning recovery. The Dow industrials, which had been down more than 300 points during the session, closed down just 15 points.

Bye-bye bull? 5 ways to know

On the corporate front, shares of organic grocer Wild Oats Markets (up $2.79 to $18.00, Charts) soared 18 percent after a bid by federal antitrust regulators to temporarily block its purchase by rival Whole Foods Market (up $2.90 to $44.07, Charts, Fortune 500) was rejected by a federal judge. But the FTC filed an appeal today on the decision.

Shares of oil majors including Exxon Mobil (up $3.25 to $83.92, Charts, Fortune 500), BP (up $1.28 to $64.28, Charts) and Chevron (up $2.59 to $83.98, Charts, Fortune 500) all rose more than 2 percent on higher crude prices, which were supported by the Fed's move and the growing strength of Hurricane Dean.

Light, sweet crude oil rose 76 cents to $71.76 a barrel on the New York Mercantile Exchange.

Early Friday morning, Midwest Express (up $0.83 to $15.53, Charts) accepted a raised $17-a-share offer from a group led by private equity firm TPG Capital and Northwest Airlines (up $0.01 to $15.99, Charts, Fortune 500), ending the hostile bid for the company by rival AirTran Holdings.

Dow component Hewlett-Packard (up $0.98 to $47.03, Charts, Fortune 500) reported better-than-expected earnings and issued a stronger-than-forecast outlook late Thursday, sending its shares about 2 percent higher.

Of the 30 stocks in the Dow, 23 rose and seven fell.

Market breadth was positive. Winners beat losers on the New York Stock Exchange by 6 to 1 on volume of 1.8 billion shares. Advancers topped decliners by 3 to 1 on volume of 2.1 billion shares.

In economic news, consumer sentiment fell more than expected in August, according to a survey published Friday by the University of Michigan.

Short-term Treasury prices and the 10-year note were modestly higher with the yield on the benchmark note at 4.68, up from 4.67 percent late Thursday. Bond prices and yields move in opposite directions.

Overseas, European markets finished sharply higher after the Fed discount rate cut. But Asian markets tumbled Friday, with Japan's Nikkei index skidding 5 percent, posting its worst day since the Sept. 11 attacks.

The dollar eased versus the euro and the yen.

COMEX gold for December jumped $8.80 to $666.80 an ounce

UBS warns about market turmoil

Swiss banks says ongoing turbulence could hurt its investment banking results in the second half.

ZURICH (Reuters) -- Swiss bank UBS, the world's largest wealth manager, beat forecasts with record second-quarter profits but warned that market turmoil was likely to hit its investment banking business in the second half of the year.

In an explicit warning that the upheaval in credit markets is likely to take a heavy toll, UBS said that if turbulent conditions prevailed throughout the third quarter, "UBS will probably see a very weak trading result in the investment bank."

UBS is the first big bank to comment on trading conditions since last week's havoc in financial markets forced central banks to intervene in the interbank lending market to restore order.

"The results are fine. It's all about the outlook. You have some earnings downgrades coming," said Kinner Lakhani at ABN Amro. "It shows the extent of the drag from the investment bank, another example of the tail wags the dog."

UBS drew a line under its hedge fund, Dillon Read Capital Management, which it said was closing in May after running up big losses. It said there would be no further costs after it took a pretax charge of 384 million francs in the second quarter.

The bank also said it had paid back 1.5 billion francs to outside investors following the closure.

Net second-quarter net group profit rose to 5.622 billion francs ($4.7 billion) from 3.147 billion in the second quarter of 2006 and 3.275 billion in the first quarter. It exceeded an average forecast of 4.751 billion by 11 analysts in a Reuters poll.

The result included a 1.926 billion franc windfall from the sale in June of UBS's 20.7 percent stake in Swiss private bank Julius Baer.

The results are the first to be unveiled since Peter Wuffli's abrupt departure and replacement as chief executive officer in early July by Marcel Rohner, who formerly ran the bank's wealth management business.

Rohner said he was comfortable with the level of the bank's exposure in leverage finance with a market share of about 4 percent. He also said trading in U.S. mortgage-backed securities market was satisfactory.

"In July we have experienced significant dislocation in the U.S. mortgage market, but we have had a satisfactory trading result," Rohner told a conference call with journalists.

The bank said its traditional strength in wealth and asset management would help see it through the second half, with weaker investment banking results "offset by predictable earnings from wealth and asset management."

Rohner said the second-quarter results were outstanding even with the windfall from the sale of Julius Baer stripped out.

"It is a record result even if we exclude the contribution from our sale of our stake in Julius Baer. We have 3.455 billion, which is the best ever quarterly performance."

Net new money in wealth management was 35.2 billion francs, ahead of the average forecast for 32.2 billion.

Profits were boosted by record net fee and commission income of 8.099 billion francs, a rise of 26 percent over the same quarter last year.

Analysts had expected UBS to have an exceptional quarter in cash equities and derivatives trading but had been nervously waiting to find out whether the bank would take more charges from Dillon Read.