Markets & Finance

Cuomo Probe Shakes Wall Street


The New York AG's widening mortgage investigation, along with GM's big writedown and a sinking dollar, sparked a stock rout Wednesday

New York Attorney General Andrew Cuomo may have been aiming his latest legal salvo squarely at big players in the mortgage biz, but it was the broader stock market that sustained collateral damage on Wednesday. Weakness in financial issues, sparked by sharp declines in mortgage-funding giants Fannie Mae (FNM), Freddie Mac (FRE), and major lender Washington Mutual (WM), led a big stock sell-off on Wall Street Wednesday, with the S&P 500 index falling nearly 3%.

On Wednesday, the Dow Jones industrial average dropped 360.92 points, or 2.64%, to 13,300.02. The broader S&P 500 index plunged 44.65 points, or 2.94%, to 1,475.62. The tech-heavy Nasdaq composite index fell 76.42 points, or 2.71%, to 2,748.76.

Activity in the broader market was markedly negative, with 30 shares declining in price for every 3 that advanced on the NYSE. Nasdaq breadth was 20-6 negative.

It wasn't as if the news that Cuomo's office had subpoenaed Fannie and Freddie as part of his office's ongoing investigation into the mortgage industry, which hit around midsession, spoiled a lovely day on the street. Financial issues were already down on worries about derivatives writedowns by major financial institutions. An enormous loss at General Motors (GM) also gave investors pause. Oil prices continued to hover just below the $100 per barrel mark.

Also on the laundry list of market misery: The U.S. dollar fell in value vs. other major currencies on indications China might diversify its $1.43 trillion foreign-currency reserves away from the greenback, though officials later backpedaled on the idea. The greenback recovered from record lows amid speculation the Fed might be forced to cut interest rates again to bolster the economy, according to Standard & Poor's MarketScope.

Given the barrage of bad news, stocks seemed to be holding their own, with modest losses for the major indexes. But a midday announcement from Cuomo's office seemed to unhinge the market Wednesday.

Cuomo announced that his office had subpoenaed Fannie and Freddie for information on all mortgages they had purchased from WaMu, as part of an ongoing probe into U.S. mortgage loans. At issue is whether possibly inflated home appraisals have overstated the value of mortgages purchased from WaMu by the two mortgage agencies.

Cuomo said he has concerns about mortgage loans that WaMu had sold to Fannie and Freddie. The two government-sponsored enterprises have agreed to a demand by Cuomo that they retain an independent examiner to conduct a review of all WaMu appraisals and mortgages purchased by the companies.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," said Cuomo in a statement. Cuomo said the AG office's investigation into the mortgage industry has found that WaMu improperly pressured appraisers to provide inflated values on homes that best served the lender's interest.

"Knowing this, Fannie Mae and Freddie Mac cannot afford to continue buying Washington Mutual mortgages unless they are sure these loans are based on reliable and independent appraisals." he said.

"In order to fulfill their duty to consumers and investors, Fannie Mae and Freddie Mac must ensure that Washington Mutual's mortgages have not been corrupted by inflated appraisals," said Cuomo in a statement. Cuomo said the AG office's investigation into the mortgage industry has found that WaMu improperly pressured appraisers to provide inflated values on homes that best served the lender's interest.

Cuomo said he uncovered a "pattern of collusion" between lenders and appraisers and he is targeting banks beyond Seattle-based WM. Last week, his office filed suit against First American Corp. (FAF) and its mortgage appraisal subsidiary eAppraiseIt, for colluding with WaMu to inflate the appraisal values of homes.

WaMu shares fell a whopping 17% Wednesday, while Fannie was down 10% and Freddie slumped 8.6%.

This was all too much for investors, who have been wringing their hands over multibillion dollar writedowns tied to derivatives losses by major investment banks and the prospect of a housing led economic slowdown. CNBC commentator James Cramer, never one to mince words, said on the network's afternoon broadcast that Cuomo was trying to shut down the mortgage business.

WaMu was already under pressure Wednesday after it said it expects industrywide mortgage originations to total $1.5 trillion in 2008, far lower than consensus forecast of $2 trillion. The company said it will maintain its dividend but will review its payout as the fourth quarter progresses.

Financials have been the tail wagging the Wall Street dog. "We believe the weakness in the overall market was a direct result of the major breakdown in the financial indexes," wrote S&P equity strategists in a note issued Wednesday evening.

Things didn't look good from a technical perspective, either. "Both the S&P 500 and the DJIA broke important chart support from their recent lows; we see further losses from here," wrote S&P technical analyst Chris Burba in an afternoon note.

December crude oil futures on NYMEX, which soared to a record $98.62 per barrel earlier Wednesday on a weaker dollar, fell 33 cents to $96.37 after a Dept. of Energy inventory report showing crude stocks fell 800,000 to 311,900 million barrels in the week ended Nov. 2 even though oil imports rose. Gold futures in New York reached a 28-year highs of $833.50 per ounce on a weaker dollar.

In economic news Wednesday, two reports showed the continued resilience of the U.S. economy. U.S. wholesales sales surged 1.3% in September from a revised 0.8% increase in August (from 0.4% previously). Inventories climbed 0.8% after a 0.7% jump the prior month (revised from 0.1%). The inventory-sales ratio declined to 1.10 from 1.11 over the prior four months.

U.S. productivity grew 4.9% in the third quarter, far more than the 3% economists were expecting, and up from 2.2% in the second quarter. Action Economics says the data, though good news for the Federal Reserve and allaying inflation fears, would "be relatively ignored today amid wild gyrations in the financial markets."

Among stocks in the news Wednesday, General Motors reported a loss of $2.80 per share, vs. earnings of 88 cents a year ago as revenue fell 10%. Its GMAC unit saw net income fall handily. GM's $38.6 billion non-cash charge related to deferred tax assets in the U.S., Canada and Germany. If the big charge is included, GM's loss was $68.85 per share.

Time Warner (TWX) reported earnings of 24 cents per share, vs. 33 cents a year ago, despite a 8.6% rise in revenue. The firm contines to expect 2007 earnings of $1.07 per share.

Dollar Thrifty Automotive Group (DTG) reported earnings of 48 cents per share, vs. 24 cents a year ago as revenue rose 7.7%. The firm cuts its 2007 earnings guidance due to slower-than-expected revenue growth, a delay in vehicle shipments and a write-down of obsolete software.

Harrah's Entertainment (HET) reported earnings of $1.16 per share, vs. 96 cents a year ago as revenues rose 13%.

Sara Lee Corp. (SLE) posted earnings of 28 cents per share, vs. 34 cents a year ago. Sales rose 8.3%. Due to the impact of fluctuating currencies, the company raised its fiscal 2008 earnings guidance.

Fluor Corp. (FLR) reported lower-than-expected earnings of $1.02 per share, vs. 31 cents a year ago. Revenue rose 22% at the engineering and construction firm.

European equity indexes ended lower Wednesday. In London, the FTSE 100 index lost 0.85% to 6,420.1. Germany's DAX index fell 0.35% to 7,799.62. In Paris, the CAC 40 index declined 0.46% to 5,683.22.

Asian markets were mixed. In Japan, the Nikkei 225 index was down 0.94% to 16,096.68. In Hong Kong, the Hang Seng index rose 0.92% to 29,708.93. The Shanghai composite index rose 1.18% to 5,601.78.

Treasury Market

Treasuries achieved modest gains amid growing risk aversion due to dollar weakness and losses in financial stocks on back of concerns over losses from securities tied to subprime mortgages. Investment capital came heavily out of equities into Treasuries.

The 10-year note rose 11/32 to 103-10/32 for a yield of 4.33%. The 30-year bond rose 05/32 to 105-14/32 for a yield of 4.67%.


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