BUSINESS BRIEFS
Insurer of bonds bumped to 'junk'
Associated Press
NEW YORK — A major insurer of bonds was downgraded to "junk" status yesterday, a move that could potentially cost banks and local governments billions of dollars.
Credit rating agency Standard & Poor's slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade "CCC" from investment grade "A." S&P said ACA's capital cushion of $650 million is still $2.2 billion short of what it needs to cover potential losses.
S&P, in downgrading ACA and placing warnings on four other insurers, cited concerns about increasing claims from defaults on mortgage-backed bonds, and the risk that those claims could drain the bond insurers of needed capital. The agency also acknowledged its actions could change the way bond insurers do business from now on.
The downgrade led S&P to cut ratings on bonds issued to fund everything from schools to sewers and prisons to parks.
SALLIE MAE STOCK HITS 5-YEAR LOW
WASHINGTON — Just days into his second turn as CEO of Sallie Mae, Albert L. Lord couldn't find the right words to soothe Wall Street.
With frustrated analysts seeking more details about the struggling student lender's finances than Lord was willing — or able — to provide, a half-hour conference call was punctuated by awkward exchanges and an expletive. When it was over, Sallie's stock soon plummeted to a five-year low.
Lord sought to calm investors in the wake of Sallie Mae's failed $25 billion buyout and its previously reduced profit forecast, which the company attributed last week to rising loan defaults and a new law that slashed government subsidies for student loans. He also offered steps the company, formally known as SLM Corp., was considering, including cutting its dividend and using stock to acquire a smaller student lender.
But analysts voiced dissatisfaction with what they considered to be a lack of details from Lord, especially about the company's ability to package student loans into investments. The market for all kinds of risky debt has suffered as defaults rise on home loans, credit-card debt, auto loans and student loans.
BANKS LINE UP TO BORROW FROM FED
WASHINGTON — Cash-strapped banks took the Federal Reserve up on its offer of $20 billion in short-term loans to help them overcome credit problems, but the interest rate wasn't as low as some had hoped.
The central bank said yesterday that it had received bids for $61.6 billion worth of loans, more than three times the amount that was made available. The loans carried an interest rate of 4.65 percent, which is slightly less than the 4.75 percent the Fed charges banks on emergency loans through its "discount" window.
Banks have been reluctant to use the Fed's discount window because of the fear that investors will believe they are having trouble getting funds in a normal manner.
There were 93 bids for the loans, the Fed said. Each bank could submit up to two bids. The auction for the 28-day loans was conducted on Monday, and the results released yesterday.
BARCLAYS SUES BEAR STEARNS
NEW YORK — Barclays Bank PLC yesterday sued Bear Stearns & Cos., alleging the investment bank misrepresented the health of one of its failed hedge funds.
The suit, filed in federal court in New York, says Bear Stearns knew for months that certain assets in the Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund were worth "far less" than their stated values.
Barclays is seeking compensatory and punitive damages to be determined at trial.
The failure of two Bear hedge funds over the summer was one of the early warning signals of a collapse in the subprime mortgage market.
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