FedEx, Morgan Stanley, Fifth Third Bank Contribute To Market Gloom

FedEx reported a fourth quarter loss of $241 million on rising fuel costs and a write down of its Kinko's unit.  The company provided a bleak outlook for the rest of the year, lowering its estimates for first quarter and stating that earnings would be difficult to predict due to sagging demand coupled with volatile energy prices.  Somebody please call Bernake and let him know that when companies start mentioning volatile commodity prices as a reason for lack of predictability in earnings, he has not achieved his goal of "price stability" regardless of what the core rate of inflation indicates.  

Meanwhile, in banking news, Morgan Stanley reported a 57% decline in earnings on a 60% drop in revenues and Firth Third Bancorp announced it will raise $2 billion of convertible preferred shares and slash its dividend to raise its tier 1 capital ratio to 8.5%.  It is becoming apparent to the market that Goldman's earnings report yesterday was a aberration.  Somehow through savvy trading (and apparently an increase in risk according to the Financial Times Lex column today), Goldman has managed to avoid suffering major losses.  On the same day that Goldman proved its trading prowess through its earnings report, analysts from the firm released a research note claiming that banks may need to raise another $65 billion in capital.  Perhaps Goldman's good earnings proved to the market that those guys know what they are talking about, and bank stocks promptly took a beating.  The sell-off looks likely to continue today as investors become more and more aware that the worst is not over for US banks.  Delinquencies are rising, assets are deteriorating, and continued weakness in the housing sector shows no signs of abating.  The Fed's hands are tied now that inflation is rearing its ugly head.  I offer a small suggestion to the remaining banks who need to raise capital: you may want to get that offering circulating ASAP.  I have a sneaking suspicion that if you wait for the other $60 billion in capital to be raised before you get your act together, there may not be any left for you.

Citigroup in a Pickle, Again

In a desperate attempt to avoid being sued by its retail investors in April, Citigroup chose to bail Smith Barney investors out of Falcon, a hedge fund that lost 75% in three months. Institutional investors are now stepping up to the Citi bailout trough. Wachovia and Fifth Third have disclosed enormous losses from investments in Falcon. According to the Wall Street Journal, Fifth Third is suing the insurer and brokerage firm that arranged the investments. Fifth Third and Wachovia had invested in Falcon through their Bank Owned Life Insurance assets. For those unfamiliar with BOLI, this is life insurance that banks take out on their employees in order to collect money if and when their employees die. If you think it is morbid and creepy that banks hope to collect money when their employees die, rest assured that they have ulterior motives. Apparently, BOLI is some sort of a tax shelter.
Fifth Third and Wachovia had invested over $600 million and $1 billion in Falcon respectively and are now facing combined losses of approximately $1.2 billion. They weighed the embarrassment factor of disclosing the losses against the magnitude of $1.2 billion. Although it was probably a very close call, they chose to suck it up and go after the money. After all, Citigroup has already set a precedent by propping up other hedge funds that were failing and bailing out its retail investors in Falcon. It is true that institutional investors shouldn't be able to sue for refunds based on the "we didn't know what we were doing" defense, since it is their job to know. But it's worth a shot. Citi has already written down $40 billion in losses and raised $44 billion in new capital. What's another $1.2 billion, if investors are willing to continue to throw money at the bank? Note to Wachovia and Fifth Third: If you're looking for a better place to put your BOLI money, give me a call. I'm thinking of starting a hedge fund that comes with a guarantee that it won't lose more than 50% in the first three months.