Bank jitters hit Wall Street

Stocks slipped Friday afternoon as the debate about the proposed $700 billion bank rescue plan wore on, and JPMorgan Chase bought Washington Mutual after it was seized by federal regulators in the biggest bank failure in U.S. history.

Credit markets remain stressed, with short-term borrowing costs rising as banks hoarded cash. Oil prices fell and gold prices rose. The dollar was mixed versus other major currencies.

The Dow Jones industrial average (INDU) lost 0.6% around 3 hours into the session, with a bounce in select bank shares after the recent battering helping to offset the broader weakness.

The Standard & Poor's 500 (SPX) index lost 1.3% and the Nasdaq composite (COMP) lost 1.6%.

Stocks rallied Thursday after lawmakers said they had essentially agreed on terms of the $700 billion bank bailout plan following days of heated debate.

But talks broke down along party lines at a White House meeting later in the day, and a late-night meeting of Treasury Secretary Henry Paulson and members of Congress proved unsuccessful.

Talks resumed Friday morning. President Bush spoke briefly after the markets opened, acknowledging the gridlock and also saying that Congress will move quickly on the plan. (Full story)

If the debate spills into next week, that's not a disaster for the markets, but the sooner something is established, the better, said Kenny Landgraf, principal and founder at Kenjol Capital Management.

"The quicker you get something done, the quicker the confidence is restored and the market needs it," Landgraf said.

President Bush, Paulson and Federal Reserve Chairman Ben Bernanke all have said that the struggling economy will be dealt an even bigger blow if a plan is not enacted.

The bank rescue plan would mark the biggest government intervention in the financial system since the Great Depression. It calls for the Treasury Department to buy, hold and eventually sell bad mortgage assets from banks in an effort to get them to lend again and loosen up the credit markets.

The plan also provides help to taxpayers, limits executive pay at participating firms and includes more government oversight. Democrats and House Republicans are reportedly at odds on how to fund the bailout, with some House Republicans arguing that Wall Street should fund the recovery through private capital. (Full story)

Businesses depend on the credit markets to function on a daily basis, and the absence of ready capital has threatened to stall the broader financial system.

Washington Mutual: The savings and loan giant is the latest company to collapse amid the housing market collapse and subprime mortgage crisis.

Federal regulators seized WaMu (WM, Fortune 500) Thursday night and sold its banking assets to JP Morgan Chase (JPM, Fortune 500) in a $1.9 billion deal. The deal also includes JP Morgan raising $10 billion in stock, $2 billion more than initially announced. (Full story)

The collapse was the biggest bank failure in history and marks the second storied Wall Street firm bought by JP Morgan this year, following Bear Stearns in March. The government also negotiated that deal.

Also Friday, the Federal Reserve expanded deal with the European Central Bank and the Swiss National Bank to make an additional $13 billion in funds available to banks overseas. (Full story).

GDP: At the same time as the bank crisis, reports continue to show that economic growth is slowing. The government revised second-quarter GDP growth lower, to an increase of 2.8% from an initial reading of 3.3% a month ago. However, second-quarter growth was still better than the previous two quarters. (Full story)

Bonds: Long-term treasury prices rose Friday, lowering the yield on the benchmark 10-year note to 3.81% from 3.85% late Thursday. Treasury prices and yields move in opposite directions.

The three-month Treasury bill, seen as the safest place to park money in the short term, rose to 0.87% from 0.75% late Thursday. Last week, the three-month bill fell to a 68-year low around 0% as panic gripped financial markets.

And the TED spread, a measure of financial market jitters, dipped to 2.90% after touching a 22-year high on Thursday of 3.37%. The TED spread is the difference between what the Treasury pays to borrow for three months and what banks charge each other. If banks are charging each other a big premium, that's a sign of fear.

Treasury prices have been rallying recently and yields tumbling as nervous stock market investors have looked for safer areas to move their cash.

(For a look at how tighter credit conditions have been impacting individuals, click here.)

Oil and gold: U.S. light crude oil for November delivery fell $3.12 to $104.90 a barrel on on the New York Mercantile Exchange.

Oil prices had plummeted over $55 after peaking at $147.27 a barrel on July 11, as investors bet that sluggish global growth will diminish oil demand. But prices have soared in the last few weeks as the financial crisis has intensified and investors sought to put their money into hard assets.

COMEX gold for December delivery rose $10.50 to $892.50 an ounce. Like oil, gold prices had also rallied during the biggest periods of unrest over the last few weeks

Other markets: In currency trading, the dollar rose against the euro and fell versus the yen.

Gas prices fell for the eighth day in a row, according to a nationwide survey of credit card activity.

In global trade, European and Asian markets both ended lower.

Stocks slump on bank woes

Stocks slumped Friday morning as bank bailout talks hit gridlock and JP Morgan bought Washington Mutual after it was seized by federal regulators in the biggest bank failure in history.

Credit markets remained jammed, with short-term borrowing costs rising as banks clung to cash amid the ongoing uncertainty.

The Dow Jones industrial average (INDU) lost about 140 points, or 1.3% in the early going. The Standard & Poor's 500 (SPX) index fell 1.7% and the Nasdaq composite (COMP) lost 2.2%.

This follows a strong Thursday session, as investors showed their enthusiasm over reports that Congressional leaders had reached a deal on a proposed $700 billion cash injection to buy bad mortgage-related investments from the failing finance sector.

But late Thursday, opposition to the deal by some Republicans emerged, and negotiations broke down. House Republicans have created a competing plan that would ease tax laws and allow the injection of more private capital, rather than taxpayer money, to bail out the finance industry. Bailout talks were set to resume Friday.

Financial services power JPMorgan Chase (JPM, Fortune 500) said late Thursday it would buy the failed bank WaMu after it was seized by the Federal Deposit Insurance Corp. JPMorgan said it would acquire all of WaMu's banking operations, including $307 billion in assets and $188 billion in deposits. The buyer said it would pay $1.9 billion to the FDIC and raise another $8 billion through the sale of stock.

In other financial news, the Federal Reserve Bank announced a plan to stabilize global markets by boosting its currency swap agreements with the European Central Bank and the Swiss National Bank by $13 billion.

In yet another sign of a sluggish economy, the Commerce Department said the economy grew at a 2.8% annual rate in the second quarter, which was lower than the previously reported 3.3% and the 3.4% that was expected by economists surveyed by Briefing.com.

Markets: European markets were down and Asian stocks ended lower. The dollar slipped against the euro, the British pound and the yen. As yet another sign of a stuttering economy, oil prices dropped $2.21 a barrel to $105.81.

Lending freeze at all-time high

Just when it looked like relief was on its way, lending seized up again Friday.

With the Treasury's $700 billion financial industry bailout proposal in jeopardy, and with Thursday night's collapse of an agreement and subsequent JPMorgan Chase takeover of Washington Mutual - the largest bank failure in the nation's history - credit markets have again stalled.

"Things have frozen over again," said Steve Van Order, chief fixed income strategist with Calvert Funds. "Banks are nervous about lending to each other, and the commercial paper market has come to a standstill."

Market gauges of lending showed higher prices for loans between banks. When lending tightens in this way, businesses and consumers have to pay more for loans, like mortgages, or can't get them at all.

For instance, one gauge that banks use to determine lending rates rose to an all-time high. The difference between the London interbank offered rate, or Libor, and the Overnight Index Swaps rose to an unprecedented 2.08%. The Libor-OIS "spread," or difference between the two rates, measures how much cash is available for lending between banks. The higher the spread, the lower availability of cash for lending.

Another lending measure rose to a 26-year high. The "TED spread" - the difference between three-month Libor, what banks pay to borrow money for three months, and the three-month Treasury borrowing rates - rose to 2.92% after hitting 3.1% earlier in the day, the widest margin for that measure since 1982. Just a month ago, the TED spread was at 1.11%.

With loads of troubled assets on their balance sheets, banks are hesitant to take on more loans if the risk of default is high. Furthermore, when banks need to write down those assets, they have less cash on hand to issue loans. That stops the financial system's gears from turning, in turn hurting customers who need a loan to finance a home, a car or tuition.

"The interbank lending markets are clogged up, because there is a freeze-up in the pipes that normally carry funding from central banks to banks to customers," Van Order explained.

How WaMu makes it worse: The announcement that JPMorgan Chase (JPM, Fortune 500) acquired the banking assets of Washington Mutual (WM, Fortune 500) late Thursday after the beleaguered thrift was seized by federal regulators sent yet another shock to already skittish lenders.

"JPMorgan is going to have to take a writedown and ultimately raise capital," Van Order said. "The bank's lines of credit are being drawn on...and the acquisition puts another strain on lending."

As JPMorgan tries to finance its purchase, it priced $10 billion in new capital Friday morning, building on the $8 billion that was included in the deal. But other banks without the access to capital that JPMorgan has are finding loans hard to come by.

"More financial corporations are finding it tight in the commercial paper market," Van Order noted. "Some corporations are using lines of credit with banks, and as those get tapped it uses up marginal capacity to make new loans."

The bailout's impact: With the credit markets all but stopped, the Bush administration hopes that the removal of risky assets from the financial institutions will restore the flow of credit. But as partisan politics put the enactment of a bill in doubt, banks worry that the wrench in the gears may not be removed anytime soon.

"If banks don't have the market to sell off illiquid assets, we're just going to be stuck in the same situation a year from now," Van Order said. "There's just no market for whole classes of asset- backed securities, and the government is the only one that is large enough to create a market."

With the government the only potential buyer debating whether or not to make the deal, financial institutions continued to invest in less risky assets like government bonds.

Treasurys: The unprecedented events of the past two weeks have had investors moving into and out of Treasurys quickly. U.S. government bonds are considered one of the safest places to keep assets and as anxiety in the marketplace increases, so does demand for Treasurys.

"The holdup of the rescue plan and of course the failure of WaMu is once again flocking investors toward safety," said Peter Cardillo, chief market economist at Avalon Partners.

The benchmark 10-year note rose 20/32 to 101-24/32 and its yield fell to 3.79% from 3.84% late Thursday. Treasury prices and yields move in opposite directions.

The 30-year bond jumped 1-2/32 to 102-17/32 and its yield dipped to 4.35% from 4.39%.

The 2-year note rose 9/32 to 99-30/32, while its yield fell to 2.03% from 2.16%.

The yield on the 3-month note fell to 0.70% from 0.74% as prices ticked higher. Yields on 3-month Treasurys have remained at very low levels as demand for the notes has increased amid the uncertainty in the financial markets.

The 3-month note is a popular asset for money markets looking for stability because it offers a safe place to park cash on a short-term basis.

On Thursday, bond prices were mixed as key lawmakers announced they had reached an agreement for the proposed $700 billion bailout of the financial system, which has been battered by the collapse of the housing market. Investors started tip-toeing out of the safe haven of government bonds; stocks rallied, sending the Dow Jones industrial average up 197 points.

But the bank failure and the breakdown in the bailout agreement sent investors running right back to the safe haven of Treasurys.

Looking for a lifeline: After days of negotiations in Congress, lawmakers said Thursday they were taking a revised bailout proposal to Treasury Secretary Henry Paulson.

But a meeting at the White House later on Thursday between President Bush, Congressional leaders and the presidential candidates failed to provide a conclusion, sending fresh anxiety to Wall Street that maybe the much-needed relief was not imminent.

"The financial markets are burning and the politicians are playing politics," said Cardillo. As the uncertainty mounts as to what form a bailout would eventually take, investors are returning to the perceived safety of government bonds, sending the prices of Treasurys higher.

As the situation in the financial sector continues to deteriorate, "people are trying to protect their assets and they are running into Treasurys," said Cardillo.

In order to pay for a costly rescue plan, the government would need to sell a lot more debt. On Thursday, the government auctioned $24 billion worth of 5-year notes. The Treasury received bids totaling nearly $46 billion, with a median yield of 3%.

Consumer Focus Seen Weighing On RIM Shares, Results

(Dow Jones)- Research in Motion Ltd.'s (RIMM) warning Thursday that the costs from moving into the consumer arena will weigh on profits for the foreseeable future again raises questions about the company's decision to diversify its Blackberry line.

RIM is aggressively expanding beyond the corporate user at a time when consumers are tightening their purse strings, businesses are shrinking and the rapidly growing smartphone market may be decelerating. To get recognized in an increasingly crowded consumer smartphone market, RIM will need to spend more to attract consumers, cutting into margins and profits.

The extra spending is meant to raise the profile of RIM, which carries less brand recognition with consumers than high-profile players such as Apple Inc. ( AAPL) or even Samsung Electronics Co. (005930.SE). In the meantime, RIM faces increasing threats to its core enterprise market.

"If someone is thinking RIM's future is bright, they haven't seen the worst yet," said Trip Chowdhry, an analyst at Global Equities Research. "If RIM is smart, they have to make sure they don't lose their business customers."

To be sure, many believe RIM's strategy to broaden its market opportunity is sound, noting - among other things - that RIM already has had success in the consumer market with its slimmer Pearl.

RIM late Thursday reported fiscal second-quarter earnings largely in line with expectations. More glaring, however, was the disappointing third-quarter forecast for earnings, and the warning that gross margins may be troubled through fiscal 2010, which begins in March.

RIM shares have set a new 52-week low Friday, now trading around $72, down 26% on the day. Other handset makers also were feeling the impact, given the recent sensitivity over the weakening market. Nokia Corp. (NOK) fell 3.3% to $19.57; Motorola Inc. (MOT) was off 4.7% to $7.50; Palm Inc. (PALM) declined 3.5% to $ 6.66; and Apple gave back 4.7% to $125.78.

Losing Focus

RIM's warning of lower margins and earnings and potential delays in its products - while talking about its consumer focus - sounded a lot like another troubled smartphone vendor: Palm.

Palm is credited as a pioneer in the smartphone category. But the company lost its innovative edge, and let upstarts such as RIM dominate the market for corporate users. In the middle of a turnaround now, Palm's prospects are still up in the air.

No one is comparing RIM directly with Palm - as RIM plans to launch at least three new handsets with wildly different form factors by the end of the year. But it faces the same risk of losing share in the core segment it dominates.

The company already faces threats in the corporate world. The latest iPhone can connect with company IT systems, making it easier to use at work. Microsoft Corp.'s Windows Mobile is also making strides in getting into more smartphones, including buzz-worthy devices such as the HTC Corp. (2498.TW) Touch Diamond.

"I'm sensing an inflection point," Chowdhry said, adding that the iPhone is slowly making a dent with corporate workers.

Unclear is the fallout from the collapse of several companies on Wall Street. Blackberrys are ubiquitous with analysts, investors, traders and executives. The loss of tens of thousands of jobs in Manhattan alone could significantly cut into its user base.

Instead of focusing on the consumer, the company is better off defending its core business, Chowdhry said.

Consumer Problems

A lot of analysts believe RIM will be able to repeat the success of the Pearl. Next up for the company is a clam-shell version and a touchscreen iPhone-killer.

In the midst of Friday's share decline, Todd Rosenbluth, an analyst at Standard & Poor's, upgraded the stock on a valuation call and the belief that people will continue to buy Blackberrys.

"We think the market is overreacting to what we see as still strong fundamentals," he said.

The share decline is more the case of expectations that were out of sync with reality, Rosenbluth said, noting that lowered expectations on Wall Street will help deter future swings in the stock.

Rosenbluth is among the most bullish analysts right now. Others are more skeptical. UBS analyst Maynard Um downgraded the stock, noting that there were few positive catalysts in the near term.

Analysts may still be underestimating the difficulties RIM faces with the consumer. The company will need to expend a lot of time and resources building its brand to compensate for the headstart that players such as Apple have. Even Google Inc. (GOOG), which unveiled its G1 Android phone on Tuesday, brings a cachet that will appeal to consumers.

With the economy tightening up, people will likely keep their current phones, which lengthens the product replacement cycle and hurts RIM.

Overseas - an area of growth to which supporters point - the company has even less of a presence. Fewer Blackberrys for work are found in the international markets, so it's virtually unknown next to the likes of Samsung or Sony Ericsson.

"The whole initiative to get into the consumer market is flawed and also a distraction," Chowdhry said.

Bush, Democrats Expect Bailout Deal

WASHINGTON -- Wrangling among the nation's top political leaders threw the Bush administration's $700 billion bailout plan into disarray late Thursday, but Friday morning President Bush and Democratic leaders in the Senate said they are confident a plan will pass.

Associated Press

President Bush on Friday morning said he is confident that a financial-crisis bailout package will pass.

In a short statement, President Bush cited disagreements on details of rescue plan but said everyone agrees action is needed now. Later, Democratic Sens. Harry Reid of Nevada and Christopher Dodd of Connecticut echoed the president's confidence that a plan will be reached.

Sen. Reid said there is no reason a deal can't be done before Monday, and Congress will stay in session until a deal is done. However, he said that White House officials must be more "realistic." Sen. Dodd outlined some "non-negotiable" aspects of any plan, including limits on executive compensation, taxpayer protections and oversight over the Treasury.

The Democratic leaders also were critical of Republican efforts to alter the plan, signaling out Republican presidential candidate Sen. John McCain as an obstructionist force. "The insertion of presidential politics has not been helpful," Sen. Reid said.

Despite a dramatic day of negotiations on Capitol Hill that seemed to promise a deal, leaders broke off talks Thursday night with no agreement and with plans to reconvene this morning, without House Republicans. It was the Republicans' surprise championing of a competing plan late Thursday that derailed a carefully crafted compromise previously taking shape.

Also raising the stakes: The demise of Washington Mutual Inc., the largest banking failure in U.S. history, sent a fresh message to Washington of the fragility of the financial system.

In a sign of the extraordinary tension, at one point in the afternoon Treasury Secretary Henry Paulson interrupted a small gathering of Democratic leaders at the White House with a plea for them not to say anything that might blow up the troubled deal, according to three people familiar with the matter. In doing so, the Treasury secretary got down on one knee, a gesture that one of these people described as a moment of levity in a rough day.

Earlier in the day, congressional leaders had hammered together the outline of a compromise that involved allotting the bailout money in installments. It was widely expected to result in a deal. However a pivotal afternoon meeting at the White House, attended by President George W. Bush, congressional leaders and the two presidential candidates, broke with no agreement.

One cause of the delay: opposition from House Republicans who have tried to fashion an alternative plan that, instead of relying heavily on taxpayer money, could let banks buy insurance for the troubled assets weighing down their books.

The snafu spawned a round of political finger-pointing, with most Democrats blaming Sen. McCain, whose decision to return to Washington and meet with congressional Republicans appears to have complicated days of negotiations.

Sen. McCain "goes to a meeting and all of a sudden, we lose all the Republicans who have been working with us for the last five days," said Rep. Ellen Tauscher, a California Democrat. "This has to be a bipartisan deal. Unfortunately Republicans walked off the field."

McCain aides argue there was no deal at hand because there wasn't enough support among Republicans to move an agreement through the Congress. Instead, aides cast Sen. McCain as working to put together an agreement that can pass. His aides said the Arizona senator wants the Treasury to have flexibility to make loans as well as buy assets.

Plowing Ahead

After the contentious White House meeting, Democrats reconvened a small, bipartisan group at 9 p.m. to try to plow ahead. As the evening wore on, some senators predicted a bill would pass over the weekend, possibly using a complex congressional procedure such as folding the bailout into an existing spending measure.

The meeting, attended by Mr. Paulson, lasted roughly an hour.

Democrats could decide to go ahead with their plan without Republicans. While this would ensure passage, it would essentially saddle Democrats with responsibility for a bailout package that has stirred up strong resistance among both Democrat and Republican voters -- with elections just weeks away.

Republican leadership aides said as few as 30 to 40 of the 199 House Republicans could end up supporting the Bush package.

If Democrats are forced to move forward on their own, the party's demands on the White House are sure to go up. Proposals that once seemed off the table -- such as a plan to give bankruptcy judges authority to adjust mortgage terms -- would likely gain new life. The prospects would also likely rise for Democratic proposals to stimulate the economy, such as new spending on roads and bridges and extended federal benefits for the unemployed.

Even a temporary hitch in the process of devising a rescue plan for the financial industry, could deal a fresh blow to the markets. The Dow Jones Industrial Average rose sharply on Thursday, partly due to expectations that a bailout deal was imminent.

After the late-afternoon meeting with President Bush broke up, White House spokeswoman Dana Perino said, "Members of the administration and the congressional leaders pledged to continue working together to finalize a bill that will address concerns and solve the problem as soon as possible."

UPDATE: KB Home 3Q Loss Widens As Orders, Deliveries Slump

KB Home (KBH) reported a larger-than-expected quarterly loss early Friday, as it held firm on pricing, fueling a stunning order decline and rise in cancellations as potential buyers walked away.

The third-quarter results are the latest in a recent string of grim statistics that show the sector's worst downward spiral in decades - one that has forced dozens of builders out of business - drags on.

Chief Executive Jeffrey Mezger was bleak: "Market fundamentals appear unlikely to improve significantly in the near-term" amid competition from increased foreclosures, bloated inventory and tighter requirements for mortgage rates, even for potential buyers with good credit.

"It's pretty clear that the home building market has undergone another leg down," said Morningstar analyst Eric Landry.

Shares of Los Angeles-based KB Home slipped about 3%, slightly below the Dow Jones US Home Construction Index's 3.13% fall.

For the quarter ended Aug. 31, the company, one of the nation's largest builders, reported a net loss of $144.7 million, or $1.87 a share, compared with a prior-year net loss of $35.6 million, or 46 cents. Analysts polled by Thomson Reuters expected a loss of $1.22 a share on $734.7 million in revenue.

Revenue actually dropped 55% to $681.6 million, while orders plummeted 66% - well above the 40% JP Morgan expected. New home deliveries slid 51%. "The contraction in KBH's operating metrics are staggering in our view," noted Wachovia's Carl Reichardt. "Q3 unit backlog is 79% lower than in Q305 while orders this quarter were 85% lower than those generated in Q305."

The cancellation rate - typically unit cancellations divided by gross orders - jumped to 51%, up from 27% in the second quarter. Until recently, some builders have seen cancellation rates improve slightly.

Mezger said the dramatic order decline "reflects the broader dynamics of the housing market" and its strategic response: cutting the amount of developments underway - its active community count was sliced by 38% - and changing offerings. It is at work on "new, value-engineered product with smaller, more affordable standard features" and a lower base price.

In California's Inland Empire, one of the nation's worst housing markets, KB Home has cut the size and prices of houses - by more than half - to make them competitive with resales and foreclosures, often bargain-priced to sell quickly. The change is working, Mezger said during the earnings conference call.

The company also reduced its use of sales incentives and price discounts as it reviews pricing strategies. Since the downturn began, builders have tried everything - free gourmet kitchens, paid closing costs and even six-figure discounts - to move inventory. KB Home has even offered price protection guarantees to reassure buyers afraid of buying a house only to see it fall in value.

Analysts were divided over the decision to hold prices.

"KB Home is in an enviable position where they can afford to do that," Landry said. "The liquidity is such, where they can say 'We don't need to fire sale homes anymore.'"

KB Home executives echoed that sentiment during the earnings conference call.

But there isn't a lot of differentiation in what public builders construct - with the exception of Toll Brothers Inc.' (TOL) luxury product - so buyers could easily score price discounts from nearby competitors.

Holding firm on prices kept charges down this quarter, but JP Morgan's Michael Rehaut thinks there's more pain to come.

"While we believe this was enough to prevent material impairment charges this quarter, given the highly negative commentary, we believe that KBH will be forced to reduce its prices over the next 2-3 quarters, which should trigger further material impairments," he noted.

Builders also face the loss of seller-funded down payment assistance, or DPA, which has been a key driver of recent sales. As part of this summer's housing bill, DPA ends at the end of the month. After that, as much as 15% of the buying base could be erased.

Some investors and analysts have pinned their hopes that the effects of a proposed $700 billion government bailout of the financial industry can stem home builders' pain. But industry watchers, including the National Association of Home Builders, point out it doesn't immediately address some of the builders' biggest problems: The difficulty for first-time buyers to come up with a down payment and the downward pressure foreclosure sales are putting on house and land values.

Friday, KB Home's Mezger said "difficult conditions have now been exacerbated by the recent, unprecedented turmoil in financial and credit markets," while noting "it is too early to assess" whether conditions will improve following government intervention.

KB Home is the second builder to report a loss this week. Lennar Corp. (LEN), the nation's second-largest builder, reported a narrower loss of 56 cents a share, compared with a prior-year net loss of $3.25 a share. Orders dropped 42%, while deliveries fell 49%.

Chief Executive Stuart Miller's comments mirrored the same issues KB Home reported: "While we expected the housing market to remain constrained throughout the third quarter, the weakness in the market actually accelerated as a result of increased foreclosures, weakened consumer confidence and tightened mortgage lending standards."

Meanwhile, August's new-home sales fell 11.5%, sliding to their lowest level in 17 years, the government said Thursday. The rate tumbled 35% in a year. And existing sales, a much bigger slice of the market, also slipped in August.

WaMu Seized by U.S., Assets Sold to JPMorgan in Record Failure

Washington Mutual Inc. was seized by government regulators and its branches and assets sold to JPMorgan Chase & Co. in the biggest U.S. bank failure in history.

WaMu customers withdrew $16.7 billion since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said yesterday. Branches are open today and depositors have full access to their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said.

The failure of WaMu, which has $188 billion in deposits, ratchets up pressure on lawmakers trying to piece together a rescue package for the nation's financial system. The government's inability yesterday to reach agreement on a bailout and the seizure of the biggest savings and loan sparked a sell- off of bank stocks, led by a 25 percent tumble in Wachovia Corp.

``All eyes are now on Wachovia,'' said Anton Schutz, president of Mendon Capital Advisors Corp. in Rochester, New York.

WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.

JPMorgan became the biggest U.S. bank by deposits with the deal, acquiring WaMu's branch network for $1.9 billion.

``This is a fabulous franchise,'' JPMorgan Chief Executive Officer Jamie Dimon, 52, said in an interview. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''

Lehman, Merrill

WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was also absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan that the savings and loan valued at $4 a share.

In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 16 cents on the New York Stock Exchange.

David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''

Share Sale

New York-based JPMorgan said today it sold $10 billion of shares at $40.50 apiece. The bank rose 33 cents, or 0.8 percent, to $43.79 in composite trading at 10 a.m.

JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy.

``This is one of the reasons I own JPMorgan: They're going to win from all this,'' Schutz said. ``They're taking on credit risk, but they're not taking on any debt obligations.''

JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said.

JPMorgan had 75 people involved in the transaction and ``bid to win'' because it wanted WaMu's assets, Dimon said on a conference call yesterday. JPMorgan used its own investment bank to value the mortgages, he said.

Bailout Support

Dimon also said on the conference call that he's in favor of the government's proposed $700 billion plan to prop up the banking industry, but didn't rely on it to complete the deal. The plan was jeopardized yesterday as congressional Republicans failed to agree on its details.

JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.

Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.

Earnings Forecast

The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.

WaMu had about 2,300 branches at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984.

WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.

During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets.

`Commendable Stewardship'

``It is important to acknowledge that the largest U.S. thrift just failed and did so seamlessly with the commendable stewardship of the FDIC,'' Oppenheimer & Co. analyst Meredith Whitney wrote in a research note. ``Things could have played out much worse for all the deposit-taking parties involved.''

WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.

WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively.

``There were extreme liquidity pressures on this institution exacerbated by some ratings downgrades,'' FDIC's Bair said.

Rise of WaMu

Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.

Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.

Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans.

``There's a lot of sadness and a lot of people are hurt,'' Lee Lannoye, 71, who was chief credit officer at WaMu from 1988 to 1998, said yesterday. ``Having worked with Kerry Killinger for 10 years, I still absolutely cannot fathom where or why he went wrong, and what caused him to lead the company into taking the kinds of risks that they did.''

Fortis Says Financial Position `Solid' as Shares Fall (Update3)

Fortis, seeking to stem a sell-off that drove its stock down 35 percent this week, said the bank's financial position is ``solid.''

Chief Executive Officer Herman Verwilst told reporters at a press briefing in Brussels today that he's ``flabbergasted'' by the share decline and said the bank's market value doesn't reflect its worth. The efforts failed to bolster the stock, which fell a record 20 percent to 5.20 euros in Brussels trading, while the cost of protecting Fortis bonds from default surged.

Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it's seeking to bolster capital, and might even need more funds as financial markets deteriorate. Verwilst repeated today that the firm may sell more assets than anticipated as it becomes harder to raise money by other means.

``Investors are concerned Fortis may have to sell assets at knock-down prices,'' said Jaap Meijer, a London-based analyst at Dresdner Kleinwort who has a ``hold'' rating on the stock.

Fortis has fallen 71 percent this year, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros. Today's decline was the biggest since the company was created in a 1990 merger.

WaMu Failure

The collapse of New York-based Lehman Brothers Holdings Inc. on Sept. 15 and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc., the largest U.S. savings and loan, was seized by regulators yesterday in the biggest U.S. bank failure in history.

Financial shares across Europe also fell as U.S. Treasury Secretary Henry Paulson's proposed $700 billion rescue of the nation's financial system stumbled in Congress. The Bloomberg European banks index dropped 1.9 percent.

Fortis, based in Brussels and Amsterdam, needs to raise capital after agreeing to buy the Dutch consumer banking and asset management units of ABN Amro Holding NV last year for 24.2 billion euros.

The firm said today it earmarked for sale banking and insurance businesses that may be worth as much as 10 billion euros. In each case, ``concrete interest of potential buyers is indicated,'' the company said, without elaborating.

Fortis said it won't sell assets at fire-sale prices, and doesn't have an urgent need for funds.

``The future need for additional capital will actually only be in 12 to 18 months as we start to fold in the largest part'' of ABN Amro's business, the company said today in a statement distributed by Hugin.

Ping An Deal

Fortis agreed in March to sell half of its asset-management unit to Ping An Insurance (Group) Co., China's second-biggest insurer, for 2.15 billion euros. Verwilst said in an interview with Bloomberg Television today he still expects the companies to get regulatory approval before the end of the year.

Fortis said on June 26 it would sell so-called non-core assets, notes and asset-backed debt to raise money. It planned to sell 2 billion euros of assets this and next year. The lender also scrapped a 1.4 billion-euro dividend and sold 1.5 billion euros of shares to investors including Ping An.

The Chinese insurer said today it may make further provisions in the third quarter for losses arising from its 4.99 percent stake in Fortis. Ping An booked a 10.5 billion yuan ($1.5 billion) loss in the first half from its holding. Its shares tumbled 9.7 percent in Hong Kong trading.

`Confidence' in Fortis

Fortis repeated today that a share sale isn't being considered. Filip Dierckx, head of the company's banking unit, told reporters in Brussels that Fortis has no shortage of liquidity. Customer moves at its Benelux banking business have remained limited to less than 3 percent of assets since the start of the year, Fortis said.

Fortis started offering Belgian customers opening online savings accounts 4 percent interest on deposits of as much as 250,000 euros in July, in a bid to hang onto customers after ING Groep NV, Dexia SA and KBC Group NV raised interest rates on savings accounts.

``I still have confidence in Fortis,'' said Dominique Achourt, a client for more than 35 years, when leaving the Fortis Bank branch at the head office in Brussels. ``Clients should see that Fortis is just being caught up in the global financial crisis and that its banking activities are not affected by the share price falling.''

Deposit Guarantees

Belgian Prime Minister Yves Leterme and Finance Minister Didier Reynders reiterated that the government guarantees deposits, in a bid to calm Fortis clients, local newswire Belga reported today. They also said that the Belgian financial regulator will probe any false information or rumor about Fortis, according to Belga.

Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.

As of Sept. 24, short interest in Fortis amounted to 2.45 percent of its market value, according to London-based Data Explorers Ltd.

Credit-default swaps on Fortis by assets jumped 311 basis points to 583, according to CMA Datavision prices at 4:45 p.m. in London. Credit-default swaps on the lender's subordinated debt rose 416 basis points to 854, CMA prices show.

A basis point on a credit-default swap contract protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.

U.S. Economic Growth Slower Than Initially Estimated (Update2)

The U.S. economy expanded more slowly than previously estimated in the second quarter, showing consumer spending was weakening before the credit crisis intensified.

The annual rate of 2.8 percent was down from a preliminary estimate of 3.3 percent issued last month, the Commerce Department said today in Washington. Measures of inflation were higher than previously projected. Personal consumption, trade and business investment contributed less to gross domestic product than the prior estimate, the report showed.

Americans have since cut back on purchases, businesses have put investment plans on hold, builders have scaled back and credit markets have seized up. Economists at JPMorgan Chase & Co. and Morgan Stanley this week cut third-quarter GDP forecasts and Federal Reserve Chairman Ben S. Bernanke warned the economy may falter without a $700 billion bank rescue.

``Consumer spending doesn't bode well for overall growth over the next few quarters,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``It's pretty clear now that we are in a recession, and it's a recession that still has some room to run.''

Treasury Yields

Treasuries were higher, pushing yields down. The benchmark 10-year note yielded 3.8 percent as of 8:55 a.m. in New York, down 6 basis points from yesterday. Stock futures were lower after negotiations on the bank bailout plan stalled on Capitol Hill.

Economists had projected growth would remain unchanged at 3.3 percent, according to the median of 76 estimate in a Bloomberg News survey. Forecasts ranged from 3 percent to 3.7 percent. Today's report is the final of three estimates.

The world's largest economy grew at a 0.9 percent pace in the first quarter.

Today's gross domestic product report showed that the Fed's preferred measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 2.2 percent annual rate, higher than forecast and faster than the 2.1 percent previously estimated. Prices overall came in less than anticipated.

The biggest part of the economy, consumer spending, rose at a 1.2 percent annual rate from April through June, weaker than the 1.7 percent estimated last month. Spending received a lift during the second quarter from the government's stimulus plan.

Bernanke, who was on Capitol Hill this week urging quick passage of the administration's plan to rescue weakened Wall Street firms, said the U.S. faces ``grave threats'' to financial stability and warned the credit crisis is hurting business spending. He added that the outlook for consumer spending is ``sluggish at best.''

Labor Market

A deteriorating labor market is one reason consumer spending is likely to stagnate this quarter, the worst performance since 1991, according to economists surveyed by Bloomberg earlier this month.

The U.S. has lost jobs every month this year, and the unemployment rate in August jumped to a five-year high of 6.1 percent, according to Labor Department data.

Retail sales fell in August for a second consecutive month, the Commerce Department said previously. Holiday sales during November and December may be the weakest in six years as high food prices pare spending on non-essential items, the National Retail Federation said in a statement Sept. 23.

The trade gap widened to a $381.3 billion annual pace and added 2.9 percentage points to growth, the biggest contribution since 1980 and down from the previous estimate of 3.1 percent. Excluding trade, the economy would have contracted at a 0.1 percent pace after growing at a 0.1 percent rate in the first three months of the year.

The boost from trade may wane this quarter as growth among some of the U.S.'s biggest trading partners slows. Europe and Japan both shrank last quarter.

`Very Weak August'

Dell Inc., the world's second-largest personal-computer maker, said that a U.S. slowdown in technology spending that started last quarter has spread to Western Europe and some Asian countries.

``We saw a very weak August,'' Chief Financial Officer Brian Gladden said Sept. 16 at a Bank of America Corp. investment conference in San Francisco, reiterating comments made last month. ``It is not coming back the way we thought it would.''

Estimates for inventories were revised downward. Companies drew down stockpiles at a $50.6 billion annual rate from April through June, compared with a previous estimate of $49.4 billion. The decrease subtracted 1.5 percentage points from growth.

Revisions in today's report also showed a smaller decline in housing. Residential construction fell at an annual rate of 13.3 percent, higher than the 15.7 percent decrease previously estimated. The housing recession subtracted 0.5 percentage points from growth.

Corporate profits were revised lower. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, were down 3.8 percent to an annual rate of $1.53 trillion. The prior estimate was a drop of 2.4 percent.

Government Bonds Rise as Bailout Plan Stalls, WaMu Collapses

Government bonds around the world rose after talks on a $700 billion rescue package for the U.S. financial system stalled and Washington Mutual Inc. was taken over in the biggest U.S. bank failure in history.

U.S. two-year Treasuries headed for a fifth week of gains and German notes of the same maturity posted their biggest weekly advance since the September 2001 terrorist attacks. Japanese 10-year bonds rallied for a second day.

``Clearly the focus is on the vacillations of U.S. Congress,'' said John Stopford, who oversees about $12 billion in assets as the London-based head of fixed-income at Investec Asset Management. ``We've taken a defensive position in the short term. We and others are increasingly accumulating a large pool of overnight deposits.''

Investors are piling in to the safest assets on concern delays to the bailout plan will cause more banks to fail. At the same time, the short-term debt markets that provide financing for the global economy are seizing up. The Libor-OIS spread, a measure of the availability of cash among banks, widened for a fifth day to near a record today.

U.S. lawmakers were meeting again today in Washington after some House Republicans, led by Virginia's Eric Cantor, said they wouldn't back a plan based on Treasury Secretary Henry Paulson's approach. The stalemate came after an unprecedented meeting of the two presidential candidates, President George W. Bush, congressional leaders and Cabinet officers.

`Changed Perception'

``What has changed is the market's perception of the bail- out package and whether or not it proceeds in its original form,'' said Nick Parsons, head of markets strategy in London at NabCapital, a unit of National Australia Bank Ltd., the country's largest bank. ``The market has come to focus on the underlying problems, rather than the short-term solution.''

The yield on the two-year U.S. Treasury note fell 15 basis points to 2.02 percent as of 12:30 p.m. in New York, taking its decline in the past five weeks to 38 basis points. Two-year German yields dropped 18 basis points to 3.66 percent and Japanese 10-year yields lost 2 basis points.

``It's gloomy because the bailout package was seen as the cavalry coming over the hill,'' said Richard McGuire, a senior fixed-income strategist at RBC Capital Markets in London. ``The safe-haven bid for fixed income has returned.''

Central banks have so far failed to unlock the credit markets and get banks to lend to each other again. The European Central Bank lent banks $35 billion for seven days today. The Bank of England loaned $30 billion of one-week cash as well as $10 billion overnight.

Balking at Lending

Financial institutions are balking at lending to each other because they are concerned counterparties may hold tainted assets at a time when demands on their own cash are rising. The yield on bonds sold by Morgan Stanley maturing in three months' time was almost 37 percent today, up from 4.07 percent two weeks ago.

Few strategists and analysts predicted the gains in government bonds of the past two weeks. The two-year U.S. note today yielded 14 basis points less than 2.16 percent median forecast of 31 analysts in a Bloomberg survey for the end of the third quarter. The forecast was 2.60 percent in August.

The London interbank offered rate, or Libor, that banks charge each other for three-month loans stayed near the highest level since January today, the British Bankers' Association said. The euro rate, or Euribor, for such loans rose to the highest level since the single currency was introduced in 1999, according to the European Banking Federation.

China Curbs

The Libor-OIS spread, which compares the cost of borrowing in dollars over three months with the overnight indexed swap rate, widened 13 basis points to 208 basis points, after exceeding 200 basis points for the first time yesterday.

Concern about more failures among financial institutions prompted domestic Chinese banks to cut trading with foreign firms in the interbank market, according to Zhuang Zhiqiang, a trader at Xiamen International Bank Co., which is partly owned by the Asian Development Bank. The move aims to control risks after the bankruptcy of Lehman Brothers Holdings Inc., said Zhao Qingming, an analyst in Beijing at China Construction Bank Corp., the nation's second-largest lender.

Washington Mutual became the U.S. biggest bank failure in history yesterday after being seized by regulators and sold to JPMorgan Chase & Co. following $16.7 billion of customer withdrawals since Sept. 16. Financial institutions worldwide posted $522 billion of losses and writedowns tied to U.S. subprime mortgages since the start of 2007.

Stock Declines

Stocks and other higher-risk assets fell as investors shunned all but the safest government debt. Europe's Dow Jones Stoxx 600 Index decreased 1.9 percent, extending its drop this week to 4.4 percent, and the Standard & Poor's 500 Index slid 1.4 percent.

Waning demand for emerging-market assets widened the difference in yield, or spread, between U.S. Treasuries and the bonds of nations from Brazil to Ukraine by 10 basis points to 377 basis points, according to a JPMorgan Chase & Co. index.

Fortis, the Brussels and Amsterdam-based financial-services company, said the bank's financial position is ``solid,'' seeking to stem a sell-off that's driven the stock down 35 percent this week. Fortis has come under pressure because of speculation the company will struggle to raise the 8.3 billion euros ($12.2 billion) it needs to bolster capital, and may even need more as financial markets deteriorate.

Favoring T-Bills

The U.S. commercial paper market slumped $61 billion, or 3.5 percent, to a seasonally adjusted $1.7 trillion in the week ended Sept. 24, the Federal Reserve said yesterday, a further sign of investor reluctance to take on higher-risk assets.

``Investors are clearly shunning financial market commercial paper in favor of T-bills,'' said Jane Caron, chief economic strategist at Dwight Asset Management Co. in Burlington, Vermont. ``Hopefully the stress level doesn't increase significantly from here.''

Three-month U.S. Treasury bill yields fell to 0.36 percent on Sept. 24 as demand for the shortest-dated government debt surged. The rate, which declined to 0.02 percent last week, the lowest since World War II, was at 0.85 percent today.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed 11 basis points to 291 basis points. It was as much as 337 basis points yesterday, the most since Bloomberg began compiling the data in 1984. From 2000 to 2007, before the credit crisis began, the spread averaged 31 basis points.

Fed pumps out more dollars

The Federal Reserve expanded deals early Friday morning with two of its counterparts in Europe in order to make an extra $13 billion available to banks there, after reporting increased lending to U.S. banks and Wall Street firms.

The deal will have the Fed provide $10 billion to the European Central Bank and $3 billion to the Swiss National Bank. In return, it will receive a reciprocal amount of foreign currency from each country.

The $13 billion comes on top of the $277 billion in such swap deals that had previously been announced, including $110 billion with the ECB and $27 billion with the Swiss National Bank.

Friday's action helps provide dollars to foreign banks that needed the U.S. currency to transact business but had been unable to access the Fed directly the way U.S. banks can.

The three central banks said the latest action is designed to help banks that needed access to the cash to close transactions at the end of the third quarter, which concludes on Tuesday.

The Fed has been taking steps to pump dollars into the U.S. financial system as well, lending out more than $140 billion over the course of the last week.

Figures released Thursday showed that borrowing by Wall Street securities firms totaled $105.7 billion as of Wednesday, up from $59.8 billion a week earlier.

In addition, under an emergency program unveiled by the banks last week, commercial banks borrowed $72.7 billion through Wednesday in order to buy commercial paper from money-market mutual funds.

And loans through the traditional discount window rose to $39.3 billion, up $5.9 billion from a week earlier. Other credit extensions jumped by $16 billion to $44 billion.

The moves come as banks and Wall Street firms have become reluctant to lend money to each other, or to customers. There are reports of banks hoarding cash out of concerns about their own future as well as uncertainty about the financial condition of other institutions.

That resulting freezing of credit and financial markets has prompted the Treasury Department and Fed to push for a $700 billion bailout package that would have the government buy mortgage-backed securities whose value has plunged in the face of sliding home prices and climbing foreclosures.

Congressional negotiators were reportedly close to a deal Thursday to win bipartisan approval of the bailout package but objections from House Republicans have thrown the status of those talks into doubt.

The announcement also came the day after Washington Mutual was taken over by the Federal Deposit Insurance Corp., making it the largest bank failure in U.S. history. The nation's largest thrift was then sold to JPMorgan Chase (JPM, Fortune 500).

Asia Banks Dodge the Wall Street Crisis

It was a scene eerily reminiscent of the dark days of Asia's financial crisis in 1997. Long lines of panicked savers waited outside branches of Hong Kong's Bank of East Asia on Sept. 24 after rumors had started circulating the day before by cell-phone message that the bank was in peril because of its exposure to Wall Street's meltdown. Shares fell 6.9%. The run only lasted 24 hours, ending after the bank issued denials and threatened to take legal action against those spreading the rumors. BEA also won support from Hong Kong tycoons such as Li Ka-shing, who snapped up bank shares, and assurances by the Hong Kong Monetary Authority that the bank's balance sheet was strong.

Ironically, the general public's jitteriness about the health of local banks comes at a time when many of them are actually in pretty good shape. With the notable exception of HSBC (London-based but Hong Kong-listed), which is on the front line of the U.S. financial crisis because of its mortgage portfolio there, Asian banks look strong thanks to minimal exposure to the woes of Fannie Mae (FNM), Freddie Mac (FRE), and Lehman Brothers. Indeed, a number of analysts have buy recommendations for banks in Hong Kong, Singapore, and Korea.

Take the case of Standard Chartered Bank (STAN.L), which Daniel Tabbush, head of Asian Banks Research at CLSA Asia-Pacific Markets is keen on. Unlike bigger rival HSBC (HBC), it has a minimal exposure to loans in Britain or the U.S. While HSBC has about $896 billion in U.S. loans, Stanchart (which is also London-based but derives most of its business from Asia) has just $21 billion. "We are very comfortable with Standard Chartered's [loan] exposure," he says. What's more, it has seen profit growth in excess of 25% for the past 18 months. In contrast, HSBC could be facing billions more in writedowns, bad loans, and other assets which must be marked to market. It has already provisioned for $15 billion.

Thailand and Singapore Look Good

Singapore banks also look well positioned to weather the storm. Stephen Docherty, head of global equities at Aberdeen Asset Management in Edinburgh points out that several Asian banks have been unjustly tarred with the same brush as U.S. and European banks. He notes that United Overseas Bank (UOBH.SI) and Oversea-Chinese Banking Corp. (OCBC.SI), whose share prices are down 15% and 18%, are both "well run, well capitalized, and have a good record of preserving capital." Thanks to sufficient demand for loans, these banks were not compelled to "participate in repackaged, synthetic products" such as collateralized debt obligations to boost profits.

Even Thailand, whose banks were among the worst hit in the region a decade ago, is looking attractive. Sirinattha Techasiriwan, banking analyst at Kasikorn Securities in Bangkok is recommending clients buy shares in Siam Commercial Bank, for which she is forecasting full-year profit growth of 32%, to $590 million.

"This bank has no exposure to troubled U.S. paper and we see personal loans and mortgages picking up quite well," she says. The bank's shares are off 18.5% this year.

Indian banks, too, are well insulated from the troubles roiling other financial institutions, thanks to convertibility restrictions in the country that prevented banks from getting overseas exposure. What's more, Indian banks including State Bank of India (SBI.BO), ICICI Bank (ICN), and HDFC Bank (HDB) are well capitalized from secondary stock offerings in the past 12 months that raised a combined $15 billion. Property exposure at home is relatively small, accounting for less than 10% of overall assets in the banking system, so even if housing prices slump, these banks are still in a strong position. "The health of the banking system in general is good," says N. Krishnan, head of research at CLSA India.

Not Immune

To be sure, Asian banks haven't been able to fence themselves off entirely from the financial meltdown. To the extent the region is still strongly dependent on export growth, Asian economic growth is bound to suffer, and this will have a knock-on effect for the banks. Nowhere is this truer than in China, where a slowdown in U.S. demand has taken its toll on thousands of small manufacturers who have shuttered their factories in southern China. "Credit risk is the No. 1 risk for Chinese banks," says Ryan Tsang, senior director of Financial Institutions Ratings at Standard & Poor's in Hong Kong. "The risk is coming from a global slowdown, how that impacts the economy of China, the corporate sector, and NPLs."

Nonperforming loans in China, which stood at 6.1% in June, could increase by 50% says CLSA's Tabbush, who notes a sagging property sector puts China Merchants Bank (600036.SS) in a particularly vulnerable place. Investors in the Shanghai-listed company share his concerns: The stock is down more than 55% this year.

Brown set for showdown at conference

Prime Minister Gordon Brown played up his economic credentials on Saturday to quieten persistent calls to step down from within the Labour Party as it meets for its annual conference.

Behind in the polls and with his economic reputation under scrutiny against a backdrop of a global financial downturn, Brown is fighting for his political life.

Writing in the Guardian, Brown sought to emphasise the role his government had played in tackling the financial shockwaves, despite the collapse of Northern Rock last year, the forced merger of another last week, and the economy tottering on the brink of recession.

"Just as when we stopped Northern Rock going to the wall, we took the necessary and decisive action this week to protect stability and keep the financial system moving," Brown wrote.

"We have acted to secure people's savings, support the housing market, and underpin liquidity in the banking sector."

It was an open pitch by the former finance minister to talk up his economic skills on the opening day of his party's decision-making gathering. Anything less than a command performance when he addresses party delegates is likely to see Brown's popularity further dented at a time he faces a low-level revolt within his party.

More than a dozen Labour MPs called for Brown to stand down or submit to a leadership contest last week, piling pressure on the prime minister just 15 months after he succeeded Tony Blair without an election.

Opinion polls show Brown is the least popular prime minister in 70 years, and his party lags the Conservatives by up to 28 points, a deficit that would translate into a heavy electoral defeat if an election were held.

Brown does not have to call the next election until June 2010. Given his and his party's lack of popularity, and the economic and financial problems affecting the nation, he is likely to wait as long as possible before calling it.

Instead, he hopes the conference can revive fortunes and party unity, and perhaps lay the groundwork for a fightback.

" People are beginning to see again that politics is not a permanent referendum on a government, but a choice between competing philosophies," Brown wrote.

"It is only a Labour government that is able to act now to tackle the instability in the economy and provide the security that businesses and families need."

CALL FOR UNITY

While last week was a torrid one for Brown, senior members of his party, including cabinet ministers, rallied around him on Saturday, describing him as the best man for the job.

Foreign Secretary David Miliband, someone tipped to succeed Brown if he were to be forced from office, called for party unity and for all members to throw their support behind Brown.

"It is time for the party to come together," he told the Mirror newspaper. "I've made it clear I don't think it's the time for a leadership election."

Others tipped as possible successors also threw their support behind Brown, a 57-year-old Scot regarded as a serious political thinker but without the style and charisma of Blair.

Yet despite the show of unity, not everyone agrees. An online poll of 788 Labour Party members showed 54 percent want another leader.

As a consequence every minister's speech to the conference in Manchester will be examined in detail for any sign of disloyalty.

No immediate rebellion is expected, but Brown will have to show he can still electrify the party with his own conference speech on Tuesday if he is to have any hope of stopping the constant challenges to his authority.