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Subprime Losses Begin to Spread Beyond Banks
Thursday, Nov. 8, 2007 10:07 a.m. EST
General Motors, insurance giant AIG — even retailers like Whole Foods and Wal-Mart — are starting to feel the pinch from years of bad mortgage lending.
The car maker said this week it lost a record $39 billion in the third quarter on a deferred tax charge stemming from its home loan affiliate, ResCap, in which it holds a 49 percent stake through GMAC. The lending arm is better known for approving car loans.
AIG said its third quarter net income – while $3.09 billion in the black – nevertheless fell 27 percent compared to the same period a year ago on AIG’s exposure to bad loans. Investors immediately punished the stock.
Such non-bank exposure to the mortgage lending industry could ripple out, a kind of domino effect not unlike what happened a few years ago with Gulf Coast hurricanes: Businesses that wouldn’t be expected to be driven down by an event suddenly have to come clean on how bad things really are.
More companies are expected to report their third quarter earnings this week, which could reveal additional large losses.
Morgan Stanley said in a research note that it lowered its view of retailers to cautious from in-line, saying that companies such as Nordstrom, Bed Bath & Beyond, Whole Foods Market and even Wal-Mart, will be hard hit by a dip in discretionary spending.
Morgan Stanley analyst Gregory Melich said retail has already declined by 11 percent year-to-date. He also predicted that sales growth next year will be a meager 2.5 percent, compared to 4 percent in 2007.
Melich added that Bed Bath & Beyond, which sells home-related items, will see its consumers pull back on their spending because of the slump from the housing market slump.
Other stocks are taking a beating, including Morgan Stanley itself. The investment bank later wrote down $3.7 billion of its own from subprime lending problems, far less than Citi and Merrill but a big hit in any case.
Mortgage companies continue to suffer overwhelming losses even as some have switched to offering less risky mortgages. Indymac, the California lender, reported a loss a third quarter loss of $202 million compare to last year’s net income of $86 million.
Indymac shifted its strategy to being a lender specializing in Fannie Mae and Freddie Mac loans from being an "Alt-A" mortgages or near-prime loans lender. The question remains whether it can make money on issuing fewer loans with a smaller profit margin.
IndyMac Chief Executive Mike Perry said in a conference call that the company is putting aside even more money next quarter for past due loans in an attempt to better manage its credit risk.
