Discover profit dips after UK unit sale

NEW YORK - Discover Financial Services LLC said Wednesday its first-quarter profit fell 65 percent to $81.2 million after shedding its card business in Britain and preparing for more defaults from U.S. cardholders.
Excluding the U.K. unit sale, the credit card lender posted a profit of $239 million, or 50 cents per share. That surpassed the average analyst forecast for 40 cents per share, according to Thomson Financial.

Still, the Riverwoods, Ill.-based company's shares sank $1.67, or 9.6 percent, to $15.73 in afternoon trading, after surging more than 30 percent over the last week-and-a-half. 15.68 -1.72 -9.89

"It had a good run going into earnings," said Sanjay Sakhrani, a credit card industry analyst at Keefe, Bruyette & Woods Inc. "And maybe some people were anticipating it'd be a stronger quarter than it was. But from our vantage point, I thought it was a solid quarter in the face of a deteriorating economy."

Last year, when Discover was part of Morgan Stanley, it reported a first-quarter profit of $233.6 million, or 49 cents a share, higher than this year's 17 cents a share. Net interest revenue during the quarter rose to $1.30 billion from $1.15 billion a year ago.

Discover's profit declined partly because it set aside $305.6 million for loan losses. That quarterly provision was more than twice what it was a year ago, and dragged the U.S. card segment's pre-tax income down 6 percent to $375 million.

During the quarter, the company charged off 4.37 percent of loans, up from 3.85 percent in the previous quarter. Executives believe this rate will keeping rising — they predict Discover's 2008 charge-off rate will be between 4.75 percent and 5 percent.

Delinquencies also rose — the 30-day delinquency rate climbed to 3.93 percent from 3.59 percent in the previous quarter, while the 90-day delinquency rate rose to 1.98 percent from 1.68 percent.

But as credit worsens, sales are rising. Sales volume was 5 percent higher this quarter compared with last year.

"Discretionary spending has fallen. The nondiscretionary spending — groceries, gas — have obviously continued," CEO David Nelms said in an interview with The Associated Press.

Discover's default rates are lower than the industry average, which is around 5 percent, Sakhrani said. "Credit is hanging in there relative to our expectations. That's the key right now ... I think the success of the stock over the next 12 months will be predicated on which way the economy is going to go."

Unlike its larger competitors, Discover has no overseas operations to offset the effects of slower U.S. consumer spending and a tough credit climate.

The company announced in February it was selling Goldfish, its U.K. credit card business, to Barclays Bank PLC for about $70 million. Discover said Wednesday that the sale resulted in a $158 million loss.

Discover bought Goldfish in February 2006. Two year later, Goldfish's 1.7 million customers owed the company $4 billion — about 16.6 percent of its outstanding loans.

Investment bank Morgan Stanley spun off Discover last June. Discover's debut as a public company arrived just weeks before spiking defaults in subprime mortgages and the ensuing seize-up in the credit markets began causing huge selloffs in the broader financial sector.

Shares of Discover, which has more than 50 million card holders, are down more than 40 percent since July.

One of Discover's rivals, Visa Inc., late Tuesday launched the largest initial public offering in U.S. history. Visa, the world's largest credit card processor, sold 406 million shares at $44 each to raise $17.9 billion. Its shares jumped $15.84, or 36 percent, to $59.94 in afternoon trading. Unlike Discover, Visa is not a lender; instead, it processes the cards issued by its member banks.

Stocks decline after huge rally

NEW YORK - Stocks pulled back Wednesday as investors cashed in gains a day after the market's huge rally and digested better-than-expected results at Morgan Stanley that eased concerns about the investment banking sector. The Dow Jones industrials at times gave up more than 200 points.
News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac, a move that could help struggling homeowners, initially appeared to quell some of the market's fears. But it couldn't stave off selling late in the session by investors who have seen big advances evaporate many times during the course of the credit markets crisis.

Investors sent stocks charging higher Tuesday on stronger-than-expected investment bank results and several moves from the Federal Reserve in recent days, including a 0.75 percentage point rate cut aimed at jump-starting the credit markets. The Dow rose 420 points, its second 400-plus point gain in six sessions.

Morgan Stanley's earnings indicated that the bank is relatively healthy like Lehman Brothers Holdings Inc. and Goldman Sachs & Co., rather than at risk of failure like Bear Stearns Cos. JPMorgan Chase & Co. struck a deal Sunday to acquire Bear Stearns, which was on the verge of succumbing to credit troubles.

George Shipp, chief investment officer at Scott & Stringfellow, said that some investors are still uneasy about the health of the markets. He contends the back-and-forth days will likely continue as Wall Street tries to feel its way forward.

"Nobody wants to make the first move. There is liquidity on the sidelines. It doesn't really know what to do right now," he said, adding that investors are trying to determine whether moves by the Fed and other regulators to stimulate the economy and stabilize the markets will take hold.

"Clearly there is fear. I would say the needle is pointing more toward fear than greed right now," he said.

In midafternoon trading, the Dow fell 192.70, or 1.55 percent, to 12,199.96.

Broader stock indicators also declined. The Standard & Poor's 500 index fell 23.19, or 1.74 percent, to 1,307.55, and the Nasdaq composite index fell 37.09, or 1.64 percent, to 2,231.17.

Bond prices jumped as investors again looked for safety. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.37 percent from 3.50 percent late Tuesday. The dollar was mixed against other major currencies, while gold prices fell.

Light, sweet crude fell $5.52 to $103.90 per barrel on the New York Mercantile Exchange after government figures suggested the high price of oil and gasoline are damping demand for petroleum products.

Investors' relief over Morgan Stanley follows better than expected earnings news from Lehman and Goldman on Tuesday that gave the Dow its biggest point gain in more than five years. The Dow got an extra boost after the Fed's rate cut.

Morgan Stanley rose 45 cents Wednesday to $43.31. Lehman fell $4.46, or 9.6 percent, to $42.03, while Goldman declined $7.67, or 4.4 percent, to $167.92.

The Office of Federal Housing Enterprise Oversight, which oversees government-backed Fannie and Freddie, said the changes should result in an immediate infusion of up to $200 billion into the market for mortgage-backed securities. This could mean greater demand for mortgages — an aid for struggling homeowners hoping to refinance at more favorable terms.

Investors were upbeat about the moves at the mortgage companies. Fannie jumped $2.80, or 10 percent, to $31.02, while Freddie rose $4.03, or 15 percent, to $30.05.

The Fed has slashed key rates by more than half since last summer, when the mortgage crisis claimed its grip on the global credit markets. But the housing and lending industries are still hurting.

Late Tuesday, Visa Inc. launched the largest initial public offering in U.S. history, selling 406 million shares at $44 apiece to raise $17.9 billion. The world's largest credit card processor is not a lender, and many investors are betting that it will easily survive the faltering U.S. economy and credit climate. The stock traded up $14.64, or 33 percent, at $58.64.

Despite the pullback Wednesday, Bruce McCain, head of the investment strategy team at Key Private Bank in Cleveland, said recent trading — days when stocks didn't plummet in the face of bad news and rallied on good news — is encouraging because it could signal the market is closer to regaining solid footing.

He said while any placidity in the markets would likely need to last for some time to extinguish some of investors' fears, he was encouraged by some recent signs of strength in consumer discretionary and financial stocks.

"Those are probably the two most important sectors with respect to this market regaining some confidence and maybe starting to shift gears," he said.

Wall Street has beaten up stocks like those of financial companies in recent months in favor of energy, materials and industrials. Investors hoping for a change in the winds on Wall Street will be looking for signs that money is moving out of these defensive areas into downtrodden corners of the market, McCain said.

Declining issues outpaced advancers by about 2 to 1 on the New York Stock Exchange, where volume came to 1.33 billion shares.

The Russell 2000 index of smaller companies fell 9.75, or 1.43 percent, to 672.18.

Overseas, Japan's Nikkei stock average increased 2.48 percent, while Hong Kong's Hang Seng index rose 2.26 percent. Britain's FTSE 100 closed down 1.07 percent, Germany's DAX index fell 0.50 percent, and France's CAC-40 declined 0.58 percent.

Market sinks on oil, recession fear on day after Fed

NEW YORK (Reuters) - Stocks fell on Wednesday as investors sold stocks to take profits after Tuesday's Fed-aided rally, while a sharp drop in oil prices drove energy shares lower. The Standard & Poor's index of materials stocks (.GSPM) fell 4.9 percent as persistent worries about a recession and the health of the U.S. economy weighed on commodity prices.

On Tuesday, the S&P 500 made its biggest one-day jump in more than five years after the Federal Reserve cut short-term U.S. interest rates by 75 basis points. The Fed's decision, which was expected, brought the benchmark fed funds rate for overnight bank loans down to 2.25 percent from 3.0 percent.

Energy shares were among the biggest drags on the market as the price of oil slid more than $6 a barrel after worries about the economy overshadowed bullish weekly data.

An index of energy shares (.GSPE) fell 3.8 percent -- its biggest one-day percentage drop since October.

Exxon Mobil shares were the S&P's biggest laggard, falling 2.4 percent to $86.33, while ConocoPhillips (COP.N) slid 4.8 percent to $74.53 and Chevron (CVX.N) fell 3.2 percent to $83.37.

Meanwhile, the Chicago Board of Options Exchange Volatility Index (.VIX) -- Wall Street's favorite fear gauge -- jumped 12 percent a day after its fourth-biggest daily drop in 14 years.

"The bottom line is the recession is something that everyone is now accepting as a reality even though we've seen great news out of Fannie and Freddie this morning," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

The Dow Jones industrial average (.DJI) fell 156.55 points, or 1.26 percent, to 12,236.11. The Standard & Poor's 500 Index (.SPX) dropped 15.39 points, or 1.16 percent, to 1,315.35. The Nasdaq Composite Index (.IXIC) declined 27.57 points, or 1.22 percent, to 2,240.69.

"What you're probably seeing right now is simply profit-taking. People have decided that they got what they can out of the Fed meeting and they are now taking some money off the table," said Peter Jankovskis, director of research at OakBrook Investments LLC in Lisle, Illinois.

Shares of Alcoa Inc (AA.N) fell 5.6 percent to $36.45 and Caterpillar Inc (CAT.N) dropped 3 percent to $74.54.

Shares of Fannie Mae (FNM.N) climbed 11.4 percent to $31.43, while Freddie Mac (FRE.N) shot up 18.4 percent to $30.79 after they won approval to pump $200 billion into the distressed U.S. housing market.

(Editing by Jan Paschal)

Cheney says economy going through "rough patch"

WASHINGTON (Reuters) - U.S. Vice President Dick Cheney said on Wednesday that the economy is going through a "rough patch," a day after the Federal Reserve slashed interest rates to try to protect the economy from financial turmoil.
"We're currently going through a rough patch here, there's no question about it," Cheney said on ABC's "Good Morning America."

"We've got problems in the housing industry, mortgage backed securities and so forth, that have created problems we're having to deal with," he said.

The Federal Reserve on Tuesday slashed interest rates by 75 basis points to 2.25 percent as policymakers scramble to bolster the economy amid a housing downturn.

Cheney, who spoke from Muscat, Oman, shortly after he visited Iraq to assess the success of the U.S. troop build-up there, also said public opposition to the Iraq war should not affect how it is conducted.

The interview was aired on the fifth anniversary of the U.S. invasion of Iraq.

Informed that two-thirds of Americans now think the war was not worth fighting, Cheney said: "So?"

He added: "I think we cannot be blown off course by the fluctuations of the public opinion polls. There has in fact been fundamental change and transformation and improvement for the better. That's a huge accomplishment."

(Reporting by Andy Sullivan, editing by Vicki Allen)

Paulson says GSE changes to aid mortgage marke

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Wednesday that changes to regulatory capital requirements for Fannie Mae and Freddie Mac will allow the two government housing finance enterprises to strengthen the U.S. mortgage market.
"Fannie Mae and Freddie Mac are significant participants in the mortgage market and I am encouraged that today's announcement will make more financing available in this area. Additional capital will enable the companies to help more homeowners and will strengthen the underlying fundamentals of the mortgage market," Paulson said in a statement.

The Office of Federal Housing Enterprise Oversight, the main regulator for the two government-sponsored enterprises, on Wednesday cleared them to buy up more than $200 billion more in mortgages and immediately reduced their excess capital requirements to 20 percent from 30 percent.

"Today's announcement also reaffirms the commitment of all parties to work toward comprehensive GSE reform legislation as soon as possible," Paulson said.

(Reporting by David Lawder; Editing by James Dalgleish)

U.S. Treasury's Ryan: Markets to emerge stronger

By David Lawder
WASHINGTON (Reuters) - The U.S. Treasury is confident that capital markets will recover from their current turbulence and emerge stronger with enhancements such as improved credit ratings, better disclosure and increased risk management, a senior Treasury official said on Wednesday.
Anthony Ryan, Treasury assistant secretary for financial markets, said markets were experiencing "a great deal of deleveraging" that has hurt liquidity and their ability to facilitate economic activities.

"I have confidence in the resilience of our markets, and that collectively we will work through this period of stress and make our markets even stronger," Ryan said in prepared remarks to the Exchequer Club in Washington.

Ryan said the weakness that triggered market turmoil was a breakdown in underwriting standards for mortgage origination, particularly for subprime mortgages originated from late 2004 through 2006.

Ryan said Treasury was working to deal with such breakdowns, mitigate systemic risks, restore investor confidence and facilitate economic growth.

His remarks did not directly address Treasury's role in arranging a weekend buyout for Wall Street investment bank Bear Stearns (BSC.N) amid a liquidity crisis that threatened a broader collapse on Wall Street.

Ryan's speech also promoted initiatives announced by the Treasury-led President's Working Group on financial markets to enhance stability by changing practices and some rules for participants to improve risk awareness, and enhance capital positions, credit ratings, disclosures and mortgage underwriting standards. Among these is implementation of strong national standards for state licensing of mortgage brokers and national standards for consumer protection on mortgages.

"Looking ahead, we expect practices to be different," Ryan said. "Financial products will be less complex and more transparent, and the mechanisms for dealing with complexity will improve. This will include better credit rating practices, improved capital cushions, better liquidity management, and enhanced disclosure and due diligence."

(Editing by Leslie Adler)