11/18T9:20 News

COF Capital One: Despite lower NCOs, credit outlook remains negative - FBR (41.78 )
Friedman Billings believes the over-extended consumer will have difficulty meeting his debt obligations. Friday morning, COF released its monthly managed statistics for July. Apart from a surprising modest improvement in loss rates on U.S. credit card managed receivables, other credit metrics deteriorated, particularly in its auto finance and international operations. Still, the market interpreted the loss levels as benign, as COF and its peers rallied during trading. Firm believes higher level of early stage delinquencies and seasonality will likely result in significantly higher loss experience in 2H08. While its deposit franchise, ample liquidity, and capital strength lend support to the operations, they expect that adverse macro-economic trends will result in increasing credit costs over the next six to nine months.

Morgan Stanley and Goldman change approach to lending - FT
FT reports MS and GS are responding to the credit crisis with systems that use the market's view of their own creditworthiness as a basis for lending decisions, according to people familiar with the matter. These arrangements for determining the size of lending commitments to hedge fund clients were being put in place before the collapse of Bear Stearns. But implementation has gathered pace as investment banks seek ways to guard against the sudden loss of confidence - and resulting withdrawal of market funding - that crippled Bear. The message is that "if our firm is in trouble, we would rather fund ourselves than fund you [hedge funds]", said a brokerage executive with knowledge of the arrangements. He added: "We would only use it if there were a real issue." Morgan Stanley is essentially tying its promise to provide financing to hedge fund clients to the prices of credit insurance on its own debt. If the cost of the protection rises to a certain level, that would trigger a reduction in Morgan Stanley commitments to hedge funds. Goldman Sachs is understood to have a similar arrangement that uses its bond prices as a reference point for credit commitments to hedge fund clients.

Bernanke tries to define what institutions Fed could let fail - Bloomberg.com
Bloomberg.com reports Ben Bernanke is still trying to define which financial institutions it's safe to let fail. The longer it takes him to decide, the tougher the decision becomes. In the year since credit markets seized up, the chairman has repeatedly expanded the central bank's protective role, turning its balance sheet into a parking lot for Wall Street's hard-to-finance bonds and offering loans through its discount window to investment banks and mortgage firms Fannie Mae and Freddie Mac. The lack of clearly defined limits may put the Fed's independence at risk as Congress discovers that its $900 bln portfolio can be used for emergency bailouts that might otherwise require politically sensitive appropriations and taxes. The Federal Open Market Committee has ordered a formal study of the implications of the Fed's broader role in fostering financial stability, drawing on research from throughout the Fed system. Under Bernanke's predecessor Alan Greenspan, the Fed drew a clear line against using its portfolio to influence specific markets. An internal study published in 2002 warned that "the favoring of specific entities'' might "invite pressure from special-interest groups.''

LEH Lehman faces another loss, adding salt to its wounds - WSJ (16.17 )
The Wall Street Journal reports with the end of Lehman's (LEH) fiscal third quarter less than two weeks away, some analysts are girding for a loss of $1.8 bln or more, instead of the modest profit they previously expected. If the dour projections come true, Lehman's losses since the start of March would total at least $4.5 bln -- or more than the firm churned out in profit during FY07. The likelihood of back-to-back quarterly losses, fueled by widely anticipated write-downs in a portfolio saddled with more than $50 bln in risky real-estate and mortgage assets, puts even more pressure on Lehman Chairman and Chief Executive Richard S. Fuld Jr. to show that the losses won't keep piling up. If they do, Lehman could need to raise additional capital beyond the $6 bln it got in June.

Libor on the rise amid banking stress - FT
FT reports the key rate at which banks lend to each other in dollars hit its highest level in two months on Monday, suggesting there could be more turbulence ahead for the financial system. The three-month dollar London interbank offered rate reached 2.81%, a level not seen since mid-June. Libor remains particularly elevated when compared with the official overnight rate -- the Federal funds rate -- of 2%. The difference of 81 basis points between Libor and the Fed funds rate compares with an average spread of about 12bp that prevailed before the onset of the credit squeeze last year. "There is still stress in the system," said George Goncalves, strategist at Morgan Stanley. "Libor is creeping up, and banks are still restructuring their balance sheets."