Postal Service Reports a Decline in Losses

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After Losses, Yet Another Overhaul For Sony

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High Losses for Penney, but Shares Jump Higher

Shares in the company jumped 8.4 percent after it reported quarterly results that included a slowdown in sales declines and the prospect of rising profit margins during the all-important holiday season.

The spate of promising news suggests that Penney has bought itself some breathing room as it takes on its third self-help campaign in two years. Though the retailer’s executives acknowledged that much work lay ahead, they said repeatedly that the next few months would reflect even more progress.

“We’re making significant strides toward restoring J. C. Penney to its rightful place in retail,” Myron E. Ullman III, the company’s chief executive, said in a conference call with analysts. “It’s hard work, with no quick fixes, but our teams are rising to the challenge and our customers tell us they love the progress we’re making.”

Yet Penney’s revival remains far from certain, with the retailer’s stock still 70 percent lower than it was at the same time two years ago. Its room for error remains small, especially compared with better-performing rivals like Macy’s and Kohl’s.

The company reported an adjusted net loss of $457 million for the three months that ended Nov. 2. That amounted to a loss of $1.81 a share after excluding certain one-time charges and gains. Analysts on average had expected the company to lose $1.77 a share, according to estimates compiled by Standard & Poor’s Capital IQ.

Using generally accepted accounting principles, the retailer lost $489 million, or $1.94 a share. Additionally, total sales fell 5 percent, to $2.8 billion.

But investors and analysts appeared more focused on the future. Sales at stores open at least one year rose just under 1 percent last month, for the first time in nearly two years, a trend that management said it expected to continue through next quarter.

While gross margins fell to 29.5 percent for the quarter from 32.5 percent a year ago, in large part because of steep discounts, executives argued that Penney needed to take the hit to clear out merchandise associated with a previous failed strategy. Those items should be gone by the first quarter of 2014.

Online sales rose 24.5 percent, to $266 million.

Mr. Ullman, who returned to the job of chief executive earlier this year, has been working to undo one of the most prominent failures in recent corporate turnaround history. During the 17-month tenure of Ron Johnson, whom the company ousted this spring, the retailer’s stock plummeted more than 50 percent.

Mr. Johnson’s ambitious plans to eliminate discount sales drove away customers, prompting him to issue an apology in February after Penney reported a $552 million quarterly loss.

Penney became further embroiled in controversy in the summer after Mr. Johnson’s former backer, the hedge fund manager William A. Ackman, publicly feuded with his fellow board members, going as far as to publicly leak confidential director deliberations. Mr. Ackman resigned in mid-August and, two weeks later, sold his 18 percent stake in the company.

Last month, Penney agreed to abandon efforts to sell a broad range of home products designed by Martha Stewart, surrendering in a long-running branding war with Macy’s. The move, which also involved returning 11 million shares in Martha Stewart Living Omnimedia, was another unwinding of Mr. Johnson’s legacy.

Even Penney’s efforts to shore up its future, like the sale of 84 million new shares in late September to help finance the turnaround, prompted a plunge in the stock price. The company wagered that the move was worth the hit, since it now expects to have more than $2 billion in cash and available credit lines by the end of its fiscal year.

DealBook: JPMorgan Set to Pay Fines for Whale Trading Losses

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Judge Rules Against JPMorgan in Suit Over Billionaire’s Losses

In a decision made public on Monday, Justice Melvin Schweitzer of the State Supreme Court in Manhattan ordered JPMorgan to pay $42.5 million on the breach of contract claim, plus 5 percent annual interest starting in May 2008.

The judge found JPMorgan was not liable for negligence. His decision was dated Aug. 21, about seven months after the three-week, nonjury trial.

Mr. Blavatnik sued JPMorgan in 2009 to recover more than $100 million that he said the bank lost on a roughly $1 billion investment by CMMF L.L.C., a fund created by his company, Access Industries.

Separately, JPMorgan faces other litigation and investigations involving its handling of mortgage-related businesses during the financial crisis.

According to Mr. Blavatnik, JPMorgan Investment Management promised that it would invest Access’s money conservatively after opening the account in 2006.

Instead, according to Mr. Blavatnik, the bank breached a 20 percent limit for mortgage-backed securities by misclassifying securities that were backed by a pool of subprime loans, known as ABS-home equity loans, as asset-backed rather than mortgage-backed securities.

Access also accused JPMorgan of continuing to hold the troubled securities despite knowing they were inappropriate for the portfolio. CMMF closed the account in May 2008.

In finding JPMorgan liable for exceeding the 20 percent cap, Justice Schweitzer rejected the bank’s argument that “industry practice” was to classify the home equity loans separately from mortgage securities because they carried different risks.

In ruling for JPMorgan on the negligence claim, Justice Schweitzer said that the mortgage securities were considered “relatively safe and desirable” when they were bought, and that JPMorgan acted reasonably in light of current conditions when it advised CMMF to “wait out the storm” rather than sell at depressed prices.

A JPMorgan spokesman, Doug Morris, said: “We are pleased that the court rejected CMMF’s negligence claims, and found that our investment professionals lived up to their responsibilities. We respectfully disagree with the court’s interpretation of our agreement with CMMF, and we are considering our options regarding that finding.”

David Elsberg, a partner at Quinn Emanuel Urquhart & Sullivan representing Mr. Blavatnik, said: “Hopefully it signals that banks need to live up to their obligations to clients, and as the court makes clear, not hide behind what they often try to refer to as industry practice.”

Mr. Blavatnik also welcomed the decision. “There are a lot of people out there who, I understand, feel they have been wronged by JPMorgan but cannot afford to take on a huge bank. They shouldn’t have to,” he said in a statement. “JPMorgan should do the right thing because it is the right thing to do.”

Mr. Blavatnik is estimated to be worth about $16 billion, making him the world’s 44th richest person, according to Forbes magazine.

Saks Losses Rise as Sales Fall Short Of Forecasts

Saks reported a larger-than-expected second-quarter loss on Monday after disappointing sales of shoes and handbags forced it to reduce prices.

Saks, the luxury retailer that agreed last month to be acquired by Hudson’s Bay Company of Canada for $2.4 billion, reported that sales at stores open at least a year rose 1.5 percent, well below the 4.5 percent increase Wall Street analysts had predicted.

Stephen I. Sadove, chief executive of Saks, acknowledged in a statement that “our sales growth was modestly below our expectations.”

Saks is the latest retailer across the price spectrum to report mediocre sales. Last week, Macy’s, Nordstrom, Kohl’s and Wal-Mart Stores all reported lower-than-expected sales.

Overall sales at Saks rose just 0.5 percent to $707.8 million for the quarter.

Gross profit margin fell because Saks had too much inventory of shoes and handbags and cut prices to clear unsold merchandise.

For the quarter that ended Aug. 3, Saks reported a net loss of $19.6 million, or 13 cents a share, compared with a net loss of $12.3 million, or 8 cents a share, a year earlier.

Excluding costs like expenses related to store closings and the Hudson’s Bay deal, Saks lost 10 cents a share, 2 cents more than analysts had expected.

Saks, which is based in New York, had been scheduled to report its earnings on Tuesday. The company did not hold its regular earnings conference call with analysts and investors because of its pending acquisition by Hudson’s Bay, the owner of Lord & Taylor.

Shares of Saks closed little changed at $15.97, down 5 cents or 0.31 percent, and just below the $16 a share in cash that Hudson’s Bay is offering.

DealBook: Prosecutors and F.B.I. Examine JPMorgan Over Losses

DealBook: Capital One Settles Accusations It Understated Loan Losses

Brendan McDermid/ReutersA Capital One banking center in New York. Federal regulators said the company understates its losses on auto loans in filings.

Federal regulators on Wednesday accused Capital One and two of its executives of understating millions of dollars in auto loan losses suffered during the financial crisis.

The case, which the Securities and Exchange Commission agreed to settle with Capital One and the executives, illustrated a common financial misdeed during the crisis. As losses mounted in 2007 and 2008, some Wall Street firms covered up the woes from the public, prompting a wave of federal actions against Countrywide Financial and other lending giants.

In the case of Capital One’s auto-lending business, according to the S.E.C., the bank “materially understated” its loan loss expenses and “failed to maintain effective internal controls.” The S.E.C. contended that Peter A. Schnall, who was Capital One’s chief risk officer at the time, and David A. LaGassa, a lower-level executive, failed to prevent the improper statements.

“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” George Canellos, the co-chief of the S.E.C.’s enforcement unit, said in a statement. “Capital One failed in this responsibility.”

But the S.E.C. could face questions over whether its penalties fit the crime. Capital One, one of the nation’s biggest banks, paid $3.5 million to settle the case, a minuscule amount for a company of its size. And like most banks accused of wrongdoing during the 2008 crisis, Capital One was not required to admit or deny wrongdoing.

“The settlement does not require a restatement of Capital One’s financial results,” said a bank spokeswoman, Tatiana Stead. She added that the deal “will not affect any current or future business activities by Capital One.”

The two executives also emerged relatively unscathed. Mr. Schnall agreed to pay an $85,000 penalty, and Mr. LaGassa settled for $50,000. Neither is barred from the securities industry. They are still employed by Capital One, though in different roles.

“The company continues to have confidence in Mr. Schnall and Mr. LaGassa and we believe that they can perform in their current roles with the company,” Ms. Stead said.

Lawyers for both men did not respond to requests for comment.

The S.E.C.’s case stems from early 2007, when the subprime lending market was beginning to collapse. At Capital One’s subprime auto-lending arm, the losses outpaced the bank’s initial forecast.

The bank scrambled to react. Mr. LaGassa organized a “swat team” to diagnose the losses and provided almost daily e-mail updates to Capital One’s senior executives. In an e-mail cited by the S.E.C., Mr. LaGassa warned he was “not optimistic that we are going to suddenly see a slowing in losses.”

Ultimately, an internal “loss forecasting tool” traced the mounting problems to “exogenous” factors — external problems like the souring economy.

But the bank, according to the S.E.C., looked the other way. For example, according to the S.E.C., Capital One failed to include any “exogenous-driven losses” in its assessment of the second quarter in 2007.

Capital One, the S.E.C. said in the order, “gave insufficient weight to the evidence available at the time.”

The bank’s actions, the S.E.C. said, caused the company to “materially” understate its loan loss expense in public filings. In the second quarter alone, Capital One understated the expense by up to $72 million, or about 18 percent.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” Gerald W. Hodgkins, a senior S.E.C. enforcement official, said. “The S.E.C. will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

Ultimately, an internal “loss forecasting tool” traced the mounting problems to “exogenous” factors — external problems like the souring economy.

But the bank, according to the S.E.C., looked the other way. For example, according to the S.E.C., Capital One failed to include any “exogenous-driven losses” in its assessment of the second quarter in 2007.

Capital One, the S.E.C. said in the order, “gave insufficient weight to the evidence available at the time.”
Capital One’s actions, the S.E.C. said, caused the company to “materially” understate its loan loss expense in public filings. In the second quarter alone, Capital One low-balled the expense by up to $72 million, or about 18 percent.

“Financial institutions, especially those engaged in subprime lending practices, must have rigorous controls surrounding their process for estimating loan losses to prevent material misstatements of those expenses,” Gerald W. Hodgkins, a senior S.E.C. enforcement official said. “The S.E.C. will not tolerate deficient controls surrounding an issuer’s financial reporting obligations, including quarterly reporting obligations.”

DealBook: Cargo Ship Losses Weigh on European Banks

John Voos/ReutersParking an underused ship somewhere, like the River Fal in Britain, costs money.

FRANKFURT — Can a ship float and be underwater at the same time? If it has been financed by a European bank, the answer may be yes.

A glut of ships, and slack demand for shipping in the weak global economy, have reduced the value of cargo ships. According to some estimates, as many as half the cargo carriers on the high seas today may no longer be worth as much as the debt they carry — putting them underwater, in financial jargon.

Large vessels that might have sold for about $150 million new in 2008 fetch about $40 million today, according to Nicholas Tsevdos, a shipping specialist at CR Investment Management, which helps banks deal with distressed assets. And with cargo fees near record lows, many vessels are not earning enough to make debt payments, either.

As European leaders agonize about how to rescue Cyprus banks, the formerly obscure world of ship finance is a reminder of how much cleanup still lies ahead for the region’s banks. The growing fear is that some lenders, almost all of them in Europe, have yet to confront the scale of potential losses from an estimated $350 billion in loans made to the shipping industry.

“Many banks are still shackled by the leftover effects of the crisis,” Christine Lagarde, the managing director of the International Monetary Fund, told an audience in Frankfurt this week, without identifying any specific assets. “This is the weak link in the chain of recovery.” She urged banks to take a harder look at their problem loans.

Whether the risk from shipping loans is serious enough to put another torpedo into the euro zone financial system is hard to say because of a glaring lack of detailed information about banks’ portfolios of shipping loans.

Andreas R. Dombret, a member of the executive board of the German Bundesbank who is responsible for monitoring financial stability, said he thought the shipping crisis, while serious, did not pose a broad threat to the euro zone. “It’s not a concern for the stability of the financial system,” he said in an interview. “It’s not systemic.”

But he and other bank overseers are stepping up pressure on financial institutions to address their problems. Shipping is “a substantial regional and sectoral risk in the banking industry,” Mr. Dombret warned at an industry gathering in Hamburg last month. It was one of the few times a bank overseer of his stature had expressed concern about the shipping problem.

Under pressure from regulators, local governments that own most of HSH Nordbank in Hamburg said on Tuesday that they would raise their guarantees for the bank to 10 billion euros ($13 billion), from 7 billion euros ($9 billion). Though only a midsize bank, HSH is the biggest lender to the shipping industry, with more than $39 billion in outstanding loans. The announcement, by the City of Hamburg and State of Schleswig-Holstein, amounted to an admission that losses from shipping were greater than earlier estimates.

The shipping downturn, which began in 2008, has already driven several large fleet operators into bankruptcy. The Overseas Shipholding Group, the largest American tanker operator, filed for bankruptcy in November. The fear is that some of the banks most active in ship finance, which are concentrated in Germany, Scandinavia and Britain, are in denial about potential losses.

“It’s probably the most serious commercial problem that the banks have,” said Paul Slater, chairman of the First International Corporation, a consulting firm in Naples, Fla., that specializes in shipping. Banks with large portfolios of shipping loans “are just not taking the hits,” he said. “They are saying, ‘Give it time and it will work out,’ and it’s just not going to do that.”

For weak banks, the temptation to play down potential losses may be great. A frank appraisal of their losses would force some to raise billions in new capital or even to declare insolvency. That is true not only of shipping loans but also of other categories like commercial real estate, and it remains a fundamental problem for the euro zone economy.

The uncertainty about banks’ true financial health fosters mistrust among institutions, makes them reluctant to lend to each other and is partly responsible for a shortage of credit for businesses and consumers.

As sour assets go, ships are particularly troublesome. Unlike a plot of land, they require costly maintenance. They lose value over time from wear and tear or because more modern, fuel-efficient vessels make them obsolete. It costs money even to take an underused ship out of service and park it somewhere. The waters off Falmouth in Britain and Elefsina in Greece are popular anchoring spots for idle ships.

Investment funds that specialize in buying distressed debt have been wary about putting money into ships. That makes it hard for banks to unload unwanted shipping assets.

“Every hedge fund in the world is trolling Europe, but they are bidding on a small percentage of relatively good assets,” said Jacob Lyons, managing director of CR Investment Management in London.

Mr. Dombret of the Bundesbank pointed out that the banks that had made the most loans to the shipping industry were in nations like Germany or the Scandinavian countries whose governments had the least debt and were best able to cope with a banking crisis.

Mr. Dombret did not single out individual banks, but German banks like HSH Nordbank and Commerzbank in Frankfurt were among the top shipping lenders because German tax breaks favored ship finance. German banks’ exposure to shipping has been estimated at about $129 billion, more than double the value of their holdings of government debt from Greece, Ireland, Italy, Portugal and Spain. Aside from German banks, the DNB Group in Norway and Nordea in Sweden are big players in ship finance, as are Lloyds Banking Group and the Royal Bank of Scotland in Britain.

It does not necessarily follow that these banks will face losses on their shipping portfolios. Some of the savviest lenders probably still make money, or at least have made an honest appraisal of the value of their portfolios and set aside enough money to cover possible losses.

“We are very happy with our shipping business,” said Rodney Alfven, head of investor relations at Nordea. The bank, which is listed in Stockholm, increased the amount of money it set aside for potential bad loans in shipping to $81 million in the final three months of 2013 from $70 million the previous quarter. Over all, Nordea, the largest Swedish bank, has consistently made a profit from its shipping business, Mr. Alfven said. Shipping loans account for only 2 percent of Nordea’s lending, the bank said.

The sorry state of global shipping stems from a shipbuilding boom that peaked in 2008, just before the global financial crisis, and created a glut in cargo capacity. Rates for nonliquid cargo are half or less of the level needed for shipowners to break even, according an estimate by the consultant KPMG. That means that ships are doubly damaged. They do not earn enough to cover interest on their debt, nor can they be sold for the value of the loan.

Nordea has told investors it expects shipping to begin to recover in 2014, as the world economy rebounds. But others are more skeptical.

“By any kind of measure, this is a deeper and more difficult downturn than we’ve had in the last decade or two,” said Mr. Tsevdos of CR Investment.

Except for some specialized categories of ship, like liquid-natural-gas carriers, he said, “I don’t think there is a lot of indication for a lot of sectors that rates are going to turn around soon.”

Fed Officials Debate Bank’s Losses Once Economy Mends

When the economy grows stronger, the Fed plans to sell some of its vast holdings of Treasury and mortgage-backed securities. The Fed also plans to pay banks to leave some money on deposit with it to limit the pace of new lending.

And that could prove an awkward combination. The Fed faces the possibility of large losses as it sells off securities, which could force the central bank to suspend annual payments to the Treasury Department for the first time since the 1930s, even as it would be increasing the amounts paid to the banking industry for its cash holdings at the Fed to control inflation.

“That sounds like a recipe for political problems,” said James Bullard, president of the Federal Reserve Bank of St. Louis. He described the predicament as one reason the Fed might consider limiting its plans for additional asset purchases.

But Eric S. Rosengren, president of the Federal Reserve Bank of Boston, said that concerns about potential losses needed to be weighed against the benefits of asset purchases. The Fed holds almost $3 trillion in Treasuries and mortgage bonds, and it is adding about $85 billion a month in an effort to cut unemployment.

Mr. Rosengren, a leading advocate of the purchases, said Boston Fed research showed asset purchases this year could help create about 400,000 new jobs.

“That’s what the Federal Reserve should really be caring about, what’s happening with the dual mandate with and without” the asset purchases, Mr. Rosengren said. “When I think about the costs, I have to weigh that against the benefits,” he said at the US Monetary Policy Forum in New York on Friday.

By law, the Fed sends most of its profits to the Treasury, and in recent years those profits have soared as the Fed has collected interest on its investments. Last year, the central bank contributed $89 billion to the public coffers — essentially refunding a significant portion of the federal government’s annual borrowing costs.

The purpose of the investment portfolio is to hold down borrowing costs for businesses and consumers. As the economy revives, the Fed has said it will begin selling some of those holdings. But it faces potential losses on those sales because interest rates would be rising. Security prices, which move inversely to rates, would be falling, and the government would be issuing new debt at the higher rates, making the low-yield bonds that the Fed holds less valuable.

Estimating the potential losses requires a wide range of assumptions on Fed policy, economic growth and interest rates. A Fed analysis published last month, which assumed that interest rates rose to 3.8 percent later this decade, estimated that the central bank might record losses of $40 billion and suspend contributions to the Treasury for four years beginning in 2017. If rates rose by another percentage point, however, the analysis estimated that losses would triple. An independent analysis published on Friday foresaw losses of around $20 billion and a suspension of payments for only three years.

The Fed can afford to lose money because it can simply print more. It would record a liability, and pay down the debt as profits rebounded.

But there are signs that the Fed’s political opponents would seize on any losses as evidence of economic malpractice. And such that criticism could come at a vulnerable moment: central banks are never popular when they are raising interest rates.

Representative Jim Jordan, an Ohio Republican, cited the potential losses in an open letter this week to the Fed chief, Ben S. Bernanke, requesting more information on what he called “the potentially devastating consequences from any unwind.”

Jerome H. Powell, a Fed governor, insisted Friday that the central bank would not allow its course to be influenced by such political pressure.

“We’re independent for a reason,” he said. “Congress has given us a job to do.”

Some supporters of current Fed policy also argue that an economic revival would inoculate the central bank against criticism, in part because the government’s coffers would be filling even without the Fed’s contributions.

But Frederic S. Mishkin, a Columbia economist and one of the authors of the independent analysis of the Fed’s potential losses, said that was wishful thinking.

“Politicians have very short memories,” said Professor Mishkin, a former Fed governor. “They’re going to focus very much on the fact that the Fed is no longer pulling its weight in terms of producing remittances for the federal government.”

Wins and Losses for Gas Company in Marcellus Shale

In the natural-gas fields of Pennsylvania, Cabot Oil & Gas Corp. has had a split week in federal court — winning its motion to dismiss an amended complaint from a drilling company with which it had a contract and losing its argument that plaintiffs should show a heavy burden of proof before starting discovery in a separate case.