MarketView for May 14

Summary

The major equity indexes were lower on Monday due to the worsening political upheaval in the euro zone and the possibility that China's economy may be softening more than previously thought. As a result, the S&P 500 finished lower for the fourth day of five to close at its lowest level since February, adding fuel to worries of a coming market correction. Banks and energy companies paced the decline with Exxon Mobil down 1.2 percent closing at $82.12.

State television in Greece reported the president of the fiscally beleaguered country will continue talks on forming a coalition government, although Socialist leader Evangelos Venizelos said on Monday he was not optimistic that a government could be formed.

Banks were pressured by JPMorgan Chase & Co (JPM.N), which announced the exit of a top executive after suffering trading losses that could reach $3 billion or more. JPMorgan shares fell 3.2 percent to $35.79 after losing 9 percent on Friday. The KBW Bank Index .BKX dropped 2.6 percent.

Adding to the swirling political winds in Europe, German Chancellor Angela Merkel's Christian Democrats suffered a crushing defeat on Sunday, which could encourage the opposition to increase attacks on her austerity policies. Merkel said on Monday the defeat was a bitter setback, but would not alter her view on how to achieve growth.

Concerns about the depth of a slowdown in China have also been troublesome. China's decision on Saturday to cut the amount of cash banks must hold as reserves, normally seen as a pro-growth move, suggested the country may be facing more significant hurdles.

Groupon closed up 18.5 percent at $11.74 after surging more than 20 percent during the session in a short-covering rally as traders scrambled to close bearish bets ahead of the daily deal company's first-quarter results.

Safe-haven currencies, including the dollar and the Japanese yen, rose, with the euro hitting a four-month low against the dollar. Oil fell sharply, with Brent crude falling to its lowest level in 3-1/2 months.

In merger news, Avon Products said on Sunday it told Coty that it would consider the smaller company's $10.7 billion takeover bid and it expected to respond within a week. Avon shares rose 3.8 percent to close at $20.96.

Yahoo is replacing its CEO for the third time in as many years, and giving three board seats to a hedge fund led by Daniel Loeb, putting him in a strong position to influence strategy at the struggling Internet company. The stock advanced 2 percent to $15.50.

Volume was modest with about 6.6 billion shares changing hands on the three major equity exchanges, a number that was slightly below the daily average of 6.78 billion shares.

Ally’s ResCap Files Chapter 11

Ally Financials mortgage unit filed for bankruptcy protection on Monday, and the former in-house financing arm for General Motors said it will sell some international operations to help set it on a path to repaying $12 billion of government bailout money.

The bankruptcy, which still needs court approval, came early Monday as Residential Capital, known as ResCap, faced upcoming bond payments and a possible loss of financing from its parent, which is eager to shed mortgage liabilities that have left it limping in the wake of the financial crisis.

At the same time, Nationstar Mortgage Holdings, which is majority-owned by Fortress Investment Group LLC, struck a deal to buy substantially all of the mortgage-servicing and related assets from ResCap for about $2.4 billion, including debt. The deal will make Nationstar the opening bidder in a court-supervised auction.

Ally has been besieged in the past few years by losses at ResCap, once a major subprime lender and profit engine. The company has considered bankruptcy for ResCap and other ways to shed the unit since at least 2009, but has never pulled the trigger. The bankruptcy declaration is intended to help Ally focus on its main auto lending and Internet banking businesses and put together a plan to pay back what is owed to taxpayers.

ResCap plans to sell its remaining mortgage loans and other assets for $1.6 billion to Ally, unless another bidder steps up. While operating in bankruptcy, ResCap, will continue operating but will eventually wind down.

Nationstar would emerge as a top U.S. mortgage servicer if its bid is successful. The purchase would give it more than $370 billion in new loans to service, while any liabilities would stay with the ResCap bankruptcy estate.

The Treasury Department injected $17 billion into Ally through multiple bailouts during the financial crisis and now owns nearly 74 percent of the company. Ally still owes the government about $12 billion, counting dividend payments by the lender and sale of some securities by the Treasury.

The bankruptcy comes as pressure increases on Ally to repay that money and problems at ResCap become increasingly unmanageable. The Obama administration is trying to recoup money from crisis-era bailouts before the presidential election in November and does not want Ally to become a black mark on the auto industry restructuring.

ResCap is a rare example of a subsidiary of a bank holding company filing for bankruptcy. It could serve as a road map for Bank of America as it grapples with its struggling Countrywide mortgage business.

Ally will take a $1.3 billion charge, which covers its $400 million equity investment in ResCap, a $750 million settlement with ResCap and $130 million in reserves for claims related to mortgage-backed securities. In return, Ally receives legal releases to claims over mortgage-backed securities with ResCap and third-party litigants. Ally said ResCap has also obtained support for its restructuring from certain note holders.

In addition, some investors in residential mortgage-backed securities (RMBS) issued by ResCap will support the reorganization. ResCap and 17 institutional investors reached a proposed settlement in which ResCap will grant an $8.7 billion claim to 392 RMBS trusts issued from 2004 to 2008, the law firm for the investors said in a statement.

Ally will also seek "strategic alternatives" for its auto, insurance and banking businesses in Canada, Europe, Britain, Mexico and South America. These operations have about $30 billion in assets.

Of Nationstar's total purchase, the equity portion is expected to be $880 million, consisting of about $700 million for the servicing rights and $180 million for the advances.

About half the equity is coming from Nationstar and the rest from Newcastle Investment Corp, a mortgage REIT managed by Fortress, and other Fortress funds. There is a $72 million breakup fee and reimbursement of up to $10 million of transaction-related expenses if Nationstar does not win the auction. The transaction is expected to close by year end.

Ally does not have publicly traded shares, but has stockholders. Besides the Treasury, a trust for GM holds 9.9 percent and private equity firm Cerberus Capital Management owns 8.7 percent.

Coty Withdraws Offer

Coty announced on Monday that it is withdrawing its $10.7 billion takeover bid for Avon, stating that Avon had missed its deadline to start talks. Coty had first made a public offer for Avon in April, but later told that company's board that it had until the close of business on Monday to start talks.

"Your total lack of engagement with us leads us to believe that you remain reluctant to explore a friendly, negotiated combination on a reasonable timetable," Coty Chairman Bart Becht said in a letter to Avon dated Monday and made public. "It is time for Coty Inc to move on and pursue other opportunities."

Coty first reached out to Avon in March, and later made public its offer to buy the company for $23.25 per share. That offer included financial backing from Warren Buffett's Berkshire Hathaway. Although its revenues are three time that of Coty, Avon faces declining sales domestically, as well as a probe into overseas bribery allegations.