Fannie Mae (FNM) and Freddie Mac (FRE) ended an eventful week on a low note Friday. William Poole, president of the Federal Reserve Bank of St. Louis, warned in a speech to the U.S. Monetary Policy Forum in New York that the government-sponsored mortgage lenders could be the source of “substantial problems” should house prices continue to decline sharply this year.
 
Poole, a longtime critic of Fannie and Freddie, said there are two ways the government can discourage financial actors from taking excessive risks: by not bailing out firms that fail and by forcing firms to maintain adequate capital. Poole said that while U.S. banks have generally been well capitalized and therefore able to absorb the losses tied to the debt market problems of the past year, “I am more skeptical of the financial strength of the GSEs.” The comment comes days after Fannie and Freddie, which bear much lighter capital requirements than do banks, reported a combined fourth-quarter loss of $6.1 billion.
 
Poole continues that if Fannie and Freddie end up shouldering outsize losses that deplete their capital, the blame would lie with the implicit government guarantee of the companies’ obligations.

“I do not have any information on the GSEs that the market does not also have,” Poole says. “Nevertheless, in assessing the risk of further credit disruptions this year, I would put the GSEs at the top of my list of sources of potentially serious problems. If those problems were realized, they would be a direct result of moral hazard inherent in the current structure of the GSEs.” (Hat tip: Abraham Pumblechook.)

Ambac (ABK) and MBIA (MBI) sank along with the broader market Friday, after the investors in the bond insurers got hit with a bevy of bad news. First, billionaire vulture investor Wilbur Ross said he would sink as much as $1 billion into rival Assured Guaranty (AGO), bolstering the company’s capital position and giving it a chance to benefit from the uncertainty surrounding MBIA and Ambac. Then CNBC reported that talks regarding a $2.5 billion capital-raising effort for Ambac have hit a snag, with ratings agencies apparently demanding a bigger infusion, though the channel stressed that discussions continue. Last but not least, MBIA - which took some $4 billion in mark-to-market losses in its fourth quarter to account for declines in the market value of its derivatives portfolios - said on page 28 of its annual report that it expects further mark-to-market writedowns in January. Approaching midday, Assured Guaranty was up 12% and MBIA and Ambac were each down 5%. But recent history shows that if Ambac is able to work out a deal with its bankers Friday afternoon, shares of it and MBIA - as well as the big market indexes - could reverse course in a big way.

The toll of the mortgage mess keeps rising. Analysts at UBS (UBS) said Friday they expect financial firms worldwide to take writedowns totaling $600 billion in the wake of the breakdown of debt markets that started in June. The comment comes a day after insurance giant AIG (AIG) took an $11 billion hit on its portfolio of credit default swaps and government-sponsored mortgage lender Freddie Mac (FRE) took $3.1 billion in writedowns on its credit guarantee and derivatives holdings. UBS itself was hit with a $14 billion writedown on mortgage-related securities earlier this month. All told, big companies have taken $160 billion in writedowns since the credit crunch took hold last summer, Bloomberg reports, and UBS analysts expect the pain to get much worse. “Leveraged risk positions are a cancer in this market, wrote UBS analyst Geraud Charpin, “and the sooner it is treated the better.”

Vulture investor Wilbur Ross is investing as much as $1 billion in Assured Guaranty (AGO), a bond insurer that has sidestepped the worst of the questions looming over rivals Ambac (ABK) and MBIA (MBI). Ross will buy $250 million worth of stock now and could buy $750 million more next year, at Assured’s option. He’ll pay at least $21.76 a share for the stake, which is a dollar below Thursday’s closing price, though he could pay more if Assured shares rise Friday and Monday.

The news comes after Ross said publicly he would consider an investment in the financial guaranty business, leading some observers to conclude he was looking to infuse cash into either Ambac or MBIA, which until recently have been at risk of losing the triple-A ratings that allow them to write new policies. At one point a U.K. newspaper reported Ross was close to a deal with Ambac, leading some people to wonder what Ross was thinking. But that deal never came to pass, and investors continue to await confirmation of a bank-led capital infusion of Ambac that has been reported this week. 

For his part, Ross indicated Friday that he sees a bright future at Assured, which unlike its big rivals isn’t seen as painfully exposed to possible losses on mortgage-related securities like collateralized debt obligations.  “We believe that Assured has an excellent opportunity during this time of uncertainty in the financial markets to provide investors with credit enhancement products in both the public and structured finance markets,” Ross said. “We look forward to a long and profitable association with Assured.”
 

This just in from Fortune’s Scott Moritz:

The latest earnings report from Dell (DELL) suggests founder Michael Dell hasn’t restored the magic to the PC giant. The Round Rock, Texas, computer maker missed fourth-quarter earnings estimates by a penny after the market closed Thursday, on slightly weaker-than expected sales. The less-than-fantastic performance underscores Dell’s struggle against top PC shop Hewlett-Packard (HPQ).

Dell has been attempting to shift its business model from a light inventory online sales stream to a more conventional retail outlet approach. But the problem is, says one investor who is short Dell’s stock, is that “they are taking on the king of the sales channel, and their costs and capabilities are out of whack.”

Adjusting for one-time items, Dell posted earnings of 35 cents a share, up from 30 cents a year ago but not quite enough to meet the analysts’ estimates of 36 cents. Sales in the fourth quarter were $15.9 billion, up from $15.6 billion in the third quarter and above the $14.4 billion level last year. Analysts were looking for $16 billion.

Analysts point to Dell’s modest product growth rates as a sign that the company isn’t swiping much market share from the competition. PC sales grew 11% in the quarter and notebook sales were up 13%. While that’s respectable, there is still a wide disparity between those numbers and H-P’s 50% notebook growth rate.

Gross margins, the take of revenue left after covering the cost of sales, actually widened to 18.8% from 18.5% in the third quarter, due largely to the cheaper costs of supplies like memory and chips. That break on expenses was expected to provide Dell with a little tailwind as it sailed through the quarter. But so far Michael Dell’s strategy to push into big retail stores like Wal-Mart (WMT), Staples (SPLS) and Best Buy (BBY) hasn’t fired up as much revenue growth as Wall Street had hoped.

Dell shares fell 80 cents, or 4%, to $20.07 in after-hours trading.

Valentine’s Day was anything but sweet for jumbo lender Thornburg Mortgage (TMA). Shares of the New Mexico company slid 20% Thursday after Thornburg said weakness in the bond market resulted in more than $300 million in margin calls on its mortgage securities portfolio, starting on Feb. 14. The company said it doesn’t believe it will have to take any losses on the securities, but a sharp decline in demand for the paper has pushed market prices down, triggering calls from Thornburg’s brokers for additional collateral.

So far, the company has met the margin calls, but it now worries that it may have to sell assets into a weak market to raise cash if values continue to drop. “In the short term, the sudden decline in the valuation of these securities has left us with reduced readily available liquidity to meet future margin calls, relative to our cash and unpledged securities position of December 31, 2007,” Thornburg said in an 10-K filing with the Securities and Exchange Commission. “In the event that we cannot meet future margin calls from our available cash position, we might need to selectively sell assets in order to raise cash.”

Thornburg’s disclosure shows why federal regulators are eager to lift limits on the size of the mortgage portfolios at government-sponsored lenders Fannie Mae (FNM) and Freddie Mac (FRE). Wednesday’s cap-lifting decision isn’t likely to be of any immediate help to Thornburg, which specializes in loans bigger than Fannie and Freddie have been handling, though there’s hope that legislation passed earlier this year will eventually lead the GSEs into the so-called nonconforming market. In the meantime, Thornburg is left hoping the market doesn’t melt down further.

Freddie Mac (FRE) posted a bigger-than-expected fourth-quarter loss and warned that a weakening economy will lead to higher credit losses in 2008 and 2009. The McLean, Va., mortgage lender lost $2.5 billion, or $3.97 a share, for the quarter ended Dec. 31, compared with a year-ago loss of $401 million, or 73 cents a share. Analysts on Wall Street were looking for a loss of $2.04 a share.

Freddie said the latest-quarter loss reflected mark-to-market losses of $800 million on the value of the company’s credit guarantee asset and $2.3 billion on the value of the company’s derivatives portfolio, both due to the impact of declining long-term interest rates. Credit-related expenses, consisting of provision for credit losses and real estate owned operations expense, were $912 million for the fourth quarter, compared to $1.4 billion for the third quarter. Freddie said it expects total credit losses of $2.2 billion in 2008 and $2.9 billion in 2009, as a result of the deteriorating housing market.

The company also said it had adopted new accounting policies that “significantly enhance the transparency and understandability of the company’s financial results, promote uniformity in the accounting model for the credit risk retained in its primary credit guarantee business and better align revenue recognition to the release from economic risk of loss under its guarantee.” Under Freddie’s old accounting, its fourth-quarter loss would have been $3.7 billion.

The shift comes on the day that the company returned to timely financial reporting following several years of late filings as Freddie sought to fix problems with its accounting and financial oversight. Freddie’s promise to return to timely reporting was partly behind Wednesday’s decision by its regulator, the Office of Federal Housing Enterprise Oversight, to lift limits on the mortgage-portfolio holdings of Freddie and its government-sponsored sibling Fannie Mae (FNM). The hope is that Fannie and Freddie can ease the housing crunch by making the mortgage market more liquid. But as Thursday’s numbers show, the companies have plenty of problems of their own.

Sprint (S) is admitting defeat in its 2005 merger with Nextel. The struggling telco posted a fourth-quarter loss of $29.5 billion, or $10.36 a share, reversing the year-ago profit of $261 million, or 9 cents a share. The latest quarter was hit by a $29.7 billion writedown of merger-related goodwill, reflecting the difference between the price Sprint paid and the actual value of the assests purchased. Excluding that gargantuan charge, Sprint made 21 cents a share on an adjusted basis, beating the 18-cent analyst consensus estimate. Revenue fell 6% from a year ago to $9.8 billion, missing the $9.95 billion Wall Street target.

“The fourth quarter financial results reflect the challenges facing our wireless business,” said CEO Dan Hesse, who took over late last year for Gary Forsee. Adjusted operating income at the wireless business plunged to $168 million from $652 million a year earlier, as Sprint continued to lose customers, pressuring service revenue. Fortune’s Michal Lev-Ram and Scott Moritz reported Wednesday that Sprint is having more and more trouble holding onto lucrative wireless postpaid users. In the fourth quarter, the company said, total post-paid subscribers declined by 683,000.

In response, Hesse said Sprint is taking steps to bolster its financial flexibility, by saying it won’t declare any dividends in the forseeable future and letting its $6 billion stock buyback plan expire. But the business is in such disarray that he’s taking his time to consider what needs to be done. “Internally, we have rolled out a unified company culture focused on accountability and on providing a superior customer experience,” he said Thursday. “We plan to share some of our initiatives for improving the customer experience and operations next quarter.” But, he cautions, “Strategic assessments and changes may take longer to complete.”

Another obscure corner of the debt market is causing pain for taxpayers. States and cities selling municipal bonds are finding they have to pay more to issue so-called variable-rate demand notes, The Wall Street Journal reports. As with the collapse earlier this month of the now infamous auction-rate securities market, the problem is that Wall Street dealers such as Bear Stearns (BSC) and Morgan Stanley (MS) have stopped buying the debt, which allows municipalities to borrow for the long term at lower short-term rates. The dealer pullback has caused demand to dry up and interest rates to spike. The rate California paid on a recent $300 million issue quadrupled to more than 8%, the Journal reports.

Meanwhile, in a novel twist, the failure of the notes to sell at auction could leave them piling up on the balance sheets of so-called backstop banks such as Bank of America (BAC) and Citi (C), which are already stuck with billions of dollars of loans and other assets they can’t sell. That’s not even the worst news in the municipal bond market, though: Bloomberg reports that the California city of Vallejo is near a bankruptcy filing brought on by the collapse of the housing market, which has resulted in lower tax revenue, and rising pension costs. “Bankruptcy is a last resort,” councilwoman Joanne Schivley said, Bloomberg reports. “But guess what folks, that’s where we are now at.”

Elan (ELN) dropped 7% after the Irish drug company and Boston-based partner Biogen (BIIB) said their Tysabri drug for multiple sclerosis can harm patients’ livers. The news was first reported by Bloomberg, which cited a note to doctors posted on the Food and Drug Administration’s Web site. The development comes three years after the companies pulled the drug off the market for 16 months so regulators could probe Tysabri’s link to a rare, fatal brain infection. The drug returned to the market in 2006 after the FDA decided the benefits of the drug to MS patients outweighs the risks. The possibility that Tysabri could damage the liver has been reflected in the drug’s label since last month, Bloomberg reported, but the FDA says some doctors may not have known.

The letter adds some to uncertainty overhanging Elan, which is more dependent on Tysabri revenue than its bigger partner Biogen. Rating agency Moody’s recently upgraded Elan, citing Tysabri’s increasing acceptance in the marketplace since its 2006 relaunch. If reports of liver problems slow those gains, though, Elan’s stock - which has doubled over the past year - could be in for a rough patch.