After the closing bell last night, Thornburg Mortgage, Inc. (NYSE: TMA) managed to report a second-quarter profit, but the firm warned investors that it's in jeopardy of collapse as margin calls continue to roll in. Thornburg said that it covered $219 million of demands for collateral on August 21, and may face another $25.9 million of margin calls. Plus, uncertainty still remains about the outcome of an exchange offer that was meant to pull the New Mexico-based mortgage lender back from the brink of bankruptcy.

The jumbo-loan specialist said it swung to a second-quarter profit of $412.3 million, or 84 cents per share, after swallowing a first-quarter loss of $3.31 billion. During the recently concluded quarter, Thornburg wrote down $209.6 million in mortgage losses, which was offset by a $536.9-million gain from the declining value of a liability. Adjusted income for the period was $22.7 million.

Under the terms of a deal with MatlinPatterson Global Advisers, Thornburg agreed in March to conduct an exchange offer for some preferred stock. The offer expires on September 3, and holders of two-thirds of each of four classes of preferred stock must participate. The company warned that uncertainty about the outcome of the exchange offer, combined with the still-shaky market conditions, "raise substantial doubt about the company's ability to continue as a going concern for the foreseeable future."

The Wall Street Journal [subscription required] reports that banks lent a mind-boggling $32 for every dollar of equity in Carlyle Capital, the credit defaulting mortgage investment joint venture between Carlyle Group and Thornburg Mortgage (NYSE: TMA). This demonstrates that while leverage can magnify returns in an up-market, it can also magnify losses in a down one.

The cause for both bankruptcies was that banks made a margin call -- a request for some of their loan to be repaid immediately -- and neither party was willing to cough it up. In the case of Thornburg's $28 million cash call, it is a bit less surprising that it could not come up with the money. But Carlyle Capital's parent is an $80 billion private equity firm -- so it's interesting that it chose not to fork over the $37 million the banks wanted.

What's going on here is that our capital markets depend on the health of Wall Street banks. The banks are running out of capital because the value of their assets -- particularly asset-backed securities (ABSs) such as Collateralized Debt Obligations (CDOs) -- are plummeting. As those assets drop in value, banks need to write down those values and raise capital to maintain their capital ratios -- for example, Citigroup's (NYSE: C) target ratio of capital to assets -- its so-called Tier One Capital Ratio -- is 7.5%.

Thornburg Mortgage (NYSE: TMA) is recently trading at $1.64 in pre-open trading, below its close of $3.40.

TMA announced it received a letter from JP Morgan (NYSE: JPM) stating that an event of default exists after failing to meet a $28 million margin call.

RBC Capital Markets says "TMA circumstances is now likely very dire."

TMA over all option implied volatility of 207 suggested large risk

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

AFXNews reports that Thornburg Mortgage Inc. (NYSE: TMA) has defaulted on a credit agreement with one of its banks. That's because it could not come up with $28 million it owed JPMorgan Chase & Co. (NYSE: JPM). Specifically, Thornburg needed to pay JPMorgan -- to whom it owes $320 million -- the $28 million for a margin call.

According to The Associated Press, the notice of default from JPMorgan triggered cross-defaults "under all of the company's other reverse repurchase agreements and its secured loan agreements." According to MarketWatch, Thornburg has been facing margin calls due to a 15% drop in the value of mortgage-related securities in early February.

Margin calls are a common response from investors when securities purchased with loans rapidly lose value. If they fall too far too fast, they may hit triggers that require the issuing company to either shore up their position or sell off additional assets.

MOST NOTEWORTHY: Thornburg Mortgage, Expedia and Perot Systems were today's noteworthy upgrades:

• Jefferies upgraded shares of Thornburg Mortgage Inc Corp (NYSE: TMA) to Buy from Hold as they believe the stock is at an inflection point, characterized by accelerated earnings and dividend growth.
• Expedia Inc (NASDAQ: EXPE) was upgraded to Outperform from Neutral at Credit Suisse, as they believe the company is well-positioned to benefit from global e-travel and media opportunities, strong free cash flow, and attractive valuation.
• Perot Systems Corporation (NYSE: PER) was upgraded to Sector Perform from Underperform at RBC Capital following its Q4 report.

OTHER UPGRADES:

• HSBC raised Swiss Reinsurance Company (OTC: SWCEY) to Overweight from Neutral.
• The Estee Lauder Companies Inc (NYSE: EL) was upgraded to Equal Weight from Underweight at Lehman.
• Cantor upgraded Genomic Health Inc (NASDAQ: GHDX) to Buy from Hold.

MOST NOTEWORTHY: eBay, Anworth Mortgage, Healthways, Coca-Cola and Mattel were today's noteworthy upgrades:

• Soleil upgraded shares of eBay (NASDAQ: EBAY) to Hold from Sell following the Q3 results due to improving near term fundamentals with diversification of revenue streams.
• JMP Securities raised estimates on Anworth Mortgage (NYSE: ANH) to Strong Buy from Market Outperform citing the lower cost of funding and the expected improvement in earnings.
  
• Healthways (NASDAQ: HWAY) was upgraded to Buy from Neutral at Broadpoint, as they believe the company's guidance implies it is well positioned into FY09.
  
• Gabelli upgraded shares of Coca-Cola (NYSE: KO) to Buy from Hold as they believe strong international demand and the company's ability to execute will lead to double digit growth in coming years.
  
• Mattel (NYSE: MAT) was upgraded to Outperform from Neutral at Credit Suisse. The firm views risk/reward as compelling.

OTHER UPGRADES:

• WestLB upgraded Ericsson (NASDAQ: ERIC) to Hold from Reduce.
  
• Keefe Bruyette upgraded Thornburg Mortgage (NYSE: TMA) to Market Perform from Underperform.
  
• Merrill Lynch upgraded Repsol SA (NYSE: REP) and Palm (NASDAQ: PALM) to Buy from Neutral.

MOST NOTEWORTHY: Jones Lang LaSalle, Digital River, Dynamic Materials, Allot Communications and Oxford Industries were today's noteworthy downgrades:

• Wachovia downgraded shares of Jones Lang LaSalle (NYSE: JLL) to Market Perform from Outperform, as they expect the deterioration in the credit markets to lead to fewer closed deals over the next year.
  
• Oppenheimer transitioned coverage of Digital River (NASDAQ: DRIV) and downgraded shares to Neutral from Buy. The broker finds shares fairly valued given the pricing pressure and customer concentration.
  
• Jefferies downgraded shares of Dynamic Materials Corporation (NASDAQ: BOOM) to Hold from Buy on valuation as they believe shares are already pricing in the company's near-term earnings potential.
  
• Allot Communications (NASDAQ: ALLT) was downgraded to Sector Performer from Outperformer at CIBC World Markets after the company pre-announced weaker-than-expected Q3 results.
  
• Oxford Industries (NYSE: OXM) was downgraded to Hold from Buy at Morgan Joseph and to Neutral from Buy at SunTrust following the disappointing Q1 report and guidance.

OTHER DOWNGRADES:

• Piper Jaffray downgraded Target Corporation (NYSE: TGT) to Market Perform from Outperform.
  
• Thornburg Mortgage (NYSE: TMA) was downgraded to Underperform from Market Perform at Keefe Bruyette.
  
• JP Morgan removed Continental Airlines (NYSE: CAL) from its Focus List.
  
• NRG Energy (NYSE: NRG) was downgraded to Neutral from Buy at Calyon.

On today's STOP TRADING! segment on CNBC, Jim Cramer said that Thornburg Mortgage Inc. (NYSE:TMA) is one of the companies in mortgage land that is a bad short that will hurt the traders betting against it. Cramer thinks that many of these mortgage companies are really at risk, but Thornburg isn't one of them.

We'll see how these mortgage plays pan out. Obviously there are going to be more failures. But there will also be winners, at least history dictates that there always are. Thornburg shares are down under $24 and its trading range this year is $22.39 to $28.40. It is also still profitable. Cramer just created his "Mortgage Market Madness Index" on Friday, and this was one of the components. With the FOMC meeting tomorrow, financials are going to be the wildcard the first half of this week.