Big Fat Story
The government wants investor confidence restored.
Citigroup CEO Vikram Pandit is preparing to dismantle the financial superstore that Wall Street legend Sandy Weill built throughout the '80s and '90s. The bank could shrink by one-third, reports The Wall Street Journal. With two bailouts already in the works, federal regulators have now told Citigroup—America’s third-largest bank—to take whatever steps are necessary to restore investor confidence, reports The Washington Post. The sale of Smith Barney to Morgan Stanley now looks to be the first in a wave of deals. Consumer-finance units and the private-label credit-card business are reportedly next. The stock market’s reaction hasn’t been kind. Citigroup’s shares dropped below $5 this week, “a critical mark” where some institutional investors were expected to dump the stock. The future doesn’t look better—Citigroup faces a devastating fourth quarter, with expectations of a $10 billion operating loss, notes The New York Times.
The lending crisis that started in America continues to roil banks in Europe. A fresh profit warning from Germany’s largest bank, Deutsche Bank AG, and a prediction that HSBC may need fresh capital shook confidence in two European banks previously credited with dodging the worst of the crisis, Reuters reports. Swiss giants UBS and Credit Suisse warned on profit growth late last year. Meanwhile, analysts at Morgan Stanley predicted Britain’s HSBC may need to raise up to $30 billion in a rights issue. Shares hit a nine-year low on the report. There is “mounting talk,” the Times of London says, that the British government “will have to hive off their toxic assets, but this would trigger big writedowns and earnings drops from the banks.” For his part, London School of Economics’ Howard Davies hopes EU leaders can fashion a pan-European response for the banks or “2009 could be the year in which the single market begins to unravel, an outcome we would all live to regret.”
Ken Lewis faces “the struggle of his life.”
With Citigroup unraveling, the spotlight is inevitably turning to that other financial supermarket, Bank of America. Shares are down nearly 70 percent at the bank, America’s largest, since it agreed to take over Merrill Lynch last year. And now BofA is finalizing a government deal for billions in relief to complete the deal. CEO Ken Lewis is “caught in struggle of his life,” says the Charlotte Observer. Lewis forged the Countrywide Financial Corp. acquisition last year as well as Merrill, which is showing signs of splintering. Senior executives “are bolting from the firm right and left”, Charles Gasparino writes in The Daily Beast. Tension inside the ranks grows by the day, and much of it, according to people inside Merrill, can be attributed to John Thain, he says. Still, it would be “tough to argue that Bank of America is as troubled as Citigroup,” says Reuters’ Jonathan Stempel, even if analysts expect losses to keep rising in mortgages, including those from Countrywide and in the credit-card business.
Can Anyone Fix the Banks?
With Citi's desperate maneuvers and Bank of America now getting billions more in bailout funds, the U.S. banking system is back on center stage for the markets and Washington. Are we headed for another crisis?
More than 250,000 job cuts since 2007—how many this year?
Barclays, the British banking giant that bought the remains of Lehman Brothers last year, led the pack in financial-services job cuts announced this week with a total of 4,600. Separately, Dutch bank ING set plans to cut 750 jobs in the US. The two banks are the latest to scale back on employment to cut costs. Banks in the US announced more than 129,000 financial job cuts in 2008 through October; Citigroup led the pack among the Wall Street banks with cuts of close to 20,000. The rise in job cuts came after a dismal 2007 for the financial sector as some 153,000 jobs were shed.
With half of Treasury’s $700 Billion Troubled Assets Relief Program left to spend, the pressure is building on Democrats to keep the big banks and their troubles in view. The top two Federal Reserve officials this week called for a new effort to take toxic assets off the banks’ books. Fed Chairman Ben Bernanke and Vice Chair Donald Kohn said the illiquid investments raise questions about the “underlying value” of banks and may hinder “private investment and new lending.” Democratic lawmakers such as Barney Frank want foreclosure relief for homeowners and help for community banks, but looked to back the release the remaining TARP funds with fewer strings after a strong push by Barack Obama Tuesday. His economic advisor Lawrence Summers “was wise not to promise anything too specific. The purpose of TARP was not to stimulate the economy or to rescue each and every troubled sector… It was to stabilize the financial system,” argues the Washington Post.
Bankers loved the conglomerates. Shareholders? Not so much.
The demise of Citigroup’s structure is fitting a two-part cycle for conglomerates, says economist blogger Barry Ritholtz. “During the first part, acquisitions, mergers, big combinations are all the rage. It’s a giant ego stroke for the CEOs, and it generates lots of fees for the iBankers.” The next shoe to drop “comes when the awful handiwork of the M&A binge needs to be unassembled.” Shareholders never liked these deals. The question for the next ten years is how “the politicos and regulators, especially the Fed and FDIC, vote on the matter,” he posts. Still, we should have seen it coming, says Marek Fuchs in TheStreet.com. “Reality is that we've had a wave of financial supermarkets before, and they didn't work for some of the same reasons of disorganization and culture clash that felled Citigroup.”
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