Dealwatch: Banks, write-downs and the CEO shuffle

In a Deal newsweekly feature Feb. 15, Monga and Matt Miller examined Citi's wide-reaching campaign to shore up its balance sheet. Citigroup said in January it lost $9.83 billion for the fourth quarter and that it would write down $18.6 billion. The bank then slashed its dividend and looked abroad, as Peter Moreira noted:

Citigroup said in a statement it would raise $12.5 billion by selling convertible preferred stock through a private placement, including a $6.8 billion sale to the Government of Singapore Investment Corp. Pte. Ltd. The other investors include Los Angeles-based Capital Research Global Investors and Capital World Investors; the Kuwait Investment Authority; the New Jersey Division of Investment; Saudi Prince Alwaleed bin Talal; and former Citigroup chairman Sanford I. Weill and The Weill Family Foundation.

In addition, Citigroup said it would hold a public offering of convertible preferred shares and nonconvertible preferred stock, which together would raise a further $2 billion.

Days after being named CEO of the New York banking giant, Vikram Pandit unveiled plans Dec. 14 to bring $49 billion of Citigroup's off-balance-sheet assets onto its books, which was met with mixed reaction from investors, as the bank said in November it wasn't contractually obligated to do so. Monga and Moreira noted:

Some investors were angered by the bank's about-face on the issue, while others said it was a positive move that would have only a marginal effect on Citi's balance sheet but help the broader markets overall. ...

Citi announced late on Thursday that it would backstop seven structured investment vehicles, or SIVs, with a liquidity line. The SIVs -- which borrow money in the short-term commercial paper and medium-term note markets and invest that money in structured products like mortgage-backed securities, collateralized loan obligations, auto loans and credit card facilities -- have been struggling to roll over their debt in the face of market worries about the health of their investments.

The move called into question a U.S. Treasury-backed initiative for a backstop fund for SIVs. Some said it would eliminate the need for a superfund, covering nearly half the assets it would have comprised, which, it was expected Citi, J.P. Morgan Chase & Co. and Bank of America Corp. would primarily bankroll.

Citi, which has reeled from the credit crisis, named Pandit, 50, its CEO Dec. 11. A Morgan Stanley vet and head of alternative investment banking at Citi, Pandit founded hedge fund Old Lane Partners LP and sold it to Citi in April. The bank's CEO search followed the resignation of Charles Prince Nov. 4 amid its exposure to $11 billion of fresh write-downs on top of $6.8 billion it reported in the third quarter resulting from the subprime loan crisis.

Weeks later, Citi sold a 4.9% stake to Abu Dhabi Investment Authority for $7.5 billion, and days after that, a representative confirmed Dec. 5 plans to sell its Greenwich Street complex for $1.58 billion to SL Green Realty Corp., which bills itself as New York City's largest office landlord.

Among other management changes, Citi in November tapped Jorge Bermudez for its top risk post. Bermudez, Monga wrote, "is replacing David Bushnell, who resigned earlier [in November] after ... Prince fell on his sword amid massive write-downs at the bank." Citi also made an effort to hand on to originator Chad Leat, even after he lost his job as co-head of global capital markets, responsible for debt origination. Monga wrote:

Leat, 50, had been co-head of global capital markets, responsible for debt origination. But he lost that job ... when [Pandit] restructured the capital markets group by combining equity and fixed-income capital markets origination into one unit. The combined group will be led by Tyler Dickson, 40, formerly head of global equity capital markets.

Upon Prince's resignation, Dan Slater noted his successor would have a "pivotal role" deciding whether to break up the bank.

Bank of America Corp.

BofA said Jan. 15 it would sell its prime equity brokerage unit and slash 650 jobs. The news came days after the bank agreed to embrace much-troubled Countrywide Financial Corp., the largest mortgage lender in the U.S., paying $4 billion for the company. The bank had said in mid-November it would write-down $3 billion for its fourth quarter, a projection its CEO Ken Lewis later said would likely increase.

SUN STILL SHINING

Goldman, Sachs & Co.

But some banks have fared better than their peers or put an optimistic twist on their news. Goldman took a $1.48 billion hit for the third quarter, AP noted, a drop in the bucket compared to some, and for the year ended Nov. 30, said it had net earnings of $11.6 billion and record earnings per share. The company has said it won't take any further write-downs, according to another AP report. The Wall Street Journal indicated said Dec. 14 that Goldman has profited from the credit crisis, that a bet securities backed by high-risk home loans would fall actually enabled a $4 billion profit for the year ended Nov. 30, the paper said citing sources.

J.P. Morgan Chase & Co.

J.P. Morgan said Jan. 16 it would take a $1.3 billion write-down, and that net earnings slid 34% to $3 billion in the fourth quarter. J.P. Morgan took a $2 billion write-down Oct. 17, but managed to post a 2.3% rise in earnings, The New York Times pointed out. As Monga noted:

J.P. Morgan has largely avoided taking massive hits to its balance sheet. But the bank did not even have a risk officer for the past year, having never replaced Don Wilson, who retired in 2006. That changed last week, when it named former Goldman, Sachs & Co. banker Barry Zubrow to the top risk post.

Lehman Brothers Inc.

Meanwhile, as AP noted Dec. 10, Lehman Brothers was slated to report its fourth quarter earnings Dec. 13, having taken a write-down of nearly $1.3 billion in its third quarter, without advanced guidance as to what it expected. The bank said fourth-quarter earnings per share fell 10% and that it would write down $830 million for the quarter.

HSBC Holdings plc

Europe's largest lender on Nov. 14 wrote down $3.4 billion for the third quarter. Paul Whitfield pointed out:

London-based HSBC said the charge would cover about $700 million of losses related directly to the U.S. real estate market -- its HSBC Finance unit is one of the biggest subprime lenders in the U.S. -- while the remainder was due to losses on unsecured loans and its credit card business.

Analysts anticipate HSBC will feel more fallout from the U.S. mortgage crisis. James Hutson and Mark Phin of Keefe Bruyette & Woods Ltd. wrote in a note that they expect the "charge to deteriorate further."

And further deterioration could also lead to increased shareholder pressure.

Barclays plc

The next day, Barclays on Nov. 15 said it would write down $2.7 billion, less than expected, and a 10-month profit for its investment bank. Laura Board highlighted relatively positive analyst reaction:

"The scale of the losses are certainly not in line with the worst-case scenario which some had been factoring in and, indeed, Barclays Capital as a whole improved on its 2006 performance -- quite an achievement given the wider global trading concerns," wrote Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers in a note.

Deutsche Bank AG

In early October, Deutsche Bank unveiled a $3.1 billion write-down of its loan portfolio. It wasn't all grim, however, Bulkeley pointed out:

Despite the losses, Deutsche Bank still expects 1.2 billion [euros] in third-quarter net income, level with the same figure a year earlier. However, the addition of 200 million [euros] in tax credits for the period will allow the bank to beat its third-quarter 2006 results.

Royal Bank of Scotland plc

RBS on Dec. 6 said it would write down $3 billion in related losses, which also came in lower than had been expected. "Royal Bank also noted that its operating profit will be 'well ahead' of the 9.8 billion [pound] consensus forecast," Renee Cordes noted.

Meanwhile, Monga and Moreira noted that several European banks have also taken steps to bolster their SIVs, including HSBC, SocGen, Standard Chartered plc and Rabobank Groep NV.

NEXT IN LINE

As the chief executive shuffle began, Slater weighed in Nov. 9 on how much firms would need to shell out for new CEOs. A lot, it turns out:

Critics of executive comp -- particularly those in the pay-without-performance camp, such as Harvard Law School professor Lucian Bebchuk -- might take comfort in the average CEO tenure, across all industries, having decreased by about 30% since 1998, according to a study by University of Chicago's Steven Kaplan. But while that means accountability is up, it also means -- as the law of unintended consequences would have it -- that pay is on the rise. When CEO candidates see that the buck stops so abruptly with, say, Chuck Prince, they want to be paid a premium for what they consider increasing job risk.

And Yvette Kantrow gave a rundown Nov. 9 of "slightly weird facts about very wealthy Wall Streeters," including: 22-foot Christmas trees and Manhattan apartments, golfing alone and allegations of pot smoking.