By Eric Dash
Published: October 16, 2008
Citigroup reported a $2.8 billion loss in the third quarter, the fourth consecutive period that the global banking giant has been swamped by write-downs on investments and steeper losses on consumer loans.
The bank took more than $13.2 billion in charges in the third quarter, bringing the total amount of write-offs and credit losses since the credit crisis began last year to more than $64 billion.
And as more signs of a global slowdown surface, the bank continues to come under pressure. Although the write-downs in its investment bank declined for the third quarter, losses in Citigroup’s global consumer businesses rose sharply. Credit costs increased 84 percent, to $9.1 billion, driven by charge-offs and reserve increases in the bank’s credit card, consumer finance and banking operations.
Every major region of the world where Citigroup operates, with the exception of the one anchored by the Middle East, reported a decline in revenue.
“If you made it past the credit crisis, you are not making it past the economic carnage,” said Meredith A. Whitney, a banking analyst at Oppenheimer & Company. “And there is more to come.”
The quarterly loss was a stark reversal from the $2.2 billion the bank earned in the period a year ago. The loss was 60 cents a share, compared with a gain of 42 cents a share in the third quarter a year ago. Revenue fell 23 percent, to $16.7 billion.
Citigroup shares were down 4.8 percent Thursday afternoon, to $15.45.
Vikram S. Pandit, Citigroup’s chairman and chief executive, said in a statement that the bank’s results reflected a “difficult environment” and write-downs as the bank sheds more than $400 billion in noncore operations, low-returning assets and toxic mortgages. Citigroup also eliminated 11,000 jobs in the third quarter, bringing the total number of layoffs to 23,000 this year,
Although Mr. Pandit said they were making “excellent progress,” he gave no indication of when the bank would return to profitability.
Mr. Pandit only hinted at the $25 billion investment stake that Citigroup accepted along with eight other big banks at the behest of Treasury Secretary Henry M. Paulson Jr. And Mr. Pandit did not address Citigroup’s failed bid for the Wachovia Corporation, a move that executives believed was a potentially game-changing deal for Citigroup’s domestic banking franchise. Wells Fargo swooped in with a counteroffer that derailed the bid; both sides are now waging an intense battle in the courts.
Citigroup has long been considered a bellwether for the global financial services industry. Its range of businesses, from investment banking to credit cards, and sprawling international reach are rivaled by only a handful of banks.
On paper, the diversified bank was supposed to be the ideal business model for these tumultuous times. But as the markets gyrated wildly and the global economy teeters, Citigroup shares have plummeted along with most other banks.
Citigroup is the latest big bank to announce results in what is expected to be yet another dismal quarter for nearly all financial firms. Merrill Lynch, which sold itself to Bank of America, also reported a $5.1 billion loss on Thursday morning, its fifth consecutive loss. Earlier, Bank of America, JPMorgan Chase, Wells Fargo and State Street reported earnings that were similarly muted by sobering economic projections. Dozens of small and regional banks have not yet reported their results.
Much of Citigroup’s loss was concentrated in investment banking, which is known as the institutional clients group. The unit reported $81 million in negative revenue, hurt by write-downs. It faced a laundry-list of charge, including: $2 billion on assets tied to Citigroup’s structured investment vehicles; $1.2 billion tied to Alt-A mortgages; $919 million related to its exposure to bond insurance companies; and $518 million on commercial real estate; and $471 million to settle claims that it improperly sold auction rate securities.
Citigroup also took a $792 million charge tied to lending to private equity deals, a once-lucrative business that has now left it with billions of dollars in loans and bonds it cannot sell.
The bank’s big consumer operations were pummeled in the quarter, forcing it to add to the billions it has set aside to cover potential losses in credit-card, home-equity and auto loans. In North America, credit costs for its the credit card division surged 68 percent, reflecting higher unemployment and bankruptcy filing rates.
In Europe and the Middle East, the credit costs for the credit card unit rose 33 percent as troubles spread to developed countries, like Britain, Greece and Spain. In Latin America, credit costs rose 68 percent amid high losses in Mexico and Brazil; and in Asia, they increased 51 percent, especially as India’s consumer economy worsened. The consumer finance and banking business showed similar patterns.
In other earnings, the Bank of New York Mellon reported a 53 percent decline in third-quarter profit. The bank earned $303 million, or 26 cents a share, in the quarter, compared with $642 million, or 56 cents, in the quarter a year ago.
The bank took a charge of 37 cents a share, or $433 million, to bail out money market mutual funds, cash sweep funds and other investments affected by the bankruptcy filing of Lehman Brothers Holdings.
Profit, excluding one-time charges, was $908 million, or 79 cents a share. Revenue was $3.9 billion. Analysts surveyed by Thomson Reuters had expected earnings of 66 cents a share and revenue of $3.69 billion.
Friday, October 17, 2008
3rd UPDATE: Citigroup's Results Worsen In 3Q Due To Credit
(Adds comments from conference call, starting in the fifth paragraph.)
By Matthias Rieker
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Citigroup Inc.'s (C) third-quarter results showed a shift of the banking crisis from Wall Street to Main Street as losses related to lending now outweigh market-related write-downs.
In addition, Citi's strength in global banking didn't insulate the company any longer from the credit crisis. Income from almost all parts of the world declined in most of Citi's lines of business.
The company, which has $2.1 trillion in assets, reported its fourth consecutive quarterly loss Thursday.
"There were three factors that drove this quarter's results - higher consumer credit costs, continued losses related to the disruption in the fixed-income markets, and a general economic slowdown," Chief Financial Officer Gary Crittenden said during a conference call with investors.
Crittenden said rising unemployment indicated that losses in mortgage lending and in the credit card business will continue to rise.
Citi, which last week backed down from its battle against Wells Fargo & Co. ( WFC) for Wachovia Corp. (WB), reported a net loss of $2.81 billion, or 60 cents a share. In the year-earlier period, it reported net income of $2.21 billion, or 44 cents a share. Revenue fell 23% to $16.7 billion.
The results show the bank, which had already racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown over the past year, is still roiling from its mortgage-related securities and the credit crisis. Citi reported $4.4 billion in net pretax write-downs. Crittenden said Citi's holdings of collateralized debt obligations, complex securities that have suffered steep market losses, "are virtually entirely written off." When asked about marks on other assets, Crittenden said, "there is lots of benchmark information out here, and we look at those benchmarks and we ensure that we conform with the other securities in the market."
Citi cut 11,000 jobs in the latest quarter, some 3% of staff, putting this year's total at 23,000.
While the write-downs tied to the capital-market crisis narrowed for the second consecutive quarter, credit costs continued to jump. Expenses related to loan losses and the loan-loss provision nearly doubled from the second quarter to $9.1 billion.
Crittenden had expected for some time that the size of Citi's markdowns tied to illiquid assets would begin to decline. But as the global economy weakens, credit costs, or losses and provisions for losses from lending, rise in many parts of the world.
"That creates an interesting dynamic," Crittenden said during an interview with Dow Jones Newswires. Mark-to-market losses hit capital "substantially," but credit losses, as painful as they are, have less impact on a bank's capital base, he said. "The credit losses have typically not the same risk associated with them, because they come against income. It's a question of earnings rather than a question of the capital."
Crittenden wouldn't predict when the company would return to profitability. But he said the shift from market-related write-downs to credit reduces the volatility of quarterly results, because bankers have models to predict credit losses while write-downs hinge on unpredictable activity in capital markets.
Overall, Citi's credit provision, the amount a bank adds to the reserve it set aside for loan losses, doubled from a year earlier to $8.9 billion, and its total reserve increased 49% to $24 billion. That level, Crittenden said, " relative to competitors looks pretty good. We are in reasonable shape from a reserve standpoint."
Credit problems have been mainly a U.S. issue for Citi, but in the third quarter credit quality has deteriorated in Mexico, Brazil, and India. Korea, on the other hand, is holding up much better. "You have very different performance from country to country," Crittenden said, depending on how strong the country's ties are to the faltering U.S. economy and on how overheated the respective domestic economy was.
U.S. deposits rose 6% quarter over quarter to $270 billion. The speed of the $ 17 billion deposit inflow from the second quarter increased in the last weeks of the quarter, Crittenden said, particularly in deposits from businesses "as there was broad concern and probably a flight to quality."
Consumer deposits in the U.S. were virtually flat from the second quarter, but that result suggests Citi gained because otherwise those deposits would have been down since Citi sold branches in Texas and Nevada.
Chief Executive Vikram Pandit said in a press release, "While our third- quarter results reflect both a difficult environment as well as continued write- downs on our legacy assets, we are making excellent progress on the parts of our business we control, including expense reduction, headcount, and balance sheet and capital management."
In addition to continued cost cuts, Citi continued to shrink, ridding its balance sheet of assets that don't provide attractive returns. Citi's assets shrunk more than 13% from a year earlier, and the company is now smaller than JPMorgan Chase & Co. (JPM), which on Wednesday reported total assets of $2.3 trillion following the acquisition of the banking operations of Washington Mutual Inc.
Citi's shares in late morning trading were down 8% to $14.93. Citi's shares have fallen roughly in half so far this year.
Citi's largest business, consumer banking, swung to a $1.1 billion loss amid the credit losses, though revenue edged up 1.7%. Higher revenue in North America was offset in part by declines in Latin America and Asia.
The global credit card business swung to a $902 million loss, while revenue fell 40%. A year earlier, the company had benefitted from gains derived from its stake in Brazilian card company Redecard SA (RDCD3.BR), which it reduced in March.
On credit cards, Crittenden said, "it is possible that we may see loss rates exceed their historical peaks."
The institutional clients group, including Citi's securities and investment- banking operations, posted a 48% plunge in revenue as it swung to a $2.02 billion loss amid the write-downs.
The global wealth-management business, including the Smith Barney retail- brokerage unit as well as Citi's private bank, saw profits fall 26% as revenue slid 10%. The results reflected a decline in capital markets and investment revenue, partially offset by higher banking and lending revenue.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936; matthias.rieker@ dowjones.com
(Donna Kardos contributed to this story.)
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// www.djnewsplus.com/al?rnd=3N1Yh%2B763c8JAxskzsObjw%3D%3D. You can use this link on the day this article is published and the following day.
By Matthias Rieker
Of DOW JONES NEWSWIRES
NEW YORK -(Dow Jones)- Citigroup Inc.'s (C) third-quarter results showed a shift of the banking crisis from Wall Street to Main Street as losses related to lending now outweigh market-related write-downs.
In addition, Citi's strength in global banking didn't insulate the company any longer from the credit crisis. Income from almost all parts of the world declined in most of Citi's lines of business.
The company, which has $2.1 trillion in assets, reported its fourth consecutive quarterly loss Thursday.
"There were three factors that drove this quarter's results - higher consumer credit costs, continued losses related to the disruption in the fixed-income markets, and a general economic slowdown," Chief Financial Officer Gary Crittenden said during a conference call with investors.
Crittenden said rising unemployment indicated that losses in mortgage lending and in the credit card business will continue to rise.
Citi, which last week backed down from its battle against Wells Fargo & Co. ( WFC) for Wachovia Corp. (WB), reported a net loss of $2.81 billion, or 60 cents a share. In the year-earlier period, it reported net income of $2.21 billion, or 44 cents a share. Revenue fell 23% to $16.7 billion.
The results show the bank, which had already racked up more than $40 billion in write-downs and other losses stemming from the mortgage meltdown over the past year, is still roiling from its mortgage-related securities and the credit crisis. Citi reported $4.4 billion in net pretax write-downs. Crittenden said Citi's holdings of collateralized debt obligations, complex securities that have suffered steep market losses, "are virtually entirely written off." When asked about marks on other assets, Crittenden said, "there is lots of benchmark information out here, and we look at those benchmarks and we ensure that we conform with the other securities in the market."
Citi cut 11,000 jobs in the latest quarter, some 3% of staff, putting this year's total at 23,000.
While the write-downs tied to the capital-market crisis narrowed for the second consecutive quarter, credit costs continued to jump. Expenses related to loan losses and the loan-loss provision nearly doubled from the second quarter to $9.1 billion.
Crittenden had expected for some time that the size of Citi's markdowns tied to illiquid assets would begin to decline. But as the global economy weakens, credit costs, or losses and provisions for losses from lending, rise in many parts of the world.
"That creates an interesting dynamic," Crittenden said during an interview with Dow Jones Newswires. Mark-to-market losses hit capital "substantially," but credit losses, as painful as they are, have less impact on a bank's capital base, he said. "The credit losses have typically not the same risk associated with them, because they come against income. It's a question of earnings rather than a question of the capital."
Crittenden wouldn't predict when the company would return to profitability. But he said the shift from market-related write-downs to credit reduces the volatility of quarterly results, because bankers have models to predict credit losses while write-downs hinge on unpredictable activity in capital markets.
Overall, Citi's credit provision, the amount a bank adds to the reserve it set aside for loan losses, doubled from a year earlier to $8.9 billion, and its total reserve increased 49% to $24 billion. That level, Crittenden said, " relative to competitors looks pretty good. We are in reasonable shape from a reserve standpoint."
Credit problems have been mainly a U.S. issue for Citi, but in the third quarter credit quality has deteriorated in Mexico, Brazil, and India. Korea, on the other hand, is holding up much better. "You have very different performance from country to country," Crittenden said, depending on how strong the country's ties are to the faltering U.S. economy and on how overheated the respective domestic economy was.
U.S. deposits rose 6% quarter over quarter to $270 billion. The speed of the $ 17 billion deposit inflow from the second quarter increased in the last weeks of the quarter, Crittenden said, particularly in deposits from businesses "as there was broad concern and probably a flight to quality."
Consumer deposits in the U.S. were virtually flat from the second quarter, but that result suggests Citi gained because otherwise those deposits would have been down since Citi sold branches in Texas and Nevada.
Chief Executive Vikram Pandit said in a press release, "While our third- quarter results reflect both a difficult environment as well as continued write- downs on our legacy assets, we are making excellent progress on the parts of our business we control, including expense reduction, headcount, and balance sheet and capital management."
In addition to continued cost cuts, Citi continued to shrink, ridding its balance sheet of assets that don't provide attractive returns. Citi's assets shrunk more than 13% from a year earlier, and the company is now smaller than JPMorgan Chase & Co. (JPM), which on Wednesday reported total assets of $2.3 trillion following the acquisition of the banking operations of Washington Mutual Inc.
Citi's shares in late morning trading were down 8% to $14.93. Citi's shares have fallen roughly in half so far this year.
Citi's largest business, consumer banking, swung to a $1.1 billion loss amid the credit losses, though revenue edged up 1.7%. Higher revenue in North America was offset in part by declines in Latin America and Asia.
The global credit card business swung to a $902 million loss, while revenue fell 40%. A year earlier, the company had benefitted from gains derived from its stake in Brazilian card company Redecard SA (RDCD3.BR), which it reduced in March.
On credit cards, Crittenden said, "it is possible that we may see loss rates exceed their historical peaks."
The institutional clients group, including Citi's securities and investment- banking operations, posted a 48% plunge in revenue as it swung to a $2.02 billion loss amid the write-downs.
The global wealth-management business, including the Smith Barney retail- brokerage unit as well as Citi's private bank, saw profits fall 26% as revenue slid 10%. The results reflected a decline in capital markets and investment revenue, partially offset by higher banking and lending revenue.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936; matthias.rieker@ dowjones.com
(Donna Kardos contributed to this story.)
Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http:// www.djnewsplus.com/al?rnd=3N1Yh%2B763c8JAxskzsObjw%3D%3D. You can use this link on the day this article is published and the following day.
Friday, October 10, 2008
Morgan Under Assault
John J. Mack just cannot catch a break.
After briefly beating back those who would bet against Morgan Stanley, the humbled Wall Street giant that he runs, Mr. Mack was once again playing defense on Thursday. His bank came under renewed assault in the stock market, where its share price plummeted nearly 26 percent, to $12.45, the lowest closing price in a decade. Morgan Stanley plumbed the record lows reached in mid-September, when its future as an independent bank seemed in doubt.
The latest slide came on another brutal day for stocks, particularly financial shares. But it was the travails of Morgan Stanley that seemed to rivet much of Wall Street.
Once again, questions swirled about the fate of Morgan Stanley, despite the bank’s efforts to quiet them. Short-sellers, those investors who wager against stocks, took renewed aim at the firm. At midnight on Wednesday, regulators lifted a temporary ban on short sales. Mr. Mack had angered many hedge funds by lobbying for the restriction.
Much of the concern centered on Morgan Stanley’s deal to raise $9 billion from Mitsubishi UFJ of Japan. Despite repeated assurances from Mr. Mack and Mitsubishi executives, some investors worry that the decline in Morgan Stanley’s share price, coupled with the steep sell-off in the Japanese stock market this week, might prompt Mitsubishi to reconsider its investment. Morgan Stanley hopes closing the Mitsubishi deal will help ease the burden on its shares the way Warren E. Buffett’s $5 billion infusion helped stabilize Goldman Sachs.
Fears that the deal would not close were evident in the bond market, where Morgan Stanley’s 10-year debt sank to 64 cents on the dollar on Thursday, down from 96 cents a month ago. The price of insuring Morgan Stanley’s debt soared to record heights, and Moody’s Investors Service said it put Morgan Stanley’s A1 credit rating on a review for a possible downgrade.
Morgan Stanley’s shares are off 76 percent this year and 86 percent since hitting their peak in January 2007.
Morgan Stanley executives said both sides would close the deal immediately if they could. But when the Federal Reserve approved the investment this week, it said it could not officially close until Monday.
The trouble is, Monday is a bank holiday in both the United States (Columbus Day) and Japan (Health and Sports Day), so the transaction cannot close until Tuesday. This is frustrating to many inside Morgan Stanley headquarters, who have decided they just have to stomach a full-on assault on their stock until the deal is done, and perhaps even see the shares dip into the single digits.
On Wednesday, Mr. Mack, while visiting London, assured employees during a webcast that the deal would go through and that Morgan Stanley remained well capitalized.
Mr. Mack planned to dine Thursday evening with Ryosuke Tamakoshi, the Mitsubishi UFJ chairman, and other executives from the Japanese bank. The marketplace immediately seized on that meeting as either a sign that the deal was off or that Mitsubishi might swoop in and buy all of Morgan Stanley.
Officials on both sides strongly denied those rumors and said the meeting was scheduled some time ago and that Mitsubishi UFJ executives were in London on their way to the World Bank and International Monetary Fund meetings in Washington.
Still, assurances about the deal did not assuage nervous investors and analysts who said failure to close the deal could be devastating.
“They need to bring this equity in to restore confidence in the marketplace,” said Brad Hintz, analyst at Sanford C. Bernstein. “It is all about confidence because there is nothing fundamentally wrong with Morgan Stanley.”
However, Mr. Hintz said that if that confidence continued to wane, hedge funds would withdraw balances en masse, counterparties would try to get out of trades and Morgan Stanley could find itself in the same kind of squeeze that hit Bear Stearns, then Lehman Brothers.
In fact, the twisted morass of Lehman’s bankruptcy filing could make things worse, analysts said, because hedge funds and trading counterparties who find themselves owed billions by Lehman could move more swiftly to ensure they do not face similar problems with Morgan Stanley.
Mr. Mack should theoretically be in a much better position to weather the crisis than was Lehman. The bank does not need to tap short-term debt markets, which are currently frozen, until the third quarter of next year. It has reduced its reliance on borrowed money and has about $50 billion in cash and highly liquid securities on its balance sheet. Now that it is a bank holding company (as is Goldman Sachs) Morgan Stanley can borrow directly from the Federal Reserve.
“We think the company’s liquidity profile is fine for now,” Glenn Schorr, UBS analyst, wrote in a note to clients.
The “for now” part concerns others who say that if clients and trading partners flee, even permanent direct access to Fed borrowing will not be enough. And the company will need to tap debt markets eventually.
“They are very proud that they don’t have to tap the markets until 2009 and that’s fine,” said Mr. Hintz of Sanford C. Bernstein. “But I can also proudly say I don’t need to breathe for the next three minutes.”
The bank could face some increased skepticism based on the increase in assets on its balance sheet that it categorizes as “Level 3,” or hardest to value.
According to a filing with the Securities and Exchange Commission, Morgan Stanley increased its Level 3 assets by 13 percent to $78.4 billion in the third quarter, up from $69.2 billion last quarter. Morgan Stanley said the increase was in part because of the reclassification of certain corporate loans and loan commitments because a decline in transaction volume made it difficult to price the loans accurately.
Meanwhile, even if Morgan Stanley withstands the current crisis, some question its earnings potential in the near future.
“The next question becomes what is the business model that Morgan Stanley is going to put in place to keep producing sizable profits?” Richard X. Bove, analyst at Ladenburg Thalmann, said. “They don’t have one right now.”
After briefly beating back those who would bet against Morgan Stanley, the humbled Wall Street giant that he runs, Mr. Mack was once again playing defense on Thursday. His bank came under renewed assault in the stock market, where its share price plummeted nearly 26 percent, to $12.45, the lowest closing price in a decade. Morgan Stanley plumbed the record lows reached in mid-September, when its future as an independent bank seemed in doubt.
The latest slide came on another brutal day for stocks, particularly financial shares. But it was the travails of Morgan Stanley that seemed to rivet much of Wall Street.
Once again, questions swirled about the fate of Morgan Stanley, despite the bank’s efforts to quiet them. Short-sellers, those investors who wager against stocks, took renewed aim at the firm. At midnight on Wednesday, regulators lifted a temporary ban on short sales. Mr. Mack had angered many hedge funds by lobbying for the restriction.
Much of the concern centered on Morgan Stanley’s deal to raise $9 billion from Mitsubishi UFJ of Japan. Despite repeated assurances from Mr. Mack and Mitsubishi executives, some investors worry that the decline in Morgan Stanley’s share price, coupled with the steep sell-off in the Japanese stock market this week, might prompt Mitsubishi to reconsider its investment. Morgan Stanley hopes closing the Mitsubishi deal will help ease the burden on its shares the way Warren E. Buffett’s $5 billion infusion helped stabilize Goldman Sachs.
Fears that the deal would not close were evident in the bond market, where Morgan Stanley’s 10-year debt sank to 64 cents on the dollar on Thursday, down from 96 cents a month ago. The price of insuring Morgan Stanley’s debt soared to record heights, and Moody’s Investors Service said it put Morgan Stanley’s A1 credit rating on a review for a possible downgrade.
Morgan Stanley’s shares are off 76 percent this year and 86 percent since hitting their peak in January 2007.
Morgan Stanley executives said both sides would close the deal immediately if they could. But when the Federal Reserve approved the investment this week, it said it could not officially close until Monday.
The trouble is, Monday is a bank holiday in both the United States (Columbus Day) and Japan (Health and Sports Day), so the transaction cannot close until Tuesday. This is frustrating to many inside Morgan Stanley headquarters, who have decided they just have to stomach a full-on assault on their stock until the deal is done, and perhaps even see the shares dip into the single digits.
On Wednesday, Mr. Mack, while visiting London, assured employees during a webcast that the deal would go through and that Morgan Stanley remained well capitalized.
Mr. Mack planned to dine Thursday evening with Ryosuke Tamakoshi, the Mitsubishi UFJ chairman, and other executives from the Japanese bank. The marketplace immediately seized on that meeting as either a sign that the deal was off or that Mitsubishi might swoop in and buy all of Morgan Stanley.
Officials on both sides strongly denied those rumors and said the meeting was scheduled some time ago and that Mitsubishi UFJ executives were in London on their way to the World Bank and International Monetary Fund meetings in Washington.
Still, assurances about the deal did not assuage nervous investors and analysts who said failure to close the deal could be devastating.
“They need to bring this equity in to restore confidence in the marketplace,” said Brad Hintz, analyst at Sanford C. Bernstein. “It is all about confidence because there is nothing fundamentally wrong with Morgan Stanley.”
However, Mr. Hintz said that if that confidence continued to wane, hedge funds would withdraw balances en masse, counterparties would try to get out of trades and Morgan Stanley could find itself in the same kind of squeeze that hit Bear Stearns, then Lehman Brothers.
In fact, the twisted morass of Lehman’s bankruptcy filing could make things worse, analysts said, because hedge funds and trading counterparties who find themselves owed billions by Lehman could move more swiftly to ensure they do not face similar problems with Morgan Stanley.
Mr. Mack should theoretically be in a much better position to weather the crisis than was Lehman. The bank does not need to tap short-term debt markets, which are currently frozen, until the third quarter of next year. It has reduced its reliance on borrowed money and has about $50 billion in cash and highly liquid securities on its balance sheet. Now that it is a bank holding company (as is Goldman Sachs) Morgan Stanley can borrow directly from the Federal Reserve.
“We think the company’s liquidity profile is fine for now,” Glenn Schorr, UBS analyst, wrote in a note to clients.
The “for now” part concerns others who say that if clients and trading partners flee, even permanent direct access to Fed borrowing will not be enough. And the company will need to tap debt markets eventually.
“They are very proud that they don’t have to tap the markets until 2009 and that’s fine,” said Mr. Hintz of Sanford C. Bernstein. “But I can also proudly say I don’t need to breathe for the next three minutes.”
The bank could face some increased skepticism based on the increase in assets on its balance sheet that it categorizes as “Level 3,” or hardest to value.
According to a filing with the Securities and Exchange Commission, Morgan Stanley increased its Level 3 assets by 13 percent to $78.4 billion in the third quarter, up from $69.2 billion last quarter. Morgan Stanley said the increase was in part because of the reclassification of certain corporate loans and loan commitments because a decline in transaction volume made it difficult to price the loans accurately.
Meanwhile, even if Morgan Stanley withstands the current crisis, some question its earnings potential in the near future.
“The next question becomes what is the business model that Morgan Stanley is going to put in place to keep producing sizable profits?” Richard X. Bove, analyst at Ladenburg Thalmann, said. “They don’t have one right now.”
Monday, October 6, 2008
Buffett’s Bet on G.E.: Almost as Good as a Bailout
Warren E. Buffett is emerging as the banker of choice to the embattled blue-chip companies of American business.
Mr. Buffett, the billionaire investor, announced on Wednesday that he would invest $3 billion in General Electric, the industrial giant that is also the nation’s largest nonbank financial company. The move comes eight days after he said he would invest $5 billion in Goldman Sachs.
In both cases, Mr. Buffett has driven a hard bargain and extracted favorable terms. Still, he is betting when other investors remain fearful and on the sidelines. And his investments, analysts say, are based on the assumption that these two companies will come through the financial turmoil in good shape — helped by a government economic rescue package that will not only emerge but will bring confidence to shaky markets.
“Buffett is the poster child for what the Fed and Treasury want to see happen, private money coming in to turn things around,” said James W. Paulsen, chief investment strategist for Wells Capital Management. “The government plan is about tamping down Wall Street fear and bringing back Wall Street greed to pursue profit-making opportunities. Buffett is just doing it ahead of the game, before there is a government package, betting there will be one and it will work.”
G.E. is selling $3 billion of preferred stock in a private offering to Mr. Buffett’s company, Berkshire Hathaway. The preferred stock pays dividend of 10 percent, and G.E. can purchase the shares back from Mr. Buffett after three years by paying a 10 percent premium, or $3.3 billion.
But the real payoff for Mr. Buffett will come if G.E.’s battered stock rebounds. As part of the financing, Berkshire Hathaway is receiving warrants to purchase $3 billion of G.E. common stock for $22.25 a share, at any time over the next five years. In regular trading, G.E. shares closed down $1 a share on Wednesday, at $24.50 a share, and rose in after-hours trading before closing at the same price. G.E.’s shares are off 13 percent in the last month, and down 34 percent so far this year.
Yet despite the seemingly generous terms for Mr. Buffett, analysts say, G.E. is getting not only needed financing but also a credibility dividend.
“Warren Buffett has become the new triple-A credit rating system,” said Edward Yardeni, an independent investment strategist. “It’s a big endorsement for G.E.”
Mr. Buffett, the chief executive of Berkshire Hathaway, said in a statement, “G.E. is the symbol of American business to the world,” adding that he has known the company’s leaders for decades. “They have strong global brands and businesses with which I am quite familiar. I am confident that G.E. will continue to be successful in the years to come,” he said.
Besides the Buffett investment, G.E. announced that it planned to sell at least $12 billion in common stock to the public. The offering is expected to be priced just before the opening of the stock market on Thursday.
G.E. portrayed its financing plans as a kind of insurance policy, giving the company ballast in extremely uncertain times. Last Thursday, G.E. announced that it would report lower-than-expected profits for the third quarter, citing “unprecedented weakness and volatility in the financial services markets.” The company also lowered its earnings outlook for the year.
The company also outlined steps to bolster its finance arm, GE Capital, by reducing the dividend it pays to the parent company, halting G.E.’s stock buyback program and becoming less dependent on short-term commercial paper borrowings. Last Thursday, Jeffrey R. Immelt, G.E.’s chief executive, called those steps “tough decisions to further reduce risk and strengthen our balance sheet.”
After a few days, however, those steps did not seem to go far enough. After Wachovia, the nation’s fourth-largest bank, reached for a lifeline and was sold to Citigroup, and the House rejection of a bailout plan on Monday, G.E. decided more drastic action was needed. Mr. Immelt, who has known Mr. Buffett for years, quickly negotiated the financing deal.
G.E. is potentially vulnerable to a credit squeeze because of GE Capital, whose global portfolio spans aircraft leasing, commercial real estate, credit cards and home mortgages. It no longer has a mortgage-lending operation in the United States, it has shunned exotic securities and G.E. retains its triple-A credit rating.
But G.E. has about $90 billion in commercial paper, which is short-term, low-cost borrowing made for as little as one month. Commercial paper costs have risen for G.E., as it has for others, though it has been tapping that market throughout the crisis.
Yet if that lending market simply froze in a panic, analysts say, G.E. would face a liquidity squeeze and probably be forced to pull back from some businesses in a forced shrinkage.
The financing from Mr. Buffett and sale of shares to the public, plus its cash on hand and credit lines from banks, analysts say, add up to about $90 billion — effectively hedging the company’s risk from a seize-up in the commercial paper market.
In a statement on Wednesday, Mr. Immelt said the financing gave G.E. more flexibility and liquidity in case the financial markets worsen. If things hold steady, he suggested, G.E. will be looking for opportunities to buy with its extra cash. “It gives us the opportunity to play offense in this market should conditions allow,” he said.
Mr. Buffett, the billionaire investor, announced on Wednesday that he would invest $3 billion in General Electric, the industrial giant that is also the nation’s largest nonbank financial company. The move comes eight days after he said he would invest $5 billion in Goldman Sachs.
In both cases, Mr. Buffett has driven a hard bargain and extracted favorable terms. Still, he is betting when other investors remain fearful and on the sidelines. And his investments, analysts say, are based on the assumption that these two companies will come through the financial turmoil in good shape — helped by a government economic rescue package that will not only emerge but will bring confidence to shaky markets.
“Buffett is the poster child for what the Fed and Treasury want to see happen, private money coming in to turn things around,” said James W. Paulsen, chief investment strategist for Wells Capital Management. “The government plan is about tamping down Wall Street fear and bringing back Wall Street greed to pursue profit-making opportunities. Buffett is just doing it ahead of the game, before there is a government package, betting there will be one and it will work.”
G.E. is selling $3 billion of preferred stock in a private offering to Mr. Buffett’s company, Berkshire Hathaway. The preferred stock pays dividend of 10 percent, and G.E. can purchase the shares back from Mr. Buffett after three years by paying a 10 percent premium, or $3.3 billion.
But the real payoff for Mr. Buffett will come if G.E.’s battered stock rebounds. As part of the financing, Berkshire Hathaway is receiving warrants to purchase $3 billion of G.E. common stock for $22.25 a share, at any time over the next five years. In regular trading, G.E. shares closed down $1 a share on Wednesday, at $24.50 a share, and rose in after-hours trading before closing at the same price. G.E.’s shares are off 13 percent in the last month, and down 34 percent so far this year.
Yet despite the seemingly generous terms for Mr. Buffett, analysts say, G.E. is getting not only needed financing but also a credibility dividend.
“Warren Buffett has become the new triple-A credit rating system,” said Edward Yardeni, an independent investment strategist. “It’s a big endorsement for G.E.”
Mr. Buffett, the chief executive of Berkshire Hathaway, said in a statement, “G.E. is the symbol of American business to the world,” adding that he has known the company’s leaders for decades. “They have strong global brands and businesses with which I am quite familiar. I am confident that G.E. will continue to be successful in the years to come,” he said.
Besides the Buffett investment, G.E. announced that it planned to sell at least $12 billion in common stock to the public. The offering is expected to be priced just before the opening of the stock market on Thursday.
G.E. portrayed its financing plans as a kind of insurance policy, giving the company ballast in extremely uncertain times. Last Thursday, G.E. announced that it would report lower-than-expected profits for the third quarter, citing “unprecedented weakness and volatility in the financial services markets.” The company also lowered its earnings outlook for the year.
The company also outlined steps to bolster its finance arm, GE Capital, by reducing the dividend it pays to the parent company, halting G.E.’s stock buyback program and becoming less dependent on short-term commercial paper borrowings. Last Thursday, Jeffrey R. Immelt, G.E.’s chief executive, called those steps “tough decisions to further reduce risk and strengthen our balance sheet.”
After a few days, however, those steps did not seem to go far enough. After Wachovia, the nation’s fourth-largest bank, reached for a lifeline and was sold to Citigroup, and the House rejection of a bailout plan on Monday, G.E. decided more drastic action was needed. Mr. Immelt, who has known Mr. Buffett for years, quickly negotiated the financing deal.
G.E. is potentially vulnerable to a credit squeeze because of GE Capital, whose global portfolio spans aircraft leasing, commercial real estate, credit cards and home mortgages. It no longer has a mortgage-lending operation in the United States, it has shunned exotic securities and G.E. retains its triple-A credit rating.
But G.E. has about $90 billion in commercial paper, which is short-term, low-cost borrowing made for as little as one month. Commercial paper costs have risen for G.E., as it has for others, though it has been tapping that market throughout the crisis.
Yet if that lending market simply froze in a panic, analysts say, G.E. would face a liquidity squeeze and probably be forced to pull back from some businesses in a forced shrinkage.
The financing from Mr. Buffett and sale of shares to the public, plus its cash on hand and credit lines from banks, analysts say, add up to about $90 billion — effectively hedging the company’s risk from a seize-up in the commercial paper market.
In a statement on Wednesday, Mr. Immelt said the financing gave G.E. more flexibility and liquidity in case the financial markets worsen. If things hold steady, he suggested, G.E. will be looking for opportunities to buy with its extra cash. “It gives us the opportunity to play offense in this market should conditions allow,” he said.
Friday, September 26, 2008
JPMorgan To Raise $10 Billion For WaMu Deal, 25% More Than Planned
JPMorgan Chase & Co. (JPM) priced the capital raising related to its deal to buy the bulk of Washington Mutual Inc.'s (WM) operations and will sell $10 billion in stock - $2 billion more than expected.
The public offering for 246.9 million shares of its common stock at $40.50 a share - a 6.8% discount to its closing price Thursday - is crucial to its rescue of WaMu, which is being seized by federal regulators in what is by far the largest bank failure in U.S. history.
The terms of the offering also include a 30-day option to buy for an additional 37 million shares of common stock to cover over-allotments. That means JPMorgan could raise an additional $1.5 billion as part of the capital raising, which is expected to occur on or about Tuesday. JPMorgan had 3.44 billion shares outstanding as of June 30.
In its deal to buy the bulk of the nation's largest savings and loan, JPMorgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the $307 billion thrift.
But the full cost is much higher, amid the capital raising announced Friday as well as the need to write down about $31 billion in bad loans.
The deal will vault JPMorgan into first place in nationwide deposits and greatly expand its franchise. It represents JPMorgan's second rescue as a buyer of last resort this year. In March, it agreed to buy Bear Stearns Cos., getting a $29 billion backstop from the federal government.
WaMu's collapse was triggered by a wave of deposit withdrawals and marked a new low point in the country's financial crisis. It marked another watershed event in a frenetic period for the U.S. banking system. Over the past few weeks, a number of U.S. financial giants have either been seized by the government or sold themselves off to stronger companies, including mortgage titans Fannie Mae (FNM) and Freddie Mac (FRE), insurer American International Group Inc. (AIG), and Wall Street firms Lehman Brothers Holdings Inc. (LEHMQ) and Merrill Lynch & Co. (MER).
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The public offering for 246.9 million shares of its common stock at $40.50 a share - a 6.8% discount to its closing price Thursday - is crucial to its rescue of WaMu, which is being seized by federal regulators in what is by far the largest bank failure in U.S. history.
The terms of the offering also include a 30-day option to buy for an additional 37 million shares of common stock to cover over-allotments. That means JPMorgan could raise an additional $1.5 billion as part of the capital raising, which is expected to occur on or about Tuesday. JPMorgan had 3.44 billion shares outstanding as of June 30.
In its deal to buy the bulk of the nation's largest savings and loan, JPMorgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the $307 billion thrift.
But the full cost is much higher, amid the capital raising announced Friday as well as the need to write down about $31 billion in bad loans.
The deal will vault JPMorgan into first place in nationwide deposits and greatly expand its franchise. It represents JPMorgan's second rescue as a buyer of last resort this year. In March, it agreed to buy Bear Stearns Cos., getting a $29 billion backstop from the federal government.
WaMu's collapse was triggered by a wave of deposit withdrawals and marked a new low point in the country's financial crisis. It marked another watershed event in a frenetic period for the U.S. banking system. Over the past few weeks, a number of U.S. financial giants have either been seized by the government or sold themselves off to stronger companies, including mortgage titans Fannie Mae (FNM) and Freddie Mac (FRE), insurer American International Group Inc. (AIG), and Wall Street firms Lehman Brothers Holdings Inc. (LEHMQ) and Merrill Lynch & Co. (MER).
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
WaMu Seized, Sold Off to J.P. Morgan;
n what is by far the largest bank failure in U.S. history, federal regulators seized Washington Mutual Inc. late Thursday and struck a deal to sell the bulk of its operations to J.P. Morgan Chase & Co.
On Friday, financial stocks and the broader market slumped as investors digested the WaMu news and the wrangling in Washington over a bailout plan. Besides WaMu, which tumbled 90% to 16 cents, Wachovia was among the weakest financials, slumping 21% to $10.76 and putting this week's losses at 45%. Wachovia, like WaMu, has a troubled mortgage portfolio and faces its own uncertain future.
Also Friday, J.P. Morgan priced the capital raising related to its WaMu deal and said it will sell $10 billion in stock -- $2 billion more than expected. The public offering is for 246.9 million shares of its common stock at $40.50 a share, a 6.8% discount to its closing price Thursday.
WaMu's Collapse
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.
Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.
The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.
The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress debated the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The failure of WaMu eclipsed what had long been America's largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital.
WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.
This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.
FDIC Chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer." Referring to J.P. Morgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30. WaMu declined to comment.
Melody Williams, 50 years old, said in the past 30 days she has moved about $25,000 out of Washington Mutual, spreading it to other financial institutions she thought were stronger, including Wells Fargo & Co. Ms. Williams, the controller for an architecture firm, said she thought that Washington Mutual had gotten "too big for their britches" with too many deals over the years.
Accelerated Shutdown
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.
In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.
As pressure mounted on WaMu over the past two and a half weeks, regulators sparred over how to handle the situation, according to people familiar with the matter. Last week WaMu met in Washington, D.C., with the FDIC and OTS, WaMu's chief regulator. WaMu, according to a person familiar with the situation, asked for the meeting because it had received conflicting information from the two agencies. The tension between the two groups was palpable, this person said. The FDIC, this person said, was more aggressive in describing the information it wanted from the thrift.
Federal regulators said the exodus of deposits left WaMu "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the OTS.
The OTS closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC ran the bidding process that resulted in the decision to sell WaMu's banking operations to J.P. Morgan.
The change, according to OTS, "will have no impact on the bank's depositors or other customers." WaMu's bank branches will open on Friday morning as usual and business will "proceed uninterrupted."
As of June 30, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits, according to the OTS.
"The housing market downturn had a significant impact on the performance of WaMu's mortgage portfolio," said OTS director John Reich.
With mortgage losses mounting and its stock price plunging, WaMu has been scrambling over the past month to find a solution. Last week, it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal. Those talks were viewed as a last-ditch effort.
Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday.
J.P. Morgan's takeover of WaMu's deposits represents a huge blow for private-equity firm TPG, which led a deal to inject $7 billion into the thrift this spring.
"Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual," said a TPG spokesman. "The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and led to widespread losses among investors throughout the sector." TPG said its losses are about $1.35 billion, wiping out its investment.
Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America Corp., Wachovia Corp. and Wells Fargo. Its network of more than 3,100 branches stretches across 17 states with deep penetration in New York, Illinois, Texas, Michigan and Ohio.
Instant Presence
The deal will expand J.P. Morgan's footprint westward and into the South. Most importantly, it will give J.P. Morgan an instant presence in two states where it is now virtually non-existent: California and Florida. Although both states have been battered by the housing market collapse, they still offer significant potential for J.P. Morgan, which can pitch a slew of financial services that weren't big business for WaMu, such as wealth management and commercial banking. WaMu has nearly 700 branches in California and operates more than 250 branches in Florida.
James Dimon, J.P. Morgan's chairman and chief executive, has long coveted Florida -- as have his customers. Although WaMu is dominated in Florida by Bank of America and Wachovia, J.P. Morgan is likely to boost WaMu's 3% market share in the state by tapping into its base of New York customers who spend the winter months in Florida.
Last year, one of those New York customers expressed frustration at J.P. Morgan's annual meeting, telling Mr. Dimon "it galls me" that the bank didn't have a presence there.
"It p- me off too," Mr. Dimon said, drawing laughter from the audience. "Believe me, we would love to be much bigger in Florida and we'll find some way to do it. You will see us there."
The job of integrating WaMu's branches into J.P. Morgan's vast network will fall to Charles Scharf, a longtime ally of Mr. Dimon who followed him from Citigroup to Bank One Corp. in 2000. Mr. Scharf, 43, now runs J.P. Morgan's retail operations, which include branch-banking, mortgages and home-equity loans.
Over the past few years, Mr. Scharf has overseen the overhaul of J.P. Morgan's hodgepodge of retail branches that had fallen into disrepair after a slew of big mergers. J.P. Morgan has poured millions of dollars into its tired branches that sometimes featured outdated logos and chipped wood paneling.
Taking a cue, in part, from the fresh looks flaunted by rivals like WaMu, Commerce Bancorp., and Bank of America, J.P. Morgan added brighter lights and carpeting. The bank also hired Lands End to design outfits for branch employees so they had an easily recognizable and uniform appearance.
Along with the new looks, J.P. Morgan launched a technology overhaul of its branch network so that customers who open an account in Texas could make deposits from a branch in New York. That type of integration has been missing from many banks that went through big mergers over the past decade.
J.P. Morgan's branch strategy got another push in 2006, when the bank solidified its hold on New York by acquiring 300 branches from Bank of New York Corp.
The deal is a bold move for Mr. Dimon, 52, who has emerged as one of the banking industry's most powerful executives during the current credit crisis. Just six months ago, J.P. Morgan swept in to acquire Bear Stearns as the brokerage firm was collapsing and heading for bankruptcy. Although J.P. Morgan has also been hurt by the credit crisis, it has one of the strongest balance sheets in the industry despite exposure to many of the banking businesses that are feeling pain.
Since taking the reins of J.P. Morgan nearly three years ago, Mr. Dimon has transformed the bank. Much of those efforts came during a period of prosperity for the banking industry, giving him time to upend the bank's culture and computer systems. Along the way, he has emphasized the need to create a "fortress balance sheet" that can withstand a weak economy.
Still, J.P. Morgan isn't immune to the troubles afflicting thousands of other banks. Its investment-bank unit is expected to take a big hit in the third quarter due to the widespread turmoil in capital markets. The bank has been hit badly by home-equity losses and its massive credit-card business is being hurt by rising delinquencies and defaults.
A former protégé of Citigroup's Sanford Weill, Mr. Dimon was once viewed as his heir-apparent at Citigroup. But the two had a falling out in 1998 that led to Mr. Dimon's ouster. In a move that startled the New York banking industry, Mr. Dimon headed west to take the top job at Bank One, a regional Chicago bank that had stumbled after a string of acquisitions.
Mr. Dimon's return to New York came in 2004, when J.P. Morgan acquired Bank One for $58 billion. That deal put Mr. Dimon into the upper ranks of J.P. Morgan's management and paved the way for him to take over as chairman and chief executive officer.
String of Mergers
WaMu, founded in 1889, became a national mortgage- and consumer-lending giant via a string of mergers in the 1990s led by Chief Executive Officer Kerry Killinger. But Mr. Killinger made several missteps. He pursued an aggressive retail expansion marred by poor locations in too many markets. He steered WaMu into subprime mortgages, only to discover too late that the thrift was lending to many unqualified borrowers.
Kerry Killinger
This year the company laid off employees, closed mortgage centers and cut its dividend.
But it still posted a $3.3 billion second-quarter loss and said it expected to lose $19 billion on its mortgage portfolio over the next two and a half years. WaMu's biggest predicament was that it held large amounts of mortgages made in U.S. regions where housing prices have fallen sharply, such as California. WaMu has $53 billion in option adjustable-rate mortgages, a type of loan particularly vulnerable to default, as well as $16.1 billion in loans made to subprime borrowers.
The board, responding to investor discontent, stripped Mr. Killinger of his chairman's title and then ousted him Sept. 7, installing Brooklyn banker Alan Fishman in his place. Messrs. Killinger and Fishman couldn't be reached for comment Thursday night.
Short Tenure
Upon taking WaMu's helm, Mr. Fishman, who had run Independence Community Bank in Brooklyn, N.Y., before selling it to Sovereign Bancorp Inc. in 2005, declared his intention to keep WaMu independent. As rumors swirled about the company's financial troubles, he tried to reassure investors and depositors by releasing more details about the company's financial health.
But Mr. Fishman seemed to realize that WaMu's problems were intractable. Last week, he asked Goldman Sachs Group Inc. investment bankers, hired by WaMu earlier in the year as it sought additional capital, to put the thrift up for sale.
In a year in which a number of financial-services CEOs have had remarkably short tenures -- notably Merrill Lynch's John Thain and AIG's Robert Willumstad -- Mr. Fishman stands out. While it's not clear what role, if any, he will play following the J.P. Morgan transaction, he has been on the job for a mere 16 days.
WaMu's deal team, including Mr. Fishman, left New York on Thursday night and caught a plane back to Seattle, not knowing that the company was about to be taken over by the OTS and sold to J.P. Morgan.
On Friday, financial stocks and the broader market slumped as investors digested the WaMu news and the wrangling in Washington over a bailout plan. Besides WaMu, which tumbled 90% to 16 cents, Wachovia was among the weakest financials, slumping 21% to $10.76 and putting this week's losses at 45%. Wachovia, like WaMu, has a troubled mortgage portfolio and faces its own uncertain future.
Also Friday, J.P. Morgan priced the capital raising related to its WaMu deal and said it will sell $10 billion in stock -- $2 billion more than expected. The public offering is for 246.9 million shares of its common stock at $40.50 a share, a 6.8% discount to its closing price Thursday.
WaMu's Collapse
The collapse of the Seattle thrift, which was triggered by a wave of deposit withdrawals, marks a new low point in the country's financial crisis. But the deal, as constructed by the Federal Deposit Insurance Corp., could hold some glimmers of hope for the beleaguered banking system because it averts any hit to the bank-insurance fund.
Instead, J.P. Morgan agreed to pay $1.9 billion to the government for WaMu's banking operations and will assume the loan portfolio of the thrift, which has $307 billion in assets. The full cost to J.P. Morgan will be much higher, because it plans to write down about $31 billion of the bad loans and raise $8 billion in new capital. All WaMu depositors will have access to their cash, but holders of more than $30 billion in debt and preferred stock will likely see little if any recovery.
The deal will vault J.P. Morgan into first place in nationwide deposits and greatly expand its franchise.
The seizure was another watershed event in a frenetic period for the U.S. banking system, and came while members of Congress debated the Bush administration's proposed $700 billion bailout package. The tally of U.S. financial giants that have either been seized by the government or sold themselves off to stronger firms in recent weeks includes mortgage titans Fannie Mae and Freddie Mac, insurer American International Group Inc., and Wall Street firms Lehman Brothers Holdings Inc. and Merrill Lynch & Co.
The failure of WaMu eclipsed what had long been America's largest bank bust on record, the 1984 collapse of Continental Illinois, which had $40 billion in assets.
The fact that no bank was willing to buy WaMu until it failed shows how badly confidence has eroded in a banking system awash with record profits just a few years ago. Faced with deepening losses on mortgages, credit cards and other loans, big and small banks across the country are struggling with what many bank executives say is a crisis far deeper than the savings-and-loan debacle.
The seizure of Washington Mutual is likely to send tremors through the thrift industry. Many of WaMu's smaller brethren are also struggling with a wave of bad loans and some have already been ordered by regulators to raise capital and stop growing. Many community and regional financial institutions are also slashing dividends, selling branches and reining in lending in order to preserve capital.
WaMu has suffered huge losses but still boasts a strong deposit base and a network of 2,239 branches that bigger banks would have paid dearly for when times were good. In March, with the credit crisis in full bloom, J.P. Morgan offered to acquire WaMu but was spurned in favor of a $7 billion infusion led by the private-equity firm TPG, considered one of the savviest buyout firms. TPG, led by investor David Bonderman, said it will lose $1.35 billion, wiping out its investment.
This is the second time that J.P. Morgan, the second-largest U.S. bank in stock-market value, has been a buyer of last resort. In March, the New York company agreed to purchase Bear Stearns Cos., getting a $29 billion backstop from the federal government.
FDIC Chairman Sheila Bair said that WaMu's downward spiral "could have posed significant challenges without a ready buyer." Referring to J.P. Morgan's willingness to buy WaMu and absorb its shaky loans amid continuing debate over the $700 billion bailout package, she added: "Some are coming to Washington for help, others are coming to Washington to help."
While WaMu has been struggling since last year, its demise occurred with breathtaking speed.
Starting Sept. 15, the day that Lehman filed for bankruptcy protection, WaMu's customers began heading for the exits. Over the next 10 days, they yanked a total of $16.7 billion in deposits, according to the Office of Thrift Supervision. That was about 9% of the thrift's deposits as of June 30. WaMu declined to comment.
Melody Williams, 50 years old, said in the past 30 days she has moved about $25,000 out of Washington Mutual, spreading it to other financial institutions she thought were stronger, including Wells Fargo & Co. Ms. Williams, the controller for an architecture firm, said she thought that Washington Mutual had gotten "too big for their britches" with too many deals over the years.
Accelerated Shutdown
Regulators also hustled to shut down WaMu faster than they have with other failing banks this year. Normally, when the FDIC and another regulatory agency are preparing to take over a bank, the FDIC will solicit bids for the bank on Tuesday or Wednesday and then seize it on Friday evening, after the bank's branches have closed for the weekend. Sometimes the FDIC will even wait another week to step in. Every bank to fail this year has been shut down on a Friday. The FDIC steps in on Fridays to ensure a smooth transition so that customers hardly notice the handover.
In WaMu's case, the FDIC set a Wednesday evening deadline for interested parties to submit their offers for various parts of WaMu. Twenty-four hours later, they were already preparing to seize the bank. Earlier this month, Treasury Secretary Henry Paulson made it clear to WaMu that the company should have accepted the takeover deal J.P. Morgan had offered earlier this year, according to a person close to WaMu.
As pressure mounted on WaMu over the past two and a half weeks, regulators sparred over how to handle the situation, according to people familiar with the matter. Last week WaMu met in Washington, D.C., with the FDIC and OTS, WaMu's chief regulator. WaMu, according to a person familiar with the situation, asked for the meeting because it had received conflicting information from the two agencies. The tension between the two groups was palpable, this person said. The FDIC, this person said, was more aggressive in describing the information it wanted from the thrift.
Federal regulators said the exodus of deposits left WaMu "with insufficient liquidity to meet its obligations." As a result, WaMu was in "an unsafe and unsound condition to transact business," according to the OTS.
The OTS closed WaMu on Thursday and appointed the FDIC as receiver. The FDIC ran the bidding process that resulted in the decision to sell WaMu's banking operations to J.P. Morgan.
The change, according to OTS, "will have no impact on the bank's depositors or other customers." WaMu's bank branches will open on Friday morning as usual and business will "proceed uninterrupted."
As of June 30, WaMu had more than 43,000 employees, more than 2,200 branch offices in 15 states and $188.3 billion in deposits, according to the OTS.
"The housing market downturn had a significant impact on the performance of WaMu's mortgage portfolio," said OTS director John Reich.
With mortgage losses mounting and its stock price plunging, WaMu has been scrambling over the past month to find a solution. Last week, it put itself on the auction block. A number of banks -- including Citigroup Inc., Wells Fargo and Banco Santander SA -- pored over WaMu's books, but the bank didn't receive any offers. This week, WaMu's outside bankers approached a group of private-equity funds to gauge their interest in a deal. Those talks were viewed as a last-ditch effort.
Also this week, the FDIC took the step of reaching out to banks, asking them to express interest in taking over some or all of WaMu, according to people familiar with the matter. Those bids were due at 6 p.m. Wednesday.
J.P. Morgan's takeover of WaMu's deposits represents a huge blow for private-equity firm TPG, which led a deal to inject $7 billion into the thrift this spring.
"Obviously, we are dissatisfied with the loss to our partners from our investment in Washington Mutual," said a TPG spokesman. "The unprecedented turmoil in global financial markets and resulting macro crisis of confidence has radically changed the dynamics for all financial institutions, and led to widespread losses among investors throughout the sector." TPG said its losses are about $1.35 billion, wiping out its investment.
Before the deal, J.P. Morgan ranked as the fourth-largest bank as measured by branches, ranking below Bank of America Corp., Wachovia Corp. and Wells Fargo. Its network of more than 3,100 branches stretches across 17 states with deep penetration in New York, Illinois, Texas, Michigan and Ohio.
Instant Presence
The deal will expand J.P. Morgan's footprint westward and into the South. Most importantly, it will give J.P. Morgan an instant presence in two states where it is now virtually non-existent: California and Florida. Although both states have been battered by the housing market collapse, they still offer significant potential for J.P. Morgan, which can pitch a slew of financial services that weren't big business for WaMu, such as wealth management and commercial banking. WaMu has nearly 700 branches in California and operates more than 250 branches in Florida.
James Dimon, J.P. Morgan's chairman and chief executive, has long coveted Florida -- as have his customers. Although WaMu is dominated in Florida by Bank of America and Wachovia, J.P. Morgan is likely to boost WaMu's 3% market share in the state by tapping into its base of New York customers who spend the winter months in Florida.
Last year, one of those New York customers expressed frustration at J.P. Morgan's annual meeting, telling Mr. Dimon "it galls me" that the bank didn't have a presence there.
"It p- me off too," Mr. Dimon said, drawing laughter from the audience. "Believe me, we would love to be much bigger in Florida and we'll find some way to do it. You will see us there."
The job of integrating WaMu's branches into J.P. Morgan's vast network will fall to Charles Scharf, a longtime ally of Mr. Dimon who followed him from Citigroup to Bank One Corp. in 2000. Mr. Scharf, 43, now runs J.P. Morgan's retail operations, which include branch-banking, mortgages and home-equity loans.
Over the past few years, Mr. Scharf has overseen the overhaul of J.P. Morgan's hodgepodge of retail branches that had fallen into disrepair after a slew of big mergers. J.P. Morgan has poured millions of dollars into its tired branches that sometimes featured outdated logos and chipped wood paneling.
Taking a cue, in part, from the fresh looks flaunted by rivals like WaMu, Commerce Bancorp., and Bank of America, J.P. Morgan added brighter lights and carpeting. The bank also hired Lands End to design outfits for branch employees so they had an easily recognizable and uniform appearance.
Along with the new looks, J.P. Morgan launched a technology overhaul of its branch network so that customers who open an account in Texas could make deposits from a branch in New York. That type of integration has been missing from many banks that went through big mergers over the past decade.
J.P. Morgan's branch strategy got another push in 2006, when the bank solidified its hold on New York by acquiring 300 branches from Bank of New York Corp.
The deal is a bold move for Mr. Dimon, 52, who has emerged as one of the banking industry's most powerful executives during the current credit crisis. Just six months ago, J.P. Morgan swept in to acquire Bear Stearns as the brokerage firm was collapsing and heading for bankruptcy. Although J.P. Morgan has also been hurt by the credit crisis, it has one of the strongest balance sheets in the industry despite exposure to many of the banking businesses that are feeling pain.
Since taking the reins of J.P. Morgan nearly three years ago, Mr. Dimon has transformed the bank. Much of those efforts came during a period of prosperity for the banking industry, giving him time to upend the bank's culture and computer systems. Along the way, he has emphasized the need to create a "fortress balance sheet" that can withstand a weak economy.
Still, J.P. Morgan isn't immune to the troubles afflicting thousands of other banks. Its investment-bank unit is expected to take a big hit in the third quarter due to the widespread turmoil in capital markets. The bank has been hit badly by home-equity losses and its massive credit-card business is being hurt by rising delinquencies and defaults.
A former protégé of Citigroup's Sanford Weill, Mr. Dimon was once viewed as his heir-apparent at Citigroup. But the two had a falling out in 1998 that led to Mr. Dimon's ouster. In a move that startled the New York banking industry, Mr. Dimon headed west to take the top job at Bank One, a regional Chicago bank that had stumbled after a string of acquisitions.
Mr. Dimon's return to New York came in 2004, when J.P. Morgan acquired Bank One for $58 billion. That deal put Mr. Dimon into the upper ranks of J.P. Morgan's management and paved the way for him to take over as chairman and chief executive officer.
String of Mergers
WaMu, founded in 1889, became a national mortgage- and consumer-lending giant via a string of mergers in the 1990s led by Chief Executive Officer Kerry Killinger. But Mr. Killinger made several missteps. He pursued an aggressive retail expansion marred by poor locations in too many markets. He steered WaMu into subprime mortgages, only to discover too late that the thrift was lending to many unqualified borrowers.
Kerry Killinger
This year the company laid off employees, closed mortgage centers and cut its dividend.
But it still posted a $3.3 billion second-quarter loss and said it expected to lose $19 billion on its mortgage portfolio over the next two and a half years. WaMu's biggest predicament was that it held large amounts of mortgages made in U.S. regions where housing prices have fallen sharply, such as California. WaMu has $53 billion in option adjustable-rate mortgages, a type of loan particularly vulnerable to default, as well as $16.1 billion in loans made to subprime borrowers.
The board, responding to investor discontent, stripped Mr. Killinger of his chairman's title and then ousted him Sept. 7, installing Brooklyn banker Alan Fishman in his place. Messrs. Killinger and Fishman couldn't be reached for comment Thursday night.
Short Tenure
Upon taking WaMu's helm, Mr. Fishman, who had run Independence Community Bank in Brooklyn, N.Y., before selling it to Sovereign Bancorp Inc. in 2005, declared his intention to keep WaMu independent. As rumors swirled about the company's financial troubles, he tried to reassure investors and depositors by releasing more details about the company's financial health.
But Mr. Fishman seemed to realize that WaMu's problems were intractable. Last week, he asked Goldman Sachs Group Inc. investment bankers, hired by WaMu earlier in the year as it sought additional capital, to put the thrift up for sale.
In a year in which a number of financial-services CEOs have had remarkably short tenures -- notably Merrill Lynch's John Thain and AIG's Robert Willumstad -- Mr. Fishman stands out. While it's not clear what role, if any, he will play following the J.P. Morgan transaction, he has been on the job for a mere 16 days.
WaMu's deal team, including Mr. Fishman, left New York on Thursday night and caught a plane back to Seattle, not knowing that the company was about to be taken over by the OTS and sold to J.P. Morgan.
Friday, September 19, 2008
What happens if my bank fails?
From CNN
NEW YORK (Associated Press) - Amid the recent collapse and government seizure of savings and loan giant IndyMac Bank and heightened anxiety this week over the financial stability of No. 1 thrift Washington Mutual Inc., consumers are concerned about the safety of their bank deposits.
As of June 30, Seattle-based WaMu and its subsidiaries had assets of $309.73 billion and $181.92 billion in deposits. By comparison, Pasadena, Calif.-based IndyMac had $32 billion in assets and $19 billion in deposits when it was shut down by federal regulators on July 11.
If Washington Mutual were to tumble, the magnitude of its failure would dwarf the largest bank collapse in U.S. history _ that of Continental Illinois National Bank in 1984, with $33.6 billion in assets.
Besides IndyMac, 10 more federally insured banks and thrifts have failed this year and were closed by regulators, compared with three in all of 2007. Federal banking officials say more institutions are in danger of collapsing as turbulence from the housing slump, mounting defaults on mortgages, and the yearlong credit crisis continues to pile on soured loans for banks.
But officials also are assuring depositors that accounts are secure: Some 98 percent of the 8,450 government-insured U.S. banks and thrifts are strong, and $45.2 billion is in the federal deposit insurance fund _ replenished by premiums paid by the institutions.
Still, Federal Deposit Insurance Corp. Chairman Sheila Bair has said she will propose next month to FDIC directors an increase in premiums charged to banks and thrifts.
Some questions that bank customers may be asking:
Q. What is the maximum dollar amount that can be insured at my bank? Does it vary based on the type of accounts involved?
A. The basic insurance amount is $100,000 per depositor per bank. Individual retirement accounts, or IRAs, held in banks are insured up to $250,000. In addition, you may qualify for more than $100,000 in coverage at one bank if you have deposit accounts in different ownership categories, such as single accounts, retirement accounts, joint accounts and revocable trust accounts.
Q. What if my family has multiple individual accounts of those types, but our total deposits exceed the limits?
A. If the accounts are properly structured, a married couple could have as much as $1.1 million in deposits fully insured at one bank, according to the FDIC. With accounts for two children added, up to $1.5 million could be covered.
Q. If my bank closes, what happens to my money in deposit accounts that exceeds the insured limits?
A. You become essentially a creditor of the failed bank. You will eventually recover some of your money, but the amount can range anywhere from 40 cents on the dollar up to a full 100. Recovery of the money could take months. At IndyMac, there are an estimated $541 million in deposits of the total $19 billion that exceed the insurance limits.
Q. How has that worked out for past bank failures?
A. The average return for a depositor in that situation has been about 72 cents on the dollar, according to the FDIC. The amount that depositors recoup can depend on the amount and quality of the failed bank's assets.
Q. What else happens if my bank is shut down: Will the ATMs work? Will my automatic payments for mortgages, utilities and the like be affected?
A. Automated teller machines normally remain available after a bank closure. Checks will be processed as usual, services such as online banking and safe deposit boxes will continue to be available, and interest on accounts will accrue at the current rates. Terms of loans from the bank won't change, according to the FDIC.
Q. What can I do now, before any possible closure of my bank, to protect my assets?
A. The best way is to structure the accounts carefully. The FDIC has a calculator on its Web site, called the electronic deposit insurance estimator, or EDIE, that can help determine how much money, if any, in deposit accounts exceeds the insurance limits.
NEW YORK (Associated Press) - Amid the recent collapse and government seizure of savings and loan giant IndyMac Bank and heightened anxiety this week over the financial stability of No. 1 thrift Washington Mutual Inc., consumers are concerned about the safety of their bank deposits.
As of June 30, Seattle-based WaMu and its subsidiaries had assets of $309.73 billion and $181.92 billion in deposits. By comparison, Pasadena, Calif.-based IndyMac had $32 billion in assets and $19 billion in deposits when it was shut down by federal regulators on July 11.
If Washington Mutual were to tumble, the magnitude of its failure would dwarf the largest bank collapse in U.S. history _ that of Continental Illinois National Bank in 1984, with $33.6 billion in assets.
Besides IndyMac, 10 more federally insured banks and thrifts have failed this year and were closed by regulators, compared with three in all of 2007. Federal banking officials say more institutions are in danger of collapsing as turbulence from the housing slump, mounting defaults on mortgages, and the yearlong credit crisis continues to pile on soured loans for banks.
But officials also are assuring depositors that accounts are secure: Some 98 percent of the 8,450 government-insured U.S. banks and thrifts are strong, and $45.2 billion is in the federal deposit insurance fund _ replenished by premiums paid by the institutions.
Still, Federal Deposit Insurance Corp. Chairman Sheila Bair has said she will propose next month to FDIC directors an increase in premiums charged to banks and thrifts.
Some questions that bank customers may be asking:
Q. What is the maximum dollar amount that can be insured at my bank? Does it vary based on the type of accounts involved?
A. The basic insurance amount is $100,000 per depositor per bank. Individual retirement accounts, or IRAs, held in banks are insured up to $250,000. In addition, you may qualify for more than $100,000 in coverage at one bank if you have deposit accounts in different ownership categories, such as single accounts, retirement accounts, joint accounts and revocable trust accounts.
Q. What if my family has multiple individual accounts of those types, but our total deposits exceed the limits?
A. If the accounts are properly structured, a married couple could have as much as $1.1 million in deposits fully insured at one bank, according to the FDIC. With accounts for two children added, up to $1.5 million could be covered.
Q. If my bank closes, what happens to my money in deposit accounts that exceeds the insured limits?
A. You become essentially a creditor of the failed bank. You will eventually recover some of your money, but the amount can range anywhere from 40 cents on the dollar up to a full 100. Recovery of the money could take months. At IndyMac, there are an estimated $541 million in deposits of the total $19 billion that exceed the insurance limits.
Q. How has that worked out for past bank failures?
A. The average return for a depositor in that situation has been about 72 cents on the dollar, according to the FDIC. The amount that depositors recoup can depend on the amount and quality of the failed bank's assets.
Q. What else happens if my bank is shut down: Will the ATMs work? Will my automatic payments for mortgages, utilities and the like be affected?
A. Automated teller machines normally remain available after a bank closure. Checks will be processed as usual, services such as online banking and safe deposit boxes will continue to be available, and interest on accounts will accrue at the current rates. Terms of loans from the bank won't change, according to the FDIC.
Q. What can I do now, before any possible closure of my bank, to protect my assets?
A. The best way is to structure the accounts carefully. The FDIC has a calculator on its Web site, called the electronic deposit insurance estimator, or EDIE, that can help determine how much money, if any, in deposit accounts exceeds the insurance limits.
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