Post by kelvin on Feb 6, 2009 18:52:39 GMT -5
www.theglobeandmail.com/servlet/Page/document/v5/content/subscribe?user_URL=http://www.theglobeandmail.com%2Fservlet%2Fstory%2FRTGAM.20090116.wbanks17%2FBNStory%2FBusiness%2Fhome&ord=1068286&brand=theglobeandmail&force_login=true
Bank of America's CEO cites loyalty to country; after huge losses, investors wonder if his motive was misguided
SINCLAIR STEWART
00:00 EST Saturday, January 17, 2009
---
NEW YORK -- Ken Lewis the chief executive officer and Ken Lewis the patriot: Investors were offered a glimpse of both yesterday as the head of Bank of America defended his decision to press ahead with the purchase of deeply troubled brokerage Merrill Lynch & Co. Inc.
"We just thought it was in the best interest of our company and our shareholders and the country to move forward," Mr. Lewis explained in a conference call, not long after Merrill staggered the investment community with a $15.3-billion (U.S.) fourth-quarter loss. Bank of America, whose results don't yet include the Merrill numbers, also stumbled, losing $1.8-billion.
The government feared a collapse of the Merrill acquisition could lead to significant problems for the entire banking system, Mr. Lewis added. "We did think we were doing the right thing for the country."
Of course, it's easier to do the right thing when Washington forks over $20-billion in bailout money: the amount Bank of America wrung out of the government at a meeting late Thursday night, along with a promise that will guarantee as much as $118-billion in losses on the two companies' most toxic assets.
But wasn't this the same bank that only a month ago felt confident it could swallow Merrill without asking taxpayers to help foot the bill?
Indeed, one of the more puzzling aspects of the ongoing financial crisis is why bank leaders continue to be puzzled by the deteriorating condition of their assets.
When Mr. Lewis tabled his offer for Merrill in September, rescuing the once-proud firm from almost certain death, he boasted of creating a massive financial conglomerate that married the country's biggest retail bank with its biggest stable of brokers.
Bank of America received $25-billion in support from the government's Troubled Asset Relief Program, or TARP, in the fall, and believed it had enough capital to support the purchase - even with Merrill's heavy exposure to securities backed by subprime mortgages, an area in which it was a major player.
That view appeared to remain consistent at the merger's shareholder vote in early December, and at the deal's closing on Jan. 1. Only in recent days, however, have investors learned that Mr. Lewis was considering abandoning the deal late last month because of the alarming pace at which Merrill was writing down the value of its assets.
"We did not expect the significant deterioration in mid to late December that we saw," Mr. Lewis told analysts yesterday.
Why not? The Bank of America bailout, part two, has investors asking whether Mr. Lewis properly understood the risks he was taking on with Merrill, or if the due diligence was flawed, or if he was simply too intent on expanding his empire.
He has made a series of large bets in recent years, buying FleetBoston Financial Corp., credit card giant MBNA Corp., and most recently Countrywide Financial, one of the subprime lenders that was crushed under the housing market's collapse.
At the time of the Merrill purchase, though, no one was blind to the severity of the mortgage problem. And it's not as though economists haven't predicted for months that the crisis would engulf other corners of the economy, vaporizing jobs and increasing defaults on corporate loans and credit cards.
Mr. Lewis isn't alone in failing to anticipate continued turmoil. The markets were stunned by Deutsche Bank's $6.4-billion loss this quarter, and by Citigroup's $8.3-billion loss, which was announced yesterday. Like Bank of America, Citigroup received $45-billion from Washington to stay afloat, along with hundreds of billions of dollars in guarantees.
The Citigroup example bears a closer look. Like Bank of America, it was a company founded on the promise of massive expansion, and one of its Achilles heels was the inability to weld its disparate cultures into a cohesive whole. It also received a large bailout, with guarantees attached, that couldn't arrest its slide - if anything, the capital merely helped the company absorb losses. In the end, it bowed to pressure from lawmakers and others by splitting the company asunder yesterday, breaking up the supermarket model.
Investors are now asking whether the latest backstop for Bank of America will be enough to see it through. Congress has already authorized a $700-billion bailout program, but no one seems to know how much money Washington will have to throw at these "too-big-to-fail" banks before they are righted.
The federal government has injected $45-billion into Bank of America, and holds a 6-per-cent stake, making it the largest single shareholder - and a key voice at the decision table. Mr. Lewis has already agreed to restrictions on executive compensation, and slashed the bank's dividend from 32 cents a share to a penny, as part of his deal to obtain the $20-billion.
When asked when he thought the bank could extricate itself from the embrace of Washington, Mr. Lewis said: "I wish I knew," adding that his preference would be "as soon as possible."
He then asserted that the company will generate "huge" profits when economic conditions normalize.
"It's almost directly related to how fast you think the economy will come back," he said.
Based on the forecasting record of Mr. Lewis and his peers, that's an assumption investors might have trouble swallowing.
BANK OF AMERICA (BAC)
Close: $7.18, down $1.14
*****
As earnings drop, biggest U.S. banks merge and divest
Bank of America barely ended the year with a profit, while Citigroup posted an annual loss for 2008. Financial services firm Citigroup will split into two businesses. Current chief executive officer Vikram Pandit will undo the legacy of former CEO Sanford "Sandy" Weill in order to rebuild a capital base eroded by the credit crisis.
Total government aid money received from the Troubled Asset Relief Program, $U.S.-billion
BANK OF AMERICA: $45-billion
CITIGROUP: $45-billion
Major acquisitions or reorganizations since the financial crisis began
Acquired investment bank Merrill Lynch
Purchased home lender Countrywide Financial
Splitting into two businesses, Citicorp and Citi Holdings
Selling control of Smith Barney brokerage to Morgan Stanley
***
CITIGROUP'S $1.95-TRIILION U.S. IN ASSETS
Citicorp: $1.1-trillion
Core businesses focusing on traditional global relationship banking
Global institutional bank
Corporate and investment bank offering advisory, underwriting and lending services; Citi private bank serving wealthy clients; global transaction services
Retail bank
Global branded credit cards; regional consumer and commercial banking centers
***
Citi Holdings: $850-billion
Non-core businesses handling the company's riskier assets
Brokerage and asset management
Stake in Morgan Stanley Smith Barney; Japan's Nikko Cordial banking services; Primerica Financial Services
Local consumer finance
CitiFinancial and CitiMortgage in U.S.; consumer finance operations globally
Special asset pool
Managing the pool of mortgages and other risky assets the U.S. government agreed to back up
THE GLOBE AND MAIL
SOURCES: THE COMPANIES, BLOOMBERG
© The Globe and Mail
Bank of America's CEO cites loyalty to country; after huge losses, investors wonder if his motive was misguided
SINCLAIR STEWART
00:00 EST Saturday, January 17, 2009
---
NEW YORK -- Ken Lewis the chief executive officer and Ken Lewis the patriot: Investors were offered a glimpse of both yesterday as the head of Bank of America defended his decision to press ahead with the purchase of deeply troubled brokerage Merrill Lynch & Co. Inc.
"We just thought it was in the best interest of our company and our shareholders and the country to move forward," Mr. Lewis explained in a conference call, not long after Merrill staggered the investment community with a $15.3-billion (U.S.) fourth-quarter loss. Bank of America, whose results don't yet include the Merrill numbers, also stumbled, losing $1.8-billion.
The government feared a collapse of the Merrill acquisition could lead to significant problems for the entire banking system, Mr. Lewis added. "We did think we were doing the right thing for the country."
Of course, it's easier to do the right thing when Washington forks over $20-billion in bailout money: the amount Bank of America wrung out of the government at a meeting late Thursday night, along with a promise that will guarantee as much as $118-billion in losses on the two companies' most toxic assets.
But wasn't this the same bank that only a month ago felt confident it could swallow Merrill without asking taxpayers to help foot the bill?
Indeed, one of the more puzzling aspects of the ongoing financial crisis is why bank leaders continue to be puzzled by the deteriorating condition of their assets.
When Mr. Lewis tabled his offer for Merrill in September, rescuing the once-proud firm from almost certain death, he boasted of creating a massive financial conglomerate that married the country's biggest retail bank with its biggest stable of brokers.
Bank of America received $25-billion in support from the government's Troubled Asset Relief Program, or TARP, in the fall, and believed it had enough capital to support the purchase - even with Merrill's heavy exposure to securities backed by subprime mortgages, an area in which it was a major player.
That view appeared to remain consistent at the merger's shareholder vote in early December, and at the deal's closing on Jan. 1. Only in recent days, however, have investors learned that Mr. Lewis was considering abandoning the deal late last month because of the alarming pace at which Merrill was writing down the value of its assets.
"We did not expect the significant deterioration in mid to late December that we saw," Mr. Lewis told analysts yesterday.
Why not? The Bank of America bailout, part two, has investors asking whether Mr. Lewis properly understood the risks he was taking on with Merrill, or if the due diligence was flawed, or if he was simply too intent on expanding his empire.
He has made a series of large bets in recent years, buying FleetBoston Financial Corp., credit card giant MBNA Corp., and most recently Countrywide Financial, one of the subprime lenders that was crushed under the housing market's collapse.
At the time of the Merrill purchase, though, no one was blind to the severity of the mortgage problem. And it's not as though economists haven't predicted for months that the crisis would engulf other corners of the economy, vaporizing jobs and increasing defaults on corporate loans and credit cards.
Mr. Lewis isn't alone in failing to anticipate continued turmoil. The markets were stunned by Deutsche Bank's $6.4-billion loss this quarter, and by Citigroup's $8.3-billion loss, which was announced yesterday. Like Bank of America, Citigroup received $45-billion from Washington to stay afloat, along with hundreds of billions of dollars in guarantees.
The Citigroup example bears a closer look. Like Bank of America, it was a company founded on the promise of massive expansion, and one of its Achilles heels was the inability to weld its disparate cultures into a cohesive whole. It also received a large bailout, with guarantees attached, that couldn't arrest its slide - if anything, the capital merely helped the company absorb losses. In the end, it bowed to pressure from lawmakers and others by splitting the company asunder yesterday, breaking up the supermarket model.
Investors are now asking whether the latest backstop for Bank of America will be enough to see it through. Congress has already authorized a $700-billion bailout program, but no one seems to know how much money Washington will have to throw at these "too-big-to-fail" banks before they are righted.
The federal government has injected $45-billion into Bank of America, and holds a 6-per-cent stake, making it the largest single shareholder - and a key voice at the decision table. Mr. Lewis has already agreed to restrictions on executive compensation, and slashed the bank's dividend from 32 cents a share to a penny, as part of his deal to obtain the $20-billion.
When asked when he thought the bank could extricate itself from the embrace of Washington, Mr. Lewis said: "I wish I knew," adding that his preference would be "as soon as possible."
He then asserted that the company will generate "huge" profits when economic conditions normalize.
"It's almost directly related to how fast you think the economy will come back," he said.
Based on the forecasting record of Mr. Lewis and his peers, that's an assumption investors might have trouble swallowing.
BANK OF AMERICA (BAC)
Close: $7.18, down $1.14
*****
As earnings drop, biggest U.S. banks merge and divest
Bank of America barely ended the year with a profit, while Citigroup posted an annual loss for 2008. Financial services firm Citigroup will split into two businesses. Current chief executive officer Vikram Pandit will undo the legacy of former CEO Sanford "Sandy" Weill in order to rebuild a capital base eroded by the credit crisis.
Total government aid money received from the Troubled Asset Relief Program, $U.S.-billion
BANK OF AMERICA: $45-billion
CITIGROUP: $45-billion
Major acquisitions or reorganizations since the financial crisis began
Acquired investment bank Merrill Lynch
Purchased home lender Countrywide Financial
Splitting into two businesses, Citicorp and Citi Holdings
Selling control of Smith Barney brokerage to Morgan Stanley
***
CITIGROUP'S $1.95-TRIILION U.S. IN ASSETS
Citicorp: $1.1-trillion
Core businesses focusing on traditional global relationship banking
Global institutional bank
Corporate and investment bank offering advisory, underwriting and lending services; Citi private bank serving wealthy clients; global transaction services
Retail bank
Global branded credit cards; regional consumer and commercial banking centers
***
Citi Holdings: $850-billion
Non-core businesses handling the company's riskier assets
Brokerage and asset management
Stake in Morgan Stanley Smith Barney; Japan's Nikko Cordial banking services; Primerica Financial Services
Local consumer finance
CitiFinancial and CitiMortgage in U.S.; consumer finance operations globally
Special asset pool
Managing the pool of mortgages and other risky assets the U.S. government agreed to back up
THE GLOBE AND MAIL
SOURCES: THE COMPANIES, BLOOMBERG
© The Globe and Mail