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Catherine NgaiFROM THE ARCHIVE: 10 years ago this week
THE FINANCIAL CRISIS
January 19 2008 issue
Citi and Merrill suffer huge losses
Citi and Merrill Lynch last week
announced write-downs of huge
portions of their sub-prime
exposure for the fourth quarter,
each chalking up huge losses while
at the same time securing billions
of dollars in capital injections to
sort out their liquidity through- JP Morgan, on the other
hand, in spite of write-downs of its
own, pulled in a profit.
Citi recorded US$18.1bn in pre-
tax write-downs and credit costs
related to sub-prime exposure in
the fixed income markets in the
fourth quarter. Annual revenues
for the whole firm fell 9% to
US$82bn, but pre-tax profits
fell 94%, to just US$1.7bn. Pre-
tax losses in the markets and
banking division, containing Citi’s
investment banking operations,
were US$18.2bn.
Revenue increases in some areas,
such as the record result from
transaction services, were more than
offset by the losses in the securities
and banking segment. With
negative revenues of US$16.9bn, the
fixed income markets division lost
more money in the quarter than it
had earned since March 2006.
Under the helm of new CEO
Vikram Pandit, Citi salvaged its
balance sheet with US$20bn
in investments and slashed its
quarterly dividend by about 40% to
US$0.32. Citi also plans to reduce
staff by 4,200 in the first phase
of its productivity plans this year.
Pandit described the fourth-quarter
results as unacceptable.
Despite the awful results, Citi
was still looking to shed light on its
international aspirations. On Friday
it said it would go ahead with a
US$5bn share swap to buy out
the minority owners in Japanese
brokerage Nikki Cordial. Early last
year, Citi bought a majority stake
for more than US$10bn.
Merrill experienced pain too.
Its fourth quarter pre-tax loss of
US$14.9bn was after negative
net revenues of US$8.2bn. Pre-
tax losses for the full year were
US$12.8bn, compared with aUS$7bn profit in 2006. Net revenues
for 2007 were US$11.3bn, down 67%
from US$33.8bn in 2006.
John Thain, chairman and
CEO since November, has made
significant moves to shore up
liquidity. In December, the firm sold
most of Merrill Lynch Capital, its
middle market commercial finance
business, to GE Capital. It also raised
US$6.2bn from Temasek and Davis
Advisors and last week announced
another US$6.6bn from Korea
Investment Corp, Kuwaiti Investment
Authority and Mizuho, among others.BofA cuts 650 while UBS reduces
prop activity
Bank of America reaffirmed
its commitment to investment
banking last week, but fired 650
staff, while UBS resisted calls to
cut its investment bank loose, but
embarked on a reorganisation after
drastic cuts in its structured credit
and proprietary businesses.
Both moves partly reflected
concerns at the traditional heart
of both firms that they have over-
reached in risky areas, to the
detriment of their brands elsewhere.
This is hardly surprising at Bank
of America, whose chairman Ken
Lewis memorably said last year
that he had had all the fun he could
stand in investment banking.But for UBS the stakes are
probably higher. As a venerable
European corporate finance
name, it has more to lose from
a perception that it is no longer
committed to investment banking.
With some on the private
banking side of the business
grumbling that the investment
bank has lost all the money the
private bankers made, many
observers have suggested that a
break-up seems a sensible option.GMAC’s funding dilemma
GMAC-RFC confirmed last week
that its German unit had stopped
mortgage origination. The move
comes amid sweeping evidence
that the originate-and-distribute
business model of mortgage
lending has lost significant market
share to deposit-taking institutions.
GMAC-RFC is now considering
alternative funding strategies.
The long-term impact of the crisis
in the securitisation markets is only
now beginning to become clear. But
it is becoming increasingly obvious
that just as bank disintermediation
gave rise to the originate-and-
distribute business model for
mortgage lending, its apparent
implosion will result in market share
being handed back to deposit-
taking institutions.