The dark night of Citigroup and Bank of America
How the might have fallen! Citigroup and BoA had pushed to dominate financial services by buying up rivals and expanding horizontally. Over the last few years, they have bought into areas from stock brokering, investment banking, wealth management, credit cards, and so on. In spite of an infusion of billions in cash from the US government, both banks are in danger of foundering.
First, Citigroup, the world's largest bank. Its stock price hit a record low. It has decided to split realign into two new firms, Citicorp and Citi Holdings. Citicorp will continue traditional banking, while Citi Holdings will take on some of the less central and more risky dealings. It plans to sell the majority of its Smith-Barney brokerage division (so greedily acquired in 1998) to Morgan Stanley. It will also, according to the Wall Street Journal story sell off its consumer-finance operations, including Primerica Financial Services and CitiFinancial, its private-label credit cards, and its Japanese consumer banking businesses in Japan.
The new Citigroup will reportedly concentrate on serving businesses with wholesale banking and to retail banking in limited locations globally. This move will essentially get Citigroup back to the status quo when it bought Traveler's Insurance in 1998. (The insurance business was sold already in 2004.)
Salon's Andrew Leonard sums it all up as follows:
Citigroup's woes blow a big hole in the theory that giant integrated superbanks combining commercial and investment banking activities are inherently more likely to survive in troubled economic times than entities which focus on providing more specialized services. Citigroup, the poster-child for banking merger mania, is now asking for a big do over. Will Bank of America be next? ("The Amazing Shrinking Citigroup", 1/13/09).
It's pretty amazing to think that just last September Citigroup was trying to buy out Wachovia, until Wells Fargo outbid. Insanity, incompetence, or unvarnished chutzpah?
Bank of America's woes also involve the first quarterly loss ever. Its biggest problems come from two recent acquisitions: the first was to buy damaged mortgage lender Countrywide for $2.5 billion; the second was, last year's impulse purchase of a sinking Merrill Lynch (brokering, wealth management) for $19.4 billion. Bank of America stocks have hit a 14-year low, with news that BoA had received a fresh $20 billion after the initial $25 billion form the US government. BoA is whining that Merrill's executive deceived them about the extent of the risk.
A sharp story in Fortune ("For BofA, nothing fair about Merrill deal", 8/16/09) notes that BoA was ill served by its advisers,
But CEO Ken Lewis' decision to buy Merrill isn't the only thing that looks questionable now. So does the advice he and the BofA board got on the hastily arranged Merrill deal from the bank's advisers, Fox-Pitt Kelton and J.C. Flowers & Co.
The financial advisers offered opinions calling the deal fair to Bank of America shareholders. But that conclusion seems to be undermined by the plunge in Bank of America's shares in the months since the deal was announced, and the bank's apparent need for another capital infusion from the government
Meanwhile the two advising companies walked away with $20 million for a single weekend's work. The article quotes one critic as saying "Considering that no one -- the government, the boards or the investors - had any possible use for these opinions, it certainly puts the focus on why anybody is willing to pay $20 million for them." Of course, the fact that the opinions were wrong doesn't help. The rue is that even the biggest mistakes make money for someone.
Bank of America is not in as bad a situation as Citigroup, but thinks are looking dire, Could a sell off of some of its assets be coming as well?
