Bad fourth quarter numbers pre-announced at Citigroup and Bank of America now provide a road sign for where the two financial giants are headed this year.
After reporting a massive $8.3 bn loss, more than double what Wall Street expected, Citigroup announced it will break itself in two, a development FOX Business has been reporting since November of 2008, when the government gave Citigroup a massive $306 bn bailout.
The bank will now house a deposit-taking, plain vanilla Citicorp unit and a unit called Citi Holdings that will hold its "non-core" assets, including wealth management and brokerage divisions, executives said.
Consumers, however, will continue to receive the same deposit and loan rates, as well as credit card rates, from the new bank entity, Citicorp, as the financial giant returns to its roots as a commercial bank.
The move effectively ended Citigroup's attempt at being a "financial supermarket." A board shake-up is also imminent, executives disclosed.
A Stunning Government Bailout
Also, after midnight last night, the US government announced a stunning new $138 bn rescue package for Bank of America, in advance of BofA's pre-announcement that it had $1.8 bn in fourth quarter losses, its first in 17 years--a profit result which doesn't include a colossal $15.3 bn in losses at Merrill Lynch, which BofA bought for $19 bn Jan. 1.
With the government's huge capital injections, now totaling $45 bn for the bank, the US taxpayer has effectively paid for BofA's purchase of both Merrill and Countrywide Financial.
Specifically, the government also gave BofA a fresh $20 bn capital injection on top of the total $25 bn the bank has already received along with Merrill Lynch. Insiders tell Fox Business the merger is in turmoil, as BofA continues to experience indigestion from both its purchase of Merrill Lynch and Countrywide.
With the new government backstop for BofA, the US government through the Federal Reserve, the US Treasury Dept. and the FDIC are now guaranteeing a total of $428 bn in bad assets taken on from Bear Stearns ($29 bn), American International Group ($52.5 bn), Citigroup ($249.3 bn) and now BofA ($97.2 bn effectively).
Surprise Disclosures from BofA
As we reported first on FOX Business, BofA chief executive, Kenneth Lewis, now expects losses for the next several quarters, and the Merrill acquisition will be dilutive to earnings for the next two years. Lewis also says the economy won't recover until the second half.
Indeed, in a surprise disclosure, Lewis revealed on the BofA earnings call this morning that the bank would not have acquired Merrill Lynch without the government's assistance--despite assuring the markets that he and his executives had conducted due diligence on Merrill's assets and knew what was on its books.
Specifically, Lewis revealed that in December, late in the fourth quarter, he and other executives suddenly discovered that the problem assets at Merrill had soured worse than expected, to the point where BofA almost walked away from buying the brokerage.
Insiders now say Lewis is concerned and upset about the information he has received from Merrill Lynch prior to the acquisition, indicating that he may feel he has been misled.
BofA took $10.47 bn in writedowns for the quarter. That includes $4.78 bn in CDO-related writedowns, which is actually down from $5.65 bn in the 2007 period. Also, leveraged-loan writedowns were $1.08 bn, versus $196 mn a year earlier.
Citigroup's Bad Numbers
Citigroup recorded an $8.3 bn loss for the fourth quarter.
As reported first on FOX Business, Citigroup insiders had feared the fourth quarter would be the worst in the history of the bank, with asset sales mitigating the final result. Citi also expects more departures from its heavily criticized board, as former Treasury secretary Robert Rubin plans to leave later this year.
Citigroup has recorded about $14 bn in writedowns for the fourth quarter, with writedowns and losses climbing to more than $92 bn over the past 15 months.
Citigroup has been heavily criticized for letting its balance sheet balloon 45% during the credit bubble, from 2005 to 2007, to $2.2 tn, raising concerns that not only was it too big to fail, but too big to succeed.
Blunt, forthright, and sobering, both Bank of America's Ken Lewis and Citigroup's Vikram Pandit made it clear on their earnings conference call this morning before the markets opened that the economy will not pick up until well into the second half.
Indeed, Lewis darkened his economic outlook, after initially saying the economy would pick up in the first half. Citi group traded at $54 a share in May of 2007, it's now trading at $4. Bank of America is trading at $8, after trading at $54 in November of 2006.
The Government's Lifeline to Bank of America
In a move announced by the government after midnight, Bank of America received a government backstop to $118 bn in bad assets, 75% of which came from Merrill Lynch.
Bank of America also received a fresh $20 bn capital injection from TARP, on top of the total $25 bn BofA and Merrill has already received (Citi has received a total of $45 bn in TARP money to date; the government's total investment in Citi is $52 bn, which includes $7 bn in shares it received as a fee to provide the guarantee on Citi's bad assets).
BofA's Lewis said on the conference call it has ringfenced $118 bn in capital markets exposures, much of it loaded with commercial real estate loans, collateralized debt obligations and trading losses.
The government will bear $97.2 bn of the bad assets, with Bank of America taking the rest in earnings hits in future quarters if these assets continue to erode.
The BofA government backstop mirrors Citi's November rescue package, as the guarantee is in place for five years for commercial real estate assets, and 10 years for consumer loans. Similar to Citi, BofA issued preferred shares and warrants to the government as a fee payment in return for getting the backstop. It has also slashed its quarterly dividend to a penny a share.
In an unusual disclosure, Bank of America's chief executive Ken Lewis said the bank "would not have closed the deal without government assistance," after discovering late in the fourth quarter, in December, that Merrill's balance sheet had deteriorated worse than expected.
Lewis also noted that he expects net losses for the next several quarters to be at or above the fourth quarter levels, and that Merrill Lynch purchase will be dilutive to earnings over the next two years.
As TARP increasingly is looking like a bandaid on a tumor, the government is increasingly resorting to insuring bad assets instead of a wholesale takeover of the banking industry's bad bets, along the lines of a Resolution Trust Corp. entity set up in the early ‘90s to fix the S&L crisis.
Fighting Behind the Scenes
Sources have also told Fox Business that behind the scenes fighting between Merrill Lynch and BofA has escalated, as the Merrill acquisition now presents a potential black eye to BofA.
When the deal was announced the weekend Lehman Bros. collapsed in September, BofA's Lewis indicated that the bank was well aware of Merrill's problem assets, that it had enlisted the help of valuation experts at J.C. Flowers, and that Merrill's Thain had assured BofA these were "legacy" issues that were being swiftly cleaned up.
Bank of America, which has gone through at four chief financial officers in the past five years, according to Disclosure Insight, a research firm in Plymouth, Minn., has made about $129 bn in acquisitions over the last several years.
As the markets deteriorated further, and as the bank got a closer look, Merrill's optimism may have been overstated, angering Lewis, insiders say.
In addition, Fox Business has learned, as reported to earlier this week, that Merrill lost five key executives, including its top broker Robert McCann and its top investment banker Gregory Fleming, after Merrill's John Thain declined to give them their bonuses, keeping their base salaries at around $350,000.
This at a time when the merged company plans to lay off an estimated 35,000 workers, when Bloomberg terminals and other cutbacks are slicing through the company's operations, and at a time when Thain fought with the Merrill board to receive his $10 mn bonus, and when Thain arranged for compensation packages in excess of $70 mn to lure away former Goldman Sachs colleagues Thomas Montag and Peter Krause. Montag received more than $40 mn, Krause, $25 mn. Krause has since left the firm to run AllianceBernstein.
Reports indicate that BofA's Ken Lewis has been "purple" with rage that Thain is fighting for bonus pay and getting high compensation for Goldman colleagues at a time when the Thundering Herd has seen record, historic losses from bad bets made during the credit bubble.
Lewis is also said to be dismayed at the loss of key executives, given that he has coveted Merrill's brokerage operations for years and needs to keep in the door the very executives who can bring profits to the bank's now beleaguered bottom line.
Citigroup Splits Up
As Fox Business has reported was forthcoming, Citigroup is now in the process of breaking itself up. The new Citigroup will consist of two units, Citicorp which will house two thirds of the bank's deposits, and Citi Holdings, which will house the bank's brokerage, asset management, and global consumer finance divisions, as well as middle market units Citi may sell along with its bad assets, tough to do as these securities remain priced for the Ice Age as the credit markets are frozen over.
Citi Holdings will hold $850 bn in assets, backstopped by the US taxpayer, and Citicorp will have a $1.1 tn balance sheet.
Citigroup's Vikram Pandit noted on the conference call that in returning what was once the world's largest bank back to its banking roots, that its Smith Barney brokerage "was not central" to the bank's strategy going forward, and "in many ways competed with Citi's resources," leading to speculation that the diminishment of Smith Barney's importance was key to the departure of Sallie Krawcheck, who helped run Smith Barney.
Ironically, as the name of the game for the new Citicorp is a focus on the safer deposit side of the business, the Smith Barney sale may pose a loss of deposits for Citi, as Smith Barney customers had set up sweep deposit accounts to handle transactions.