BofA, Citi risk getting left behind by healthy rivals

NEW YORK Tue Jun 2, 2009 9:48pm EDT

A Bank of America sign is seen in the Northern Virginia town of Leesburg, January 18, 2009. REUTERS/Larry Downing

A Bank of America sign is seen in the Northern Virginia town of Leesburg, January 18, 2009.

Credit: Reuters/Larry Downing

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NEW YORK (Reuters) - Bank of America Corp (BAC.N) and Citigroup Inc (C.N) may be at risk of getting left behind.

Rivals including JPMorgan Chase & Co (JPM.N) and Goldman Sachs Group Inc (GS.N) are getting ready to repay the funds they borrowed under the U.S. government's Troubled Asset Relief Program.

But Bank of America and Citigroup, which each received $45 billion in TARP money after two rounds of government funding, are not seen leaving that program soon.

Remaining under the TARP yoke translates into additional limits on compensation for senior executives that may put the two banks an extra disadvantage in retaining talent, recruiters said.

"We are talking to people from those banks that are really concerned about what their bonuses will look like this year. I think they'll lose a lot of talent," said Wendy Weiler, a recruiter at Argosy Partners.

All major banks that are still in TARP could suffer, because the 2009 stimulus bill included strictures on bonuses for the top 25 people at the biggest TARP recipients. For example, no more than a third of these employees' salaries can be in the form of a bonus.

Bank of America and Citigroup face extra limits for 2008 and 2009 bonuses. For example, bonus pools for senior executives for those years can represent no more than 60 percent of the prior years' pool, unless the Treasury Department approves bigger bonuses.

Any interference with pay may hurt the profitability of the government's investment, assuming those who are well paid end up producing profits rather than losses as some of Wall Street's heavy hitters did in recent years.

Bank of America spokesman Scott Silvestri said in an emailed statement that the bank is confident in its ability to attract and retain talented employees, but added, "pay restrictions do create a challenge and a degree of complexity." Citigroup declined to comment.

The difficulty is determining how big a problem attracting and retaining talent will be and how much impact there will be on the banks' bottom lines. If there is a big impact, the government's more than $90 billion investment in the two banks could suffer.

NO BIG DEAL?

Some experts see this issue as overblown. There are a finite number of jobs available for bankers and traders seeking to dodge pay restrictions, said Marino Marin, an investment banker at boutique bank Gruppo, Levey & Co.

"Not everyone can go to regional banks, foreign banks, and boutiques," Marin said.

"If some firms lose a lot of talent, the people who remain will advance faster, so some talented people will recognize the opportunity and stay," Marin added.

U.S. Treasury Secretary Timothy Geithner has said that he wants to change compensation practices for the whole industry to discourage a focus on short-term gains and undue risk taking. That could limit paydays for all Wall Street firms, even at banks no longer subject to TARP.

Citigroup and Bank of America have not necessarily had trouble hiring people, according to people familiar with the matter. In March, sources said Citi had paid and was willing to pay multimillion-dollar guaranteed bonuses. Competitors have complained about Bank of America taking similar steps.

Meanwhile, Wall Street is shrinking. New York City's Independent Budget Office recently estimated that the city would lose 56,800 jobs through 2012, few of which will return by 2013. Those jobs represent about 16 percent of the sector's peak employment levels.

With more people chasing fewer jobs, compensation will not likely return to 2007 levels, even at banks like Goldman Sachs Group Inc, (GS.N) meaning Citigroup and Bank of America may not have trouble keeping up with competitors' salaries, a hedge fund investor noted.

STRANGE BEDFELLOW

But nevertheless, employment experts said the potential for a brain drain is real. Optimism is growing that the better-performing banks will be able to offer their top performers better bonuses than in 2008.

A series of relatively high-level professionals have left Bank of America recently, including Todd Kaplan, a banker who moved to Citadel Securities. The same goes for Citigroup, which recently lost investment banker Henry Michaels to a foreign rival.

"As long as the government has substantial investments in these banks, they will have a say on pay," said Robert Sedgwick, an employment lawyer at Morrison Cohen in New York.

To some investors, that's exactly the problem.

"The government's goal is to get their money back as soon as possible, not necessarily to run a successful long-term business. That's what people that got in bed with the government have learned," said Ralph Cole, portfolio manager at Ferguson Wellman Capital Management in Portland, which is considering buying Bank of America shares.

"There's no question that this could be a great time for JPMorgan or Goldman Sachs to increase their market share," Cole added.

(Reporting by Dan Wilchins, editing by Leslie Gevirtz)

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