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Summit News

Bank shareholders can shed a tear

NEW YORK (Reuters) - If you’re a big-time banker or trader, you should be happy. Fees and commissions are soaring. Your year-end bonus may set a record, again. The economy is humming. Customers are paying their bills. Life is good.

The facade of the New York Stock Exchange is decorated with the American flag, flags of European countries in New York, April 4, 2007. REUTERS/Eric Thayer (UNITED STATES)

Too bad that was a year ago.

Fast-forward. The easy money era is on hold. The private equity boom is over. Trading losses are mounting. So are write-downs, and there may be more. Jobs may be cut. Your bonus too. The housing boom: done. Mortgage defaults are soaring. Credit cards may be next. Analysts worry if your company has enough capital. And that common stock dividend? It may be cut.

Sure, stocks are near record levels, and it’s still cheap for many companies and individuals to borrow. But expectations for slowing economic growth, rising loan losses and debt write-downs make this a time for the banking industry to focus on limiting risks, not taking unnecessary ones.

Those concerns mounted this week as CIBC World Markets analyst Meredith Whitney downgraded Citigroup Inc C.N to "sector underperformer" from "sector performer." She said the largest U.S. bank may need to raise more than $30 billion of capital and cut its dividend.

Whitney said that could send its stock down to the low-$30s, about a third below where it was when Chief Executive Charles Prince took over in 2003.

“When you have the biggest, supposedly safest financial company being accused of not having enough capital, what does that say about a lot of other banks?” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “It’s a major issue, and it’s not just Citigroup.”

How bad those problems are, and how they might be fixed, or at least patched, will be among issues weighed at the Reuters Finance Summit in New York and London from November 5-8.

Investors haven't stuck around to see what happens. Through Wednesday, since Wall Street investment banks finished their last collectively strong quarter on May 31, the Amex Securities Broker-Dealer Index .XBD and Standard & Poor's Financials Index .GSPF were down 11 percent. The S&P 500? Up 1 percent.

GLOBAL PROBLEMS

Poor risk-taking led to an $8.4 billion write-down at Merrill Lynch & Co MER.N -- with perhaps more to come -- and cost Chief Executive Stanley O'Neal his job. A lengthening list of senior executives and managing directors at Citigroup, Bank of America Corp BAC.N and Wachovia Corp WB.N are also taking their leave.

It's not just a U.S. phenomenon. Swiss banks UBS AG UBSN.VX and Credit Suisse Group Inc CSGN.VX this week also reported multibillion dollar write-downs, and HSBC Holdings Plc HSBA.L UBS have ousted several top executives.

Among major U.S. banks, only Goldman Sachs Group Inc GS.N has emerged largely unscathed -- so far.

“Credit issues in mortgages and asset-backed securities aren’t going away,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management. “Investment banks will also have to adjust staff.”

New York State Comptroller Thomas DiNapoli said Wall Street bonuses may fall 10 percent from last year’s record $23.9 billion. Less money can mean less disposable income to buy expensive homes, land yachts and the occasional frou-frou, weighing on the economy and crimping tax revenue.

And while merger activity is beginning to recover, volume is down, and the volume of loans to fund acquisitions is also down. At JPMorgan Chase & Co JPM.N, the largest U.S. provider of leveraged loans, volume this quarter has fallen 64 percent from a year earlier, according to Dealogic.

The Federal Reserve’s decision on Wednesday to cut interest rates for a second time in two months may improve lending margins by cutting banks’ borrowing and deposit costs. Yet the central bank expressed concern about “disruptions in financial markets.”

Perhaps not just those in the past.

“If the financial sector is in trouble, then the Fed can cushion it, but it can’t solve it,” said Jim Awad, chairman of W.P. Stewart & Co. in New York.

Additional reporting by Jennifer Coogan, Michael Flaherty and Caroline Valetkevitch

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