After Citi, is Bank of America next?

A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including Bank of America Corp could still tempt short-sellers.
Bank of America, the No 3 US bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression.
The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest US independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage.
If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.
"I would expect there are more banks who are in dire straits and more who can expect to be helped," said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, D.C. "The share price makes it look like Bank of America might be next in line," he said.
Before Monday's stock market rally, Bank of America shares had lost 52 per cent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.
Analysts at independent research company CreditSights forecast that in a scenario where the commercial and residential real estate markets really tank beyond banks' expectations, Bank of America would have a Tier-1 capital ratio of 7.15 per cent.
The minimum that regulators seek to consider a bank "well capitalized" is 6 per cent, but any ratio near or below 7 per cent tends to spook investors.
Bank of America declined comment.
CreditSights also expressed concern about Wells Fargo & Co, which it said would have a Tier-1 capital ratio of 6.98 per cent under its worst case scenario. Wells Fargo recently agreed to buy Wachovia Corp.
Under the same assumptions, and before the government's latest investment, Citigroup would have a Tier-1 capital ratio of 8.64 per cent.
Wells Fargo, based in San Francisco, declined to comment.
To be sure, by some measures Citigroup looks worse than Bank of America and Wells Fargo, most notably the ratio of tangible assets to tangible equity, a metric on which some investors have focused.
Citigroup's tangible assets are about 42 times shareholder equity minus intangible assets, compared with 11 times for Bank of America.
The US banking system is broadly undercapitalized, perhaps to the tune of more than $1 trillion, and the only investor that can bail it out is the US government, analysts said.
"The banks already have an enormous hole to plug, and the recession will make that hole larger," noted Daniel Alpert, investment banker at Westwood Capital in New York, estimating banks may need to write down $1 trillion more in bad debt, in addition to the roughly $750 billion announced so far.
TOXIC MORTGAGES
Bank of America, through its acquisition of Countrywide, has more than $250 billion in residential mortgages and while it has stopped offering some of the most toxic types of mortgages, chargeoffs in the portfolio are increasing.
Wells Fargo inherited a portfolio of more than $260 billion in consumer loans when it acquired Wachovia, and JPMorgan Chase & Co acquired exposure to some of the most risky classes of mortgages, in addition to its own large consumer loan portfolio, when it bought Washington Mutual Inc.
Still, there are big differences. Critically for Citigroup, investors lost confidence in the company and its management after it failed to buy Wachovia Corp, thereby losing an important potential source of deposit-based funding, analysts said.
"The difference between Citi and the other three is that Citi clearly had more suspect management," said Mal Polley, chief investment officer at Stewart Capital Advisors in Pittsburgh. "They had not done enough to take the fat out of the system and right the ship," he added.
But management at Bank of America and Wells Fargo, and even JPMorgan, widely regarded as the bank that has best survived the credit crisis to date, will need to allay investors' concerns about their capital position as financial conditions worsen.
And if their losses are big enough, or investors fear they will be big enough, Bank of America and Wells Fargo could turn to the same place Citigroup did: the US government.
"I definitely think other companies will need this help," said Paul Miller, analyst at Friedman, Billings, Ramsey & Co in New York....

Indian banks capitalise on Wall Street crisis

Compared with its Wall Street rivals, India's Ambit Holdings has long been considered small fry.
Launched in 1988, the Mumbai-based investment bank has just 180 employees. With the financial crisis engulfing the big Wall Street firms, though, Ambit executives want to grab the opportunity to gain ground on their better-known competitors.
Over the past year and a half, Ambit has expanded into wealth management, private equity, and insurance brokerage. The expansion has helped it emerge as one of the top five banks in the Indian league table.
Ambit's biggest coup came on Sept 15. That's when it announced it had poached Andrew Holland, head of the strategic risk group at DSP Merrill Lynch, the Indian joint venture that Merrill operates.

Holland brings with him a four-member proprietary trading team.
Ashok Wadhwa, chief executive of Ambit, claims he had been negotiating with Holland for the past three months, and the news surrounding Merrill's shotgun acquisition by Bank of America did not force anyone's hand.
However, the bad news didn't hurt, either. "The financial crisis couldn't have come at a better time," he says.
Other Wall Street refugees are finding their way to Ambit.
In August, Wadhwa appointed Nikhil Puri, from Bear Stearns' New York office, as managing director of Ambit's corporate finance business.
Now, Wadhwa says, Ambit is in final talks with a handful of Lehman employees.

A boost for India brokers
Wadhwa isn't the only one hiring. Over the last year, the subprime crisis in the US has provided a major boost to Indian brokerage houses.
With employees worried about the stability of US and European banking giants, local rivals have been poaching talent from their big Western peers.
Homegrown Indian banks have been luring institutional brokers, wealth managers, and asset management professionals at foreign banks, with employee stock options and a share of profits.
What made it easy was the booming stock market, which yielded returns of more than 40 per cent, a growing group of wealthy Indians, and high consumer spending.
Executives from some of the biggest names in banking have been making the switch. For instance, HSBC saw its five-member India equity sales team defect to Mumbai-based brokerage firm Antique Stock Broking in December.

More than five Citi bankers moved to local financial-services firm Anand Rathi Securities in February of this year.
Now, Reliance Capital (the financial-services arm of the Reliance ADA Group), JM Financial (one of the oldest investment banks with the Tata Group as one of its major clients), and local financial-services shops like Kotak Securities, Enam Securities, and IDFC SSSKI Securities are waiting to scoop up talent in institutional brokerage, wealth management, and mergers and acquisitions.
"There's a great deal of talent available, and a ready-made setup for any startup," says Narayan SA, managing director of Kotak Securities.

In a way, the Indian banks have come full circle.
Over the years, as part of the constant employee churn, they've watched their staff desert them for foreign banks, attracted by better paychecks and a global environment in which to operate.
"It's a great learning experience and puts you on a different level altogether," says a banker who returned to an Indian firm.
Just last year, Kotak lost people to Credit Suisse.
JM Financial saw its business split and people move when it parted ways with former partner Morgan Stanley in early 2007.
The defectors are now returning, as the Wall Street crisis is drawing Indian bankers to safer havens in local firms.

Long-term strategy
Even today, India is still a great investment destination, say bankers, despite its slowing economy (which has skidded from 9 per cent growth last year to 7.5 per cent currently).
The 30 per cent drop in the Bombay Stock Exchange Sensex since January this year, and a slowdown in M&A activity that followed, may be dampening enthusiasm in India's financial sector, but other services such as wealth management, advisory, and private equity continue to do well.
"The current expansion is only an indication of our long-term strategy," claims Anand Rathi, who heads a firm of the same name. He says he is now negotiating with bankers from Lehman, Merrill, and Goldman Sachs.

Also getting ready for market conditions to perk up is Reliance Capital, with a business portfolio that includes asset management, insurance, private equity, proprietary investments, brokerage, and consumer finance.
It plans to enter investment banking, which its CEO Sam Ghosh says "was the missing link in the chain" to become a full-fledged financial-services provider.
Some key Lehman India bankers claim that they received calls and offer letters from Reliance early this month.
Keshav Sanghi, a former head of equities at Deutsche Bank who is now CEO at Reliance Equities International, won't comment regarding possible hiring but adds "we are always on the lookout for people."

A big clincher is the global experience of those at the Wall Street banks.
Indian brokerages can draw on their own India know-how but are weak in institutional equity sales, since Western banks dominate most of the foreign institutional investor business.
"People in global firms have the ability to engage with clients, have global experience in running a shop better, and are well versed on products like derivatives," says Vallabh Bhanshali, chairman at Enam Securities.
That's why there's a scramble to hire them. With Wall Street collapsing, there are so many of them, Kotak's Narayan says, "We are spoiled for choice."

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Seven days that shook the financial world

It was the week that shook the financial world to the core. On Friday, Sept. 12, traders left the New York Stock Exchange for the weekend. But key banking officials, facing the impending failure of the venerable Lehman Brothers investment house and a shaky outlook for two other huge financial players - investment firm Merrill Lynch and insurance giant American International Group - began a series of weekend meetings in an effort to prevent a possible collapse of the global financial system.
Over the next seven days, the nation's financial leaders, captained by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, produced a rapid succession of moves that reversed a decades-long trend toward financial deregulation and fundamentally changed the face of the American financial system.
Lehman failed and Merrill was sold to Bank of America. The government took effective control of AIG in an $85 billion bailout. And, in the biggest intervention of all, officials proposed to purchase the troubled mortgage assets of financial firms, a move that could cost hundreds of billions of additional dollars.
Meanwhile, worried investors sent the stock markets into a dizzying ride of huge gains and losses.

Friday, September 12:
The trading week ends with the fate of 158-year-old Lehman Brothers in grave doubt. Its stock had fallen sharply due to fears over its financial condition. Paulson, Bernanke, and New York Fed President Tim Geithner begin a series of meetings in Lower Manhattan with top bankers in an effort to engineer a bailout of Lehman, which had bet heavily in the subprime mortgage market.
Two possible buyers emerge: Britain's Barclays and Bank of America.

Saturday, September 13:
Talks on a possible Lehman buyout continue. The would-be rescuers look to the government to take on some of the risk, as it did in the shotgun sale of Bear Stearns to JPMorgan Chas in March and the effective nationalisation on Sept. 8 of mortgage giants Fannie Mae and Freddie Mac.
Government officials hold fast that there will be no federal bailout. Talks are inconclusive.

Sunday, September 14:
The negotiators continue meeting, facing a deadline to act before Asian markets open for Monday morning trading.
But government officials insist there will be no federal backing of a Lehman rescue. With no help from Washington forthcoming, Barclays - the only possibility left after Bank of America leaves the table - withdraws.
Lehman is done for.
Meanwhile, Merrill Lynch CEO John Thain, seeing the writing on the wall, arranges the sale of his company to Bank of America for about $50 billion. In one day, the fates of two storied companies are sealed.

Monday, September 15:
Lehman Brothers Holdings, the bank's holding company, files for Chapter 11 bankruptcy protection and says it will try to sell key business units.
Investor concern now turns to the fate of AIG, fearing a liquidity crisis. Rating agencies cut AIG's credit rating.
Despite reassurances about the economy from Paulson and President George W. Bush, the stock market plummets. The Dow Jones industrial average drops more than 504 points, or 4.4 per cent, the biggest loss since right after the September 11, 2001, terror attacks.
The failure also roils overseas stocks, sending them plunging. Meanwhile, concerns about a slowing economy take oil below the psychological benchmark of $100 a barrel, its lowest level since February.

Tuesday, September 16:
The Federal Reserve meets and keeps the federal funds rate unchanged at 2%. Asian markets, some of which had been closed for a holiday on Monday, plummet.
The Russian stock market goes into a tailspin, with the largest exchange down more than 17 per cent before the Russian government halts trading. Managers of the Primary Fund, a supposedly supersafe money market fund, say that shares have fallen below the sacrosanct $1 valuation.
Meanwhile, Goldman Sachs and Morgan Stanley, the two remaining independent investment banks, report stronger-than-expected results. However, investors continue to beat down the companies' shares.
Amid all the turbulence, US officials decide that AIG is indeed "too big to fail." In a move that would have been unthinkable before the credit crisis began, the Fed arranges to lend $85 billion to AIG in exchange for a 79.9 per cent equity stake.
The deal is announced Tuesday evening. Even before the deal is finalised, the Dow reverses an earlier loss and gains 141 points.

Wednesday, September 17:
The government bailout of AIG fails to stem investor fears as they flee to safety. Credit markets tighten.
The New York Times reports that Washington Mutual, the nation's largest thrift, has put itself up for sale. The Dow plunges 449 points.

Thursday, September 18:
The New York Times reports that Morgan Stanley has "stepped up" merger talks with Wachovia. The Fed moves to pump money into the financial system through lending programs operated by several overseas central banks and the Fed's own moves.
At the same time, the government begins action on the hugest bailout of all, committing hundreds of billions of taxpayer dollars to buy troubled mortgage assets from beleaguered financial institutions.
As word of the evolving plan spreads, stocks rally. The Dow closes up 410 points.
In the evening, Paulson and Bernanke and Securities & Exchange Commission Chairman Christopher Cox go to the US Capitol to brief lawmakers on the plan, which requires congressional authorisation.

Friday, September 19:
The buyout plan - with few firm details - is announced and stocks soar worldwide. President Bush says the move puts "a significant amount of taxpayer dollars on the line," but he says the risk of not acting "would be far higher."
In additional actions, the Treasury and Fed act to guarantee the assets of money-market funds, which had been threatened by the meltdown of the financial markets, and the SEC places a temporary ban on the short-selling of nearly 799 financial stocks.
The Dow closes up 368.75 points, 45 points below where it was a week earlier but still 911 points over its bottom on Thursday morning.

A momentous week indeed, but there is no sign the economic drama will limit itself to a mere seven days.
Lawmakers and regulators are to work through this weekend in an effort to devise bailout plan legislation that can come to a vote next week.
The bipartisan consensus surrounding the deal can come undone as the details are ironed out.
But for drama, it will be hard to match events that have reshaped the US financial landscape for years, if not decades to come.

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