Global Investing

from DealZone:

R.I.P. Salomon Brothers

It's official: Salomon Brothers has been completely picked apart.

Citigroup's agreement to sell Phibro, its profitable but controversial commodity trading business, to Occidental Petroleum today puts the finishing touches on a slow erosion of a once-dominant bond trading and investment banking firm.

When Sandy Weill (pictured left) staged his 1998 coup -- combining Citicorp and Travelers, Salomon Brothers was a strong albeit humbled investment banking and trading force. Yet little by little, a succession of financial crises, Wall Street fashion and regulatory intervention has whittled away at the once-dominant firm.

Not long after the Citigroup was formed, proprietary fixed income trading --  once the domain of John Meriwether, was shut down after the Asian debt crisis fueled losses that Weill could not stomach.

The Salomon name disappeared long ago as investment bankers and underwriters were rebranded Citigroup Global Markets.

Now Phibro, the former Philips Brothers that merged with Salomon in the early 1980s, is to be cast off because its energy traders made too much money when the rest of the bank suffered losses and required a $45 billion of taxpayer bailout.

Once Bitten

Nobody knows quite what the landscape for financial services will be after the mayhem of the last three weeks. There is much talk of the investment banking model being dead in the water and swingeing regulation aimed at firmly bolting the door of a horseless stable, butrtrow4b.jpg few are ready to hazard at the details.

One aspect on which we have seen almost universal agreement, however, is that investors have cottoned onto the immense risk of bankrolling investments they don’t quite understand. The trend for increasing pension fund investments in alternative strategies starts to look like a busted flush, and you have to question whether demand for the UK’s planned retail funds of hedge funds will sustain the new industry.

Schroders CIO Alan Brown told us this week: “People will be taking a long hard look at complex financial products.”

No Laughing Matter

The global financial crisis is no laughing matter for many people, but it has nonetheless laugh1.jpgresurrected some dreadful puns that were popular back during the Japanese banking fiasco in the 1990s. Doing the rounds by e-mail are the following:

Sumo Bank has gone belly up; Bonsai Bank is cutting its branches; Karaoke Bank is for sale and will go for a song; Samurai Bank islaugh32.jpg soldiering on; Ninja Bank is in the black; staff at Karate Bank have got the chop; and there is something fishy up at Sushi Bank.

The recent crisis has been less fruitful. Some people started cruelly referring to Northern Rock as Northern Wreck when the British laugh22.jpglender was nationalised and analysts have lately been toying with TARP, the Troubled Asset Relief Plan. Credit Suisse and Merrill Lynch both suggested that TARP could be a TRAP while Goldman Sachs suggested it had been TARPedoed by Congress.

UK economy — too gloomy to chart?

During a briefing in the London office of Societe Generale this week, Alain Bokobza, head of European Equity and Cross Asset strategy, handed out a booklet containing series of charts and graphs to explain the bank’s latest multi asset portfolio for the fourth quarter.
Chart
As he explained the outlook for the UK economy, a chart on UK growth was discreetly missing from the booklet.

“There’s no chart. It’s too gloomy to print it,” Bokobza told the participants.

Societe Generale sees inflation shooting below the Bank of England’s target of 2 percent over the next two years and has a bullish call on UK stocks as it predicts benchmark interest rates to fall to 3.5 percent in a year’s time from the current 5.0 percent.

Last wisdom from Lehman Brothers

Lehman“Dear readers, let us begin this week’s missive by acknowledging its partial incompleteness. For understandable considerations, there are some capital market situations that we cannot discuss. We thank all our readers for their support and look forward to continuing to provide you with timely analysis.”

This is how Lehman Brothers’ strategists began their last ever weekly research note, published on Saturday – only two days before the U.S. investment bank collapsed.

In the 146-page research, Lehman strategists argued that bonds are performing well in September thanks to rising risk aversion and financial institution uncertainties.

Thou shalt invest wisely?

Bull markets are funMerrill Lynch is giving a refresher course on Ten Markets Rules to Remember, created by Bob Farrell, the bank’s former dean of research during his tenure from 1957-2001.

Below are  the original rules:

#1: Markets tend to return to the mean over time
#2: Excess in one direction will lead to an opposite excess in the other direction
#3: There are no new eras, excesses are never permanent
#4: Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
#5: The public buys the most at the top, the least at the bottom
#6: Fear and greed are stronger than long-term resolve
#7: Markets are strongest when they are broad, and weakest when they narrow to a handful of blue-chip names
#8: Bear markets have three stages: sharp down, reflexive rebound and a drawn-out fundamental downtrend
#9: When all experts and forecasts agree, something else is going to happen
#10: Bull markets are more fun than bear markets

So what does this mean today? 

David Rosenberg, Merrill’s North American economist  says: ”Rule #4 could be about the sliding U.S. dollar, as it now revives in mean-reverting fashion (back to Rule #1) .”  

Dresdner, Commerzbank — a deal nobody likes?

rtr20qy8.jpgWhen stock markets this morning traded the news that Allianz had sold Dresdner Bank to Commerzbank, shares in both companies were down, defying stock market logic. Maybe nobody likes the deal?

Dresdner Kleinwort, the anaemic investment bank that raked up billions of credit write-downs, is not the jewel in the crown Commerzbank was looking for. Commerzbank slashed its own investment bank years ago and has said it will also scale down Dresdner Kleinwort.

Allianz is pulling the plug on bancassurance, a model that some say doesn’t work — though others have succesfully executed it. But the timing seems odd: selling a bank would probably have been a lot easier 18 months ago.

Fannie, Freddie fanning fears

More stress on its balance sheets is just about the last thing that the banking sector needs. The subprime mortgage crisis has already battered banks, leading to huge losses, scrambles for funding and free-falling banking shares. The S&P index of financial stocks has lost more than 30 percent so far this year. At its worst, the index plunged around 55 percent between a high in May last year and a low in June this year.

S&P Financial StocksNow, after a brief respite, comes more bad news. First, hedge funds still seem to be wedded to betting on further losses. Laurence Fletcher, who writes about hedge funds here at Reuters, notes that more than 6 percent of British banks’ equity is on loan to short sellers.

More worrying yet for banks, however, may be their exposure to embattled Fannie Mae and Freddie Mac. In a report, Societe Generale economists estimate that U.S. commercial banks hold about $1 trillion in Fannie and Freddie debt. That amounts to a whopping 9 percent of the commercial banks’ balance sheets.

UBS: no longer in one piece?

ubs.jpgIt is now official — Swiss bank UBS has ditched its much-cherished “One Bank” strategy.

The bank said it would split its business in three autonomous units, after taking yet another credit hit and posting a worse-than-expected second-quarter loss.

The news will spark further talk the bank may hive off business units such as its embattled investment bank. UBS in a conference call would not rule out divestments further down the line, though it said it was not now working on such plans.