Making a Monster Brokerage

CITIGROUP/In many ways, Citigroup has been the poster child for the kind of reform lawmakers seem to be talking about when they pump up the bullhorn and turn on the state taps. Too big to fail, losing staggering amounts of money, a product of the excesses of 10 years of low interest rates, Citi’s businesses are too numerous to recount, often competing with one another for clients.

It’s so big that plans to spin off its brokerage business into a joint venture with Morgan Stanley will create the biggest brokerage in the United States. A JV, expected to be announced this week, would have an estimated value of $16 billion to $20 billion, a source said, and would have more than 23,000 financial advisers, surpassing rivals Bank of America and Wells Fargo.

There are reasons for optimism that the making of a mega-broker could mark the beginning of a huge round of long-sought consolidation in the financial sector. It would certainly mark a huge divestment for Citi’s embattled CEO, Vikram Pandit. And it also comes as signs of more asset sales poke up through the quagmire of recession. South African billionaire Johann Rupert’s investment vehicle is looking at buying Lehman Brothers’ merchant banking business.

There are also reasons to worry that taxpayers are not done footing bills. Britain has had to pump more than $25 billion into Lloyds TSB and its takeover target, HBOS, after investors turned up their noses at a rights issue. Germany pumped 10 billion euros into Commerzbank last week.

And unless the promised recovery kicks in soon, having a stake in a giant brokerage might not prove as profitable as investors hope.

Happy Thanksgiving, Citigroup

Thanksgiving has come early for embattled Citigroup. The second-largest U.S. bank by assets received a pardon of sorts from the government late on Sunday, getting a $20 billion lifeline – the biggest bank bailout yet.

The bank had been widely thought to be too big to fail because of its global reach. Chief Executive Vikram Pandit and other top management will keep their jobs, but the government will have the final say on executive pay packages.

Citigroup’s shares lost 20 percent of their value on Friday, closing at $3.77, down 60 percent for the week and reaching their lowest level since December 1992. The group’s market value fell to $20.5 billion. That’s a far cry from the good old days of late 2006 when the bank’s market value topped $270 billion.

Bank dealmaking circus=recruiting bait?

Some in the financial industry apparently smell opportunity in the latest round of mergers and blood-letting among top banks.

Referring to the Wells Fargo takeover of Wachovia as the WWF and placing Bank of America CEO Ken Lewis atop a bucking Merrill Lynch bull are just a couple of the attention-getting devices financial sector recruiting firm RJ & Makay uses in its latest promotional You Tube video.

Branching out from a previous video aimed at Merrill Lynch brokers, the new “Billion Dollar Video” (the company claims assets from advisers brought to them via these viral recruiting tools represent billions of dollars) targets all financial advisers but specifically appeals to those currently at Merrill Lynch and Wachovia.

Got Risk?

The $9 billion stake in Morgan Stanley that Mitsubishi UFJ Financial Group bought earlier this month was a risky bet for a Japanese bank. Often leaning heavily on state support, banks in Japan aren’t known for taking chances. Perhaps betting with house money is going to their heads. 
MUFG bought just over a fifth of Morgan Stanley for more than the whole bank was worth back on Oct. 13. Now it is raising up to $10.6 billion by selling new shares — 18 percent more than it paid for the Morgan Stanley stake, not even counting the huge run-up in the value of the yen that makes any local share issuance pricier than anywhere else on the planet. Meanwhile, back in the United States, shares of Morgan Stanley have fallen 9 percent since revised terms of the MUFJ deal were announced on Oct. 13, and the dollar has fallen another 8.6 percent against the yen.
MUFG’s fund-raising helped convince investors to dump Japanese shares today, sending the Tokyo market to its lowest level in 26 years. This prodded the Japanese government into action. Japan’s banks are heavily exposed to the local equity markets, and were bailed out less than a decade ago. The government says it wants to set up a state body to buy shares from banks, and limit bank recapitalizations.
Japan is the best versed industrialized economy when it comes to zero interest rates and deflation over the past two decades, though all that practice has not made it very adept at stimulating growth. With the yen soaring toward 90 to the dollar, U.S. assets are going to look mighty cheap again, and if Japan’s newly risk-embracing banks are looking for entry points, it could well be the Bank of Japan that takes on the mantle of global lender of last resort. 
Deals of the day:

* Porsche plans to gain control of more than 75 percent of Volkswagen in order to pass a domination and profit transfer agreement that would grant it full control of VW’s cash flows, Porsche said on Sunday.

* General Motors and Chrysler have moved closer to offloading two niche vehicle brands associated with the era of cheap gasoline and big profits for Detroit, even as both sides intensified talks on a merger that would combine the struggling automakers. The two auto makers are discussing a merger that would keep some of Chrysler’s operations intact and save jobs with the aim of securing the U.S. government financial aid the high-stakes deal would require, people familiar with the talks said on Sunday.

Mack Smacks Shorts

mack2.jpg“It’s very clear to me — we’re in the midst of a market controlled by fear and rumors, and short sellers are driving our stock down,” Morgan Stanley Chief Executive John Mack told employees in a memo.

Ya think?

Morgan’s stock dropped 47 percent yesterday, and shorting investment banks has become the trade du jour. But it is odd for the head of a Wall Street investment bank to inveigh against short selling–hedge funds that bet on shares dropping are some of Morgan Stanley’s best customers. 

And Morgan Stanley itself was caught up in the debate over how to regulate and manage short selling a few years ago. It was one of 11 investment banks accused in 2006 of failing to deliver securities sold short by hedge funds – a service they made a healthy business of. Mack himself was named in an SEC investigation into the claims.

Who’s next and how?

A worker carries a box out of the U.S. investment bank Lehman Brothers in LondonLehman‘s most valuable assets, primarily Neuberger Berman, are still on the block, but becoming less valuable by the hour with the bank having filed for bankruptcy protection. And with Merrill Lynch now heading for the relative safety of Bank of America‘s $50 billion embrace, it’s time ask “Who is next and how?” Most attention is squarely focused on insurer AIG and investment bank Morgan Stanley.

AIG’s shares lost a third of their value in pre-market Monday action. Warren Buffett would be a natural candidate for AIG assets, given it’s a business he knows (and part of being a successful oracle is knowing your businesses).

On Sunday AIG is reported by the New York Times to have approached the Fed seeking $40 billion in short-term financing. An investor call is expected later today.
The Fed might be more willing to play a role in getting AIG sorted out as well, if it sensed a systemic risk to another strut of the financial markets.

Fire Sales and Shotgun Weddings

lehman2.jpgThe specter of Bear Stearns has never loomed so large outside the offices of Lehman Brothers. The embattled investment bank made a tough call deciding to auction a crown jewel in a market convinced the bank is close to a going-out-of-business sale.  With its stock price crashing, its credit rating shaken and murmurs up and down Wall Street about its counterparty risk, analysts are increasingly convinced that the Fed’s liquidity window – opened to investment banks after Bear’s collapse – will not be enough to save the house.

Chief Executive Dick Fuld implied on Wednesday that he was open to selling the firm, but who would buy now if they could buy later at a cheaper price? And if Lehman is the bride in a shotgun wedding officiated by the Fed’s Ben Bernanke, who would be the groom? Goldman Sachs’ share price fell 2 percent in early trading, and Morgan Stanley is just across the street… a couple doors down 7th avenue from a strip club, in case anyone wanted to throw a batchelor party. 

Other deals of the day:

* Japanese dairy goods maker Meiji Dairies will take over chocolate producer Meiji Seika in a stock deal worth about $1.8 billion, creating the country’s fifth-biggest food company.

Lehman’s long march

Staff member displays Chinese yuan notes to media at currency exchange booth at Songshan airport in TaipeiAsia’s sovereign wealth funds may be loaded, but they don’t need long memories to recall the big losses they’ve suffered on seemingly sure-thing investments in Wall Street’s troubled banks. So with reports that Lehman Brothers came up empty in efforts to win funds from top Chinese brokerage CITIC Securities and state-owned Korea Development Bank, it’s anybody’s guess where it will come up with the cash it needs to deal with an expected $4 billion in writedowns before announcing results in September.  

The path most traveled heads further east, to Singapore and the gulf, where investors could be equally, if not more gun-shy given the news flow. A ray of hope could shine from Singapore though. State investment firm Temasek said it was prepared to plunk more money into Western banks. An Singapore sling couldn’t come at a better time. This morning, Citi’s Prashant Bhatia became the latest big bank analyst to warn on Lehman and fellow investment banks Goldman and Morgan Stanley, lowering third quarter estimates for all three, and The Wall Street Journal says the Fed had called Credit Suisse last month to see if it had pulled a credit line from Lehman, acting to prevent a repeat of the cascading speculation that helped sink Bear Stearns.

U.S. private equity investor Lone Star is buying the rump of lender IKB, Germany’s most prominent casualty of the subprime crisis. The sale by state bank KfW closes an embarrassing and costly chapter for Europe’s biggest economy. IKB nearly collapsed a year ago under the weight of $24 billion in investments linked to risky U.S. home loans, making it Europe’s first major victim of the global financial crisis. The government brokered the first of three rescues to avert what the country’s banking watchdog warned could trigger Germany’s biggest financial crisis since the 1930s depression. But as the cost of the rescues spiraled towards 10 billion euros ($14.8 billion), Berlin started looking for a buyer.

John Mack takes his swings

scoreboard-cropped.jpgPlay ball!

In the face of choppy markets that have knocked down Morgan Stanley stock by a third since June, generated $11 billion of losses and cost him a bonus, Chief Executive John Mack had baseball on his mind.

Just before shareholders reaffirmed their faith in their captain, voting back all directors to the board and beating down a “say on Pay” uprising, Big Mack told Reuters that investments banks are in the final innings of what has been a grueling game.

“If you put it in a baseball analogy, and you look at the subprime problem in the U.S., you would say were in the eighth inning or maybe the top of the ninth.” (For our friends in England and other locales bereft of baseball’s blessings, there are nine innings in a game.)