Bank of America, Citigroup Losses Reflect the Economy
Saturday, January 17, 2009
The large fourth-quarter losses reported yesterday by Bank of America and Citigroup showed the depth of the recession during the last three months of 2008, while the details suggested that the economy continues to deteriorate.
Both companies reported that losses on a wide range of loans were not just increasing but accelerating, as customers of all descriptions struggle to make payments. Defaults on credit card loans rose to record heights.
The government has now invested more than $90 billion in the two companies, hoping to lift them and the broader economy simultaneously. But the rising losses threaten to outpace the government's efforts.
Citigroup, which reported a fourth-quarter loss of $8.29 billion, announced another round of restructuring. The company said it will segregate a number of units it hopes to sell, amounting to about one-third of the company, in a new entity called Citi Holdings.
The move is a combination of theater and substance. Citigroup and its shareholders will still own all of the business units until buyers can be found, not an easy task in the present economic environment. But Citi Holdings will have its own management team, allowing each half of the company to focus on its own needs, problems and opportunities. And the distinction may allow investors to start appraising the future.
The sales eventually would shrink Citigroup to about $1.1 trillion in total assets from $2.4 trillion at the end of 2007, the firm said. The remaining company will reclaim the Citicorp name and return to its historic roots as a comprehensive bank for large businesses around the world and a retail bank in select countries including the United States, Mexico and South Korea.
"Our competitive advantage is our global presence," chief executive Vikram Pandit said on a conference call yesterday. He also thanked his employees for persisting through the company's struggles, saying, "It is hard for people who are not here to understand the magnitude of change that we have gone through at Citi."
Bank of America, which reported a $1.79 billion fourth-quarter loss, said it needed another round of government assistance because of its acquisition of the troubled investment bank Merrill Lynch. Merrill lost $15.31 billion in the three months before the deal closed on Jan. 1. The government announced early yesterday it would invest $20 billion to help Bank of America absorb those losses and limit the company's losses on a portfolio of troubled loans.
Chief executive Kenneth D. Lewis yesterday defended his company against critics who said it should have renegotiated the deal with Merrill as its losses mounted.
"We just thought it was in the best interest of our company and our stockholders and the country to move forward with the original terms and timing," Lewis said.
The government's support for the merger has enraged critics outside the companies who complain that Merrill Lynch shareholders were essentially paid with taxpayer money, yet taxpayers may have little to show for this. The government chose not to take a large stake in Bank of America in exchange for the new round of assistance.
"To put it bluntly, it's disgusting," said Eric Hovde, chief executive of Hovde Capital Advisors. "Merrill Lynch shareholders are walking away with a good chunk of money for a company that was worth nothing. They're getting paid even though taxpayers are now going to have to step in and bail out Bank of America."