Never trust the weekend if you are the head of a troubled bank, or so it seems. Especially a bank wearing billions of dollars in nasty losses.
Citigroup and its CEO, Chuck Prince, are parting company after an agreed deal ahead of a board meeting in New York a few hours ago, a week after Stan O’Neal and the board of Merrill Lynch parted company with Stan walking with $US160 million. Prince has resigned, the Wall Street Journal reported, without citing its sources. Robert Rubin will be named chairman and Win Bischoff will be interim chief executive, the newspaper said. The bank will take an additional $8 billion to $11 billion in writedowns, the Journal said, without citing anyone.
Chuck will be the third CEO of a major financial group to be punted: earlier this year UBS ousted its CEO over hundreds of millions of dollars at its US investment bank and broking arm, losses that are now put in the billions.
Senior executives have gone from Merrill, Citigroup, Bear Stearns and several other banks in the wake of these multi-billion dollar losses on subprime mortgages and their associated credit derivatives, such as CDOs. Last week saw a significant wobble in the share price of many of the world’s major (non-Chinese) banks as speculation grew about the health of Citigroup and Merrill. Citigroup shares staged a small rise late Friday as word spread of the possible departure of Mr Prince, but they still lost on the day.
Shares in Morgan Stanley, which with Goldman Sachs have so far avoided major write-downs, fell off 5.6% in New York on Friday and more than 11% over the week. JPMorgan Chase, another with moderate write-downs and absent from much of the speculation, lost 9% last week. Even Goldman Sachs, which has largely escaped the subprime contagion, saw its shares sold off Friday for a loss of 2.6%: and this was in a market which rose overall on the day after the big 366 point sell off Thursday.
US banking analysts say, many of the big banks and investment houses will have to cut lending and borrowings to allow their capital positions to rebuild: many have strained capital ratios and uncertain asset values for subprime mortgages and the associated derivatives. Despite the small rise at the end of trading, Citigroup shares lost 2% Friday to add to the 7% fall on Thursday. Citigroup shares are now at $US37.73, just above their 52 week low of $36.52 and their 52 week high of $57. The loss is around 31% in 2007.
Shares in Merrill, which has had the biggest write-down so far of $US8.4 billion, fell another 8% on Friday after an article in the Wall Street Journal suggested the bank may have engaged in transactions designed to delay the recognition of losses from mortgage-related securities. Merrill denied that bit it is now capitalised at $49 billion, less than half what it was at its peak in the past year. At this level it’s a possible takeover target, but who would want it?
Washington Mutual shares, America’s leading savings and loan financier, fell 7.5% on concern about the impact of legal action over claims of fraudulent home loan valuations.
In London, Barclays fell another 5% on Friday on denied claims it could be facing more liquidity problems and had borrowed from the Bank of England. The failed Northern Rock continues to borrow and added another couple of million dollars in loans last week, indicating that an “invisible run” on the bank is continuing and is happening in the wholesale funding markets.
Barclays is now at its lowest for two years, and lower than in August when it was the centre of considerable speculation about its financial health. Shares in two other major British Banks, Royal bank of Scotland and Lloyds TSB fell 4.7% and 2.5% respectively on Friday. Shares in Fortis, a Belgium-Dutch bank, fell nearly 5% before bouncing higher because of worries about its exposure to subprime loans. It is also involved in the takeover for ABN Amro with Royal Bank of Scotland.
What stands out is the enormous strength of Australia’s big four banks and the way their shares have been re-rated by the market in recent weeks. Apart from China’s huge and untested banks, Australia’s big four (and smaller St George) would have to be close to the stand out banking sector in the world at the moment.
In contrast to the US, Australian bank shares are up around 18-20% this year, with Westpac the out performer, having risen faster than the overall market which has been driven by the mini-boom in BHP and Rio shares. CBA hit a valuation of over $80 billion on Friday, NAB, $70 billion, Westpac $56 billion and ANZ, almost $56 billion. St George was valued at $19.5 billion.
If you go here you will find our big four banks market caps exceed those of Merrill Lynch, Lehman Brothers, State Street, broker Charles Schwab, Bank of New York Mellon, the troubled Bear Stearns and Morgan Stanley: all battered financial giants, different to our banks in that they are mostly investment baking and broking operations.
Some of those are basket cases, such as Bear Stearns and Merrill Lynch, but some of our big banks are now so strongly capitalised, and priced in such a strong currency that a major US deal might not be beyond them.
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