bizzXceleration: Performance, Value and Profit

Finance Industry Futures

Is Finance's Economic Role Ebbing? The role of finance may be ebbing, after three decades of growth in which the sector staked a substantial claim of the U.S. stock market, profits and the overall economy. For the past three decades, finance has claimed a growing share of the U.S. stock market, profits and the overall economy. But the role of finance -- the businesses of borrowing, lending, investing and all the middlemen in between -- may be ebbing, a shift that would redefine the U.S. economy. "The role of finance in the economy is going to come down significantly in the coming years," says Carlos Asilis, chief investment officer at Glovista Investments, a New Jersey money manager. "From a societal standpoint, we got carried away with finance." The trend already has hurt companies beyond banks and Wall Street firms. In the 2000s, finance went into overdrive, creating an alphabet soup of derivatives that, it turned out, didn't have the risk-reducing properties they were supposed to have. Mr. Philippon compares some to "sheep with fifth legs -- something you would see in a zoo and wonder what Nature was thinking." For finance workers, this shift could resemble the 1980s, when manufacturing lost its pole position in the U.S. labor market and thousands found that skills they had honed over the years were less marketable.

Danger Ahead: Fixing Wall Street Model Proves Hazardous to Earnings Growth Wall Street's money-making machine is broken, and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come. Citigroup Inc., UBS AG and Merrill Lynch & Co. are among the banks and securities firms that have posted $310 billion of writedowns and credit losses from the collapse of the subprime mortgage market. They've cut 48,000 jobs and ousted four chief executive officers. The top five U.S. securities firms saw $110 billion of market value evaporate in the past 12 months. No one is sure the model works anymore. While Wall Street executives and regulators study what went wrong, there is no consensus solution for restoring confidence. Under review are some of the motors that powered record earnings this decade -- leverage, off-balance-sheet investments, the business of repackaging assets into bonds bonds through securitization, and over- the-counter trading of credit derivatives. Without them, it will be difficult to generate growth.  ``Investment banks leapt into commercial banking without the deposit base, while commercial banks went into investment banking without knowing risk management, and this is where we end up,'' said Brad Hintz, a New York-based analyst at Sanford C. Bernstein & Co., referring to the credit crisis.

Morgan Stanley see big bank woes just beginning Morgan Stanley (NYSE:MS - News) analysts on Monday told clients to "sell the rally" in financial stocks, slashing forecasts for big bank earnings and warning that the current credit crunch is only just beginning. In aggregate, Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26 percent, and reduced 2009 forecasts by $13 billion, or 15 percent. The analysts expect higher loan losses and expenses, offset by higher net interest income, though profits could fall further still if the Federal Reserve stops lowering interest rates. "More capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline," analysts led by Betsy Graseck wrote in a report. "We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91." A growing number of investors, and industry executives including Morgan Stanley Chief Executive John Mack, in recent weeks have predicted markets are closer to the end of the current mortgage and corporate credit crisis than to the beginning. These more upbeat comments, and recent efforts by banks to bolster their balance sheets, helped spark a rebound in bank stocks last week. Wolfensohn Is `Pessimistic' on Banking Crisis, Sees $1 Trillion of Losses , `Underwater' Subprime, Alt-A Mortgages to Swell by Midyear, Barclays Says

Banks Seek More Capital The recent raft of capital raisings by large banks, including Wednesday's $4.5 billion stock sale by Citigroup Inc., signals that the credit crunch has further to run, dashing bullish investors' hopes that profits at banks will return to normal soon. That doesn't bode well for banks' 2009 outlooks and may prove the recent run-up in financial stocks to be just another head-fake. The KBW bank-stock index, for instance, has climbed 10% since the dark days of mid-March when Bear Stearns Cos. collapsed.This rally ignores what are likely to be mounting credit losses for both consumer and commercial loans because of the weakening economy and the continuing housing crisis. That means any assumption of a return to normal profit levels is about three years too early, according to a report earlier this week by Morgan Stanley analyst Betsy Graseck. Recent capital raisings by J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup are "an acknowledgment that the cycle has a way to go before it's going to turn," said Ms. Graseck, who said she believes more capital raising and dividend cuts might be in store for big banks.Bulls counter that banks are properly taking advantage of a new sense of calm in markets to raise money while they can. This will let banks withstand losses better and even pursue opportunities that might arise as the market tumult creates bargains.

Companies 

Pandit's `Closer to the End' Means No Escape From LBOs' Depreciating Loans If the credit crunch really is close to ending, as Citigroup Inc. Chief Executive Officer Vikram Pandit says, then why is he offering below-market terms to rid the bank of some of its $26 billion in leveraged buyout loans? Citigroup sold $8 billion of the debt to private-equity firms this month only after giving buyers $6 billion of financing at cheaper rates than it can borrow itself, according to people familiar with the transaction, who declined to be identified because the terms aren't public. Deutsche Bank AG and Royal Bank of Scotland Plc are also offering credit to buyers to help cut their holdings. While the deals helped shrink the global overhang to $91 billion from $230 billion, don't expect banks to open their doors to new borrowers anytime soon, said Nigel Sillis, director of fixed-income and currency research at Baring Asset Management in London. That's because the arrangements shift one type of loan for another. Until banks can shed last year's LBO commitments, they'll be unable to make new loans, sacrificing the ability to earn fees that average 2.5 percent on high-yield debt, the most lucrative part of the capital markets, according to estimates by Mercer Oliver Wyman, a financial-services consulting firm in London. "A lot of financial institutions have big holes in their balance sheets and haven't begun to scratch the surface yet,'' Rubenstein said. ``We may be getting closer to the bottom but it may be that the bottom is a number of months away.'' Bank lending has already slumped 73 percent in the past year, according to data compiled by Bloomberg. U.S. banks made $85 billion of leveraged loan commitments in the first quarter, down from $320 billion in the same period in 2007. Citigroup Offers $3 Billion of Stock as Pandit Raises Capital; Stock Drops, Citigroup Falls as $3 Billion Share Sale Will Dilute Investors' Holdings

Deutsche Bank Posts First Loss in Five Years After $4.2 Billion Writedown The Frankfurt-based company had a first-quarter net loss of 131 million euros after earning 2.12 billion euros a year earlier, according to a statement on its Web site today. Earnings were lifted by almost 1 billion euros from selling stakes in companies and a tax gain. Deutsche Bank fell as much as 1.6 percent in Frankfurt trading. Chief Executive Officer Josef Ackermann avoided the worst of the subprime contagion because of early bets against U.S. housing and said today there are ``encouraging'' signs that markets are stabilizing. By contrast, UBS AG, the largest Swiss bank, recorded almost 38 billion Swiss francs ($36.7 billion) of markdowns since July, while Credit Suisse Group last week posted its first loss since 2003 on 5.3 billion francs of writedowns. The world's biggest banks and securities firms have reported credit losses and writedowns of about $312 billion linked to the U.S. subprime meltdown, data compiled by Bloomberg show. UBS, Citigroup Inc. and Merrill Lynch & Co. led banks seeking about $217 billion from investors to replenish capital. Germany's largest banks may announce further markdowns of 10 billion euros to 12 billion euros for the first quarter, Standard & Poor's said in a report today. Full-year pretax earnings for the industry this year could decline by as much as 20 percent on average, S&P said.

• HBOS Plans to Raise as Much as $8 Billion in Share Sale After Writedowns
• Allianz Earnings Slump 66% on Subprime-Linked Writedowns at Dresdner Bank
• UBS May Eliminate 8,000 Jobs as First-Quarter Net Loss Exceeds $10 Billion
• Fannie Mae Has $2.19 Billion Loss, Plans to Raise $6 Billion, Cut Dividend

Fannie Mae Has $2.19 Billion Loss, Plans to Raise $6 Billion, Cut Dividend  -- Fannie Mae, the largest U.S. mortgage- finance company, reported a wider loss than analysts estimated, cut the dividend for the second time in six months and said it will raise $6 billion in capital as the worst housing slump since the Great Depression deepens. The first-quarter net loss was $2.19 billion, or $2.57 a share, Washington-based Fannie Mae said in a statement. Analysts were expecting a loss of 64 cents a share, the average of 12 estimates from a Bloomberg survey. ``They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007,'' said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. ``Things in the housing and credit markets are deteriorating very fast.''

Poster Children

Fannie Mae is Fantastic ! Their loss of $2.2B was 4X greater than expected ($-2.57B v.s. $-.640m expected) • FNM accounted for 81% of the home-loan market in Q1 2008 • Shareholder equity dropped to less than zero for the first time in 15 years (from $20.5 billion in Q4) • Subprime exposure:  $51.2B • Alt-A exposure:  $344.6B • Fair market value of assets dropped to $12.2 billion last quarter from $35.8 billion in December. This includes $56.1 billion in Level 3 assets; • Moody’s downgrades FNM’s financial strength one level to ‘B’ • Credit and derivative losses rose fivefold to $8.9 billion; expects bigger credit losses in 2009;• Estimates for credit losses in 2008 were boosted to 13 basis points to 17 basis points (up from 11 to 15 basis points). Each basis point, 0.01%, = 15 cents of earnings/sh (Morgan Stanley)• Company issued $6B in securities to shore up balance sheet