Banking & Capital Markets

Banks and Brokerages Hit Hard by Economic Slump, Attack

Also, bond market shows signs of life, and the SEC looks to securities companies for help in catching terrorists.
Joseph McCaffertyOctober 22, 2001

A number of large commercial and investment banks, including some of the biggest names on Wall Street, posted sharp declines in profits last week due to slowing revenues from investing, trading, and advising on mergers and new stock offerings.

Citigroup Inc., the largest U.S. financial-services company announced that after charges, its third-quarter profits fell 9 percent to $3.18 billion, or 61 cents a share. Closure of the New York Stock Exchange and the need to temporarily close some branches after the September 11 attack on the World Trade Center cut about $200 million off the bottom line, according to the bank. In addition, Citigroup’s Travelers insurance unit had $502 million in losses for property, business interruptions, workers’ compensation, and life insurance claims associated with the attack.

J.P Morgan Chase & Co. faired far worse. The second largest bank in the nation said that quarterly net earnings dropped 68 percent. “Earnings were significantly weaker than what we would have expected earlier in the year,” J.P. Morgan CFO Dina Dublon said during a conference call. The company reported earnings of $449 million, or 22 cents per share, after $587 million in restructuring and merger charges, compared with $1.04 billion, or 69 cents per share, in the year-ago quarter. Dublon does not expect the financial picture to improve much during the fourth quarter. Managers at the recently combined bank also said that estimated merger and restructuring costs increased by $1.1 billion to $4.3 billion.

Merrill Lynch & Co., the largest full-service brokerage in the United States, posted a 52 percent drop in net income in the third quarter, its worst decline since 1998. The company suffered from the downturn in the stock market, which kept many of its customers from trading stocks. Merrill reported third-quarter net income of $422 million, or 44 cents a share, compared with $885 million, or 94 cents per share, during the same period last year. The cost from the attack, which forced the company to abandon its headquarters for several days, amounted to 6 cents a share.

In addition, the company cut 2,300 jobs during the quarter to reduce costs. Some reports indicate the brokerage firm may have to eliminate as many as 10,000 jobs, or 15 percent of its workforce, to cut costs. On Friday, Merrill announced that it was offering severance packages to all of its 65,900 employees. The company could be forced to take a charge during the fourth quarter of more than $1 billion.

In a similar move, Bear, Stearns Cos. announced it will cut 800 jobs, or 7 percent of its staff. The reductions will come in the company’s technology trading, sales, and banking departments, and will reach into senior levels. Earlier this year, Bear, Stearns cut 400 jobs, and the executive committee voted to take a pay cut of about 70 percent in 2001.

SEC Looks to Securities Businesses for Help in Catching Terrorists

The Securities and Exchange Commission is asking securities businesses–including brokerage firms, investment banks, investment advisors, bond dealers, mutual funds, and transfer agents–to check their records for accounts held or transactions made by any of the suspects in the September 11 attack, or those with suspected links to terrorism.

The SEC asked companies to designate a senior executive to receive a list of suspected individuals and organizations, known as the Control List, as well as updates to the list by E-mail. It also expects companies to look for any unusual patterns in trading from August 27 to September 11.

Banks around the country have already found accounts held by several of the individuals on the FBI list, and the account information has helped investigators piece together suspected terrorist movements and activities in the month prior to the attack.

In addition, the SEC and other government agencies are investigating suspicious trading in shares of 38 companies, including major airlines, cruise lines, and financial-services companies, to determine if people used advance knowledge of the attacks to profit.

Big Bond Deals Are Back

The bond market is perking up with some of the biggest deals since the attacks quieted new bond issuance last month.

Ford Motor Co. is preparing to issue $7.5 billion of bonds today, more than double what it had originally planned. The automaker boosted the expected offering from $3 billion on Friday, and then again from $4 billion, as demand remained strong, even after a credit rating downgrade and a second straight quarterly loss.

The companies financing arm, Ford Motor Credit Co. plans to issue $3 billion of five-year notes yielding 2.75 to 2.8 percentage points over Treasuries, $2 billion of 10-year notes yielding about 2.7 percent over Treasuries, and $1 billion of three-year floating-rate notes. The parent company plans to issue $1.5 billion of 30-year bonds with a yield of about 8 percent. Bear, Stearns, Credit Suisse First Boston, Merrill Lynch, and Salomon Smith Barney are underwriting the deal. Moody’s Investors Service recently cut Ford’s long-term debt rating from A2 to A3, its seventh-highest investment grade.

Household Finance, a unit of Household International Inc., is also tapping the bond market. The second-largest consumer-financing company in the United States sold $2 billion in 10-year global notes in a deal led by Banc of America Securities Inc. The size of the deal was increased from $1.5 billion due to strong demand.

Last week Fannie Mae completed an offering of $6 billion of three-month benchmark bills at 2.249 percent and $2 billion of six-month bills at a 2.180 percent stop-out rate.

In Brief

  • EchoStar Communications Corp. is lining up more than $5 billion in financing to help sweeten its bid for archrival Hughes Electronics Corp. EchoStar is battling Rupert Murdoch’s News Corp. for Hughes, which operates DirecTV, the largest U.S. satellite television service. The financing will be provided by UBS Warburg and possibly Deutsche Banc Alex. Brown, and will give EchoStar the ability to up the cash portion of its bid.
  • Cantor Fitzgerald L.P. announced it will end an exclusive 20-year deal with financial data platform Telerate, so Cantor can begin distributing its key market-pricing data over other systems. Cantor, which lost 733 of its 1,000 New York staff in the World Trade Center attack, announced a deal with Bloomberg L.P. to begin distributing Treasury security prices over its system. In the coming days it is expected to add European government bonds, U.S. Treasury swaps, and basis markets.
  • Medical-services company Universal Hospital Services Inc. was forced to delay its initial public offering last week despite the relative success of recent health-care issues. After cutting the price of Universal Hospital’s shares earlier last week and pushing the IPO back by two days, underwriter UBS Warburg said the deal is now day-to-day. The company was hoping to raise up to $75 million, down from the initial range of $85 million to $95 million.

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