March 29, 2024

DealBook: Bank of America Loses Title as Biggest in U.S.

Brian T. Moynihan, chief of Bank of America.Jeffrey Camarati/Bloomberg NewsBrian T. Moynihan, Bank of America’s chief executive, is reversing the legacy of Ken Lewis, his empire-building predecessor.

For Bank of America, it is the end of an era.

With the bank shrinking its balance sheet and selling off assets, the company, based in Charlotte, N.C., surrendered its title as the country’s biggest bank Tuesday, another sign of how a money-losing giant assembled over decades is being reshaped into a smaller and, investors hope, more profitable institution.

Bank of America, with $2.22 trillion in assets reported Tuesday in its third-quarter earnings, is now second to JPMorgan Chase, which has $2.29 trillion assets. It also ranks second to JPMorgan Chase in terms of branches and total deposits.

Analysts said it was more evidence of how Bank of America’s chief executive, Brian T. Moynihan, is reversing the legacy of his controversial predecessor, Ken Lewis, an empire builder who craved being the biggest in United States banking and whose creation ultimately needed two federal bailouts to survive the financial crisis.

“There’s been a huge philosophical change in who they want to be,” said Mike Mayo, a veteran bank analyst with Crédit Agricole Securities. “This is a milestone that marks the end of a two-decade-long period during which they aspired and eventually became the largest bank.”

In today’s slow-growth economy, though, bigger is not necessarily better. And the challenges Bank of America still faces were evident in the numbers it released Tuesday.

Buoyed by one-time gains from accounting changes and asset sales, Bank of America reported a $6.23 billion profit for the third quarter, but the headline number camouflaged weak results in many of its businesses. Still, investors cheered the news, pushing the bank’s shares up 10 percent to $6.64 a share.

Although its investment bank, Bank of America Merrill Lynch, has been a crucial source of profit recently as other businesses like mortgage lending hemorrhaged money, the slow trading environment and financial uncertainty in Europe caused trading revenue to drop. The company’s global banking and markets revenue fell to $5.2 billion from $7 billion, and the unit reported a $302 million loss in the third quarter, a sharp contrast to the $1.46 billion gain a year ago.

Mr. Mayo estimated that the bank’s underlying core revenues dropped 17 percent, as other businesses like global commercial banking, card services and consumer real estate services also posted declines from a year ago. One exception was the company’s wealth management business, where revenue and net income both rose.

Still, the story behind the $6.23 billion profit was mostly a tale of one-time gains from accounting changes and asset sales, including $4.5 billion from positive adjustments to the value of its outstanding debt, a $1.7 billion accounting gain on the perceived riskiness of its debt and a pretax gain of $3.6 billion from the sale of half its stake in China Construction Bank.

“It’s not like 2007 or 2008 where there are losses that threaten the bank’s capital’s position,” said Christopher Kotowski, an analyst with Oppenheimer. “But nothing was particularly great and trading was very weak.”

Without the special items, Bank of America would have earned about $2.7 billion, which included pulling back $1.7 billion it had set aside, largely for borrowers who fail to pay their consumer and credit card loans.

Jason Goldberg, an analyst with Barclays Capital, counted 15 special items in the quarter, down from 16 in the second quarter but more than the 12 in the first quarter. “It’s a big company undergoing a transformation.”

The bank reported net income of 56 cents a share, compared with a loss of $7.3 billion or 77 cents a share in the year-earlier period. Analysts had been expecting the bank to earn 28 cents a share in the third quarter. Revenue rose to $28.7 billion from $26.9 billion, although that too was pumped by one-time gains.

For investors, the red ink flowing from Bank of America’s disastrous 2008 acquisition of Countrywide Financial, the subprime mortgage giant, remains the biggest worry. Both the federal government and private investors are seeking compensation for tens of billions of dollars in losses on securities backed by subprime mortgages.

Part of the reason investors breathed a sigh of relief Tuesday was that the red ink from subprime mortgages eased in the last quarter. Provisions for so-called put-backs, in which investors try to force the bank to buy back soured mortgages by arguing they were improperly originated and bundled into securities, fell to $278 million. In the second quarter, these provisions totaled a whopping $14 billion, including an $8 deal billion with investors that include the Federal Reserve Bank of New York. Litigation costs fell to $290 million from $1.5 billion in the second quarter.

In 2006, Bank of America surpassed Citigroup to become the biggest bank by market capitalization, an event that can be seen as a high-water mark of Mr. Lewis’s era. Today, its $67 billion market value lags Wells Fargo, JPMorgan Chase and Citigroup.

Bruce R. Thompson, the company’s chief financial officer, said he expected assets to keep shrinking in the coming months, as some loans come due and are not renewed and the company’s Canadian credit card business is sold in the fourth quarter.

“We’re not focused on the size of the balance sheet, what we’re focused on is getting the balance sheet that’s best for our customers and best for us,” he said.

In fact, while JPMorgan Chase and Citigroup showed slight growth in terms of total loans in the third quarter, Bank of America’s overall loan portfolio declined by about 0.9 percent compared with the second quarter, Mr. Goldberg noted.

The company’s headcount is also set to drop sharply from the 290,509 recorded during the third quarter. Roughly 2,000 employees were told last quarter their jobs were being eliminated, and 30,000 more are set to go over the next three years as part of Project New BAC, an efficiency initiative aimed at cutting $5 billion in expenses in its first phase.

Mr. Moynihan defended Bank of America’s controversial new $5-a-month debit card fee Tuesday, arguing that customers who bring more of their banking business to the company will be able to avoid it.

Article source: http://feeds.nytimes.com/click.phdo?i=3a19738d9d0fb55eedb0d539ee98f87f

Greek Parliament Expected to Back Implementation of Austerity Plan

Stocks rallied modestly around the world for a second day and the euro neared its highest level in three weeks, after the passage of one of the most radical overhauls of the Greek economy since democracy was restored in 1974.

After several days of sometimes violent demonstrations, central Athens was expected to remain relatively calm Thursday, with no major protests expected.

The changes are deeply unpopular in Greece, where street protests continued, and the Socialist government of Prime Minister George A. Papandreou will need to overcome widespread skepticism that it can carry out the budget cuts, layoffs, tax increases and forced asset sales, beginning with a vote Thursday on putting the measures in effect.

Economists also expressed concern that the austerity program demanded by European and international lenders could end up pushing the Greek economy into a deeper slump, making its debt even harder to pay back. More broadly, critics said they doubted that Europe had done more than postpone a day of reckoning for the euro, with Ireland, Portugal and Spain, as well as Greece, all struggling with slow or negative growth and rising debts.

The passage of the measures, a difficult and possibly debilitating feat for a Socialist Party elected on a social welfare platform, ensures that Greece’s foreign lenders will unlock the next installment of $17 billion in aid that the country needs to meet its debt obligations through August. But analysts in Athens predicted that the existing government might not last much longer than that, suggesting that political and financial uncertainty could continue for some time.

“It’s a giant step in terms of conception,” said Theodore Couloumbis, a vice president of the Hellenic Foundation for European and Foreign Policy, in Athens. “But it’s a baby step in terms of realization or implementation.”

European political leaders have pressed Greece for months to commit to a thorough overhaul of its bloated, state-led economy, and they hailed the vote on Wednesday as offering hope that the debt crisis was manageable.

Chancellor Angela Merkel of Germany welcomed the development as “really good news,” while the president of the European Commission, José Manuel Barroso, and the European Council president, Herman Van Rompuy, said in a joint statement that Greece had taken “a vital step back — from the very grave scenario of default.”

They urged Greek lawmakers to pass the second vote on Thursday on carrying out the measures, adding that “it would also allow for work to proceed rapidly on a second package of financial assistance, enabling the country to move forward and restoring hope to the Greek people.” Officials have promised that they will make more money available to help stimulate growth in Greece if it sticks to its austerity pledges. Europe has much at stake in making the new bailout a success because several other countries that use the euro face similar, if less immediate, problems of high debt, widespread unemployment and little or no growth. Ultimately, many economists say, the sovereign debt of Greece and some other countries will have to be restructured, with their creditors accepting a discount on the debts’ face value. European officials have so far sought to avoid taking that step.

“If Europe comes together with an appropriate framework, that will enable a default to be avoided,” said Joseph E. Stiglitz, the Nobel-winning economist. “But there’s every sign that Europe won’t do that, so the likelihood of a problem down the line is very significant.”

Kenneth S. Rogoff, a former chief economist at the International Monetary Fund, who is now a Harvard professor, said the Greek vote and the infusion of aid would only buy a little time.

“It’s certainly kicking the can down the road,” Professor Rogoff said. “Greece is basically being bribed not to default. But as long as Greece doesn’t grow briskly for a sustained period, it’s in hot water.”

Hope is also in short supply among many Greeks, who said that the first round of austerity imposed after Greece’s first bailout last year had worsened rather than improved their plight, and that the second round demanded even deeper cuts in many areas.

“Of course things will get worse,” said Thimios Vilias, 35, who said his two-year contract at an insurance company would run out soon and who came out to protest on Wednesday. “The measures won’t do any good for Greece. We have more debt, more debt, more debt, and we have no work,” Mr. Vilias added.

The measures approved on Wednesday will at least on paper lead to the dismantling of a big part of the economy’s state-run sector. They call for the privatization of 50 billion euros, or about $72 billion, in state assets, including ports, telecommunications concerns, real estate and stakes in the public power corporation.

They also include one billion euros, or about $1.4 billion, in cuts in the defense sector over the next five years; more than two billion euros, or $2.9 billion, in cuts to the health sector through 2015 by reducing regulated prices for drugs; tax increases on heating oil and the self-employed; and a shrinking of permanent and temporary public-sector employment.

They do not, however, provide for changing the Greek Constitution, which states that public-sector workers on permanent contracts have lifetime tenure. Since last year, Greece has cut the wages of its 800,000 public workers — a quarter of the work force — by more than 10 percent.

After days of heated debate, Mr. Papandreou won by a simple majority, 155 to 138, with all but one lawmaker from his Socialist Party voting in favor and only one conservative opposition deputy breaking ranks to support the measure.

Perhaps the greatest challenge for the government will be to modernize the country’s confusing tax code, and to collect the billions of dollars in tax revenue that analysts say is at the heart of the country’s solvency problems.

At his first news conference as newly appointed finance minister after a cabinet reshuffle this month, even Evangelos Venizelos acknowledged that the new changes were emergency measures that did not constitute a new tax plan.

“It is not the new national taxation policy, it is not the modern complete taxation system that takes into consideration everything and that eradicates injustice and contradiction,” Mr. Venizelos said.

Mr. Papandreou is also running low on political capital, having failed to form a coalition government with the center-right opposition after a revolt in the Socialist Party. It is unclear if he can hold onto power long enough to see the austerity plan through.

“This only buys Greece time to get the serious work done,” said Carl Weinberg, chief economist of High Frequency Economics in New York. “But now they have to make the debt situation sustainable beyond August. Much depends on whether the government will stay the course, and when there are new elections, whether a new government decides to stick with the austerity measures this government passed, which is not certain,” Mr. Weinberg added.

Niki Kitsantonis contributed reporting from Athens, and Liz Alderman from Paris.

Article source: http://feeds.nytimes.com/click.phdo?i=2149e0fa8018c45e4e386f690d22d9eb

In a Greek Default, Higher Risk for Money Market Funds

For years, the funds in the United States have taken investors’ money and lent it out where they can get the best returns. European banks have been a target lately — so much so that about 50 percent of the funds’ $1.6 trillion in prime money market assets is in the debt of European banks.

Now that Europe is struggling to contain its debt crisis, these safe investments could be a tad less safe, especially if Greece’s Parliament votes down a set of deeply unpopular austerity measures Wednesday morning.

While any losses on money market funds could be minimal, especially compared with the turmoil that could ensue in stock and bond markets, the possible effect on this corner of the financial markets shows how the ripple effects could reach far and wide if Europe cannot resolve its debt crisis.

“A lot of them are exposed to a risk of a blowup somewhere in Europe,” René M. Stulz, professor of banking and monetary economics at Ohio State University, said about money market funds. “It does present systemic risk.”

Some experts and the funds themselves play down the risks, expressing confidence in the underlying safety of the European banks’ debt that they own.

A primary fear is that if a European bank indebted to the funds is weakened in the crisis, then it might have a hard time repaying its loans. But even the perception of trouble could, in a worse case, cause financial markets to seize up and send investors rushing to withdraw money. That is what happened after the collapse of Lehman Brothers in 2008 hit one fund that owned Lehman debt, the Reserve Primary Fund, causing a huge run on all funds.

Some investors have already withdrawn money from these funds. Their worry is that the chance of a Greek default increases if the country’s lawmakers fail to approve a set of tax increases, wage cuts and asset sales. The legislation is necessary to qualify the country for $17 billion in outside aid to get it through the summer. Unless the European governments step in, the fear of a default could potentially set off turmoil across the world’s financial markets. 

 If that happens, analysts say, Greek bond yields would jump. The euro and stock markets would fall. The cost of lending between European banks might potentially spike as banks doubt one another’s creditworthiness. 

The funds hold large amounts of debt of banks in nations at the core of Europe, like France and Germany. They now lend about $240 billion to French banks, or 14.8 percent of the funds’ assets, according to Fitch Ratings. French banks are among the biggest holders of the government debt of Greece and other weak countries, which would leave them exposed if Greece or other nations run into more trouble.

As the crisis has simmered over the last two years, fund managers have decreased their direct lending to banks in the weakest countries of the euro currency zone — Greek, Portugal and Ireland — and even in Spain and Italy. Their holdings in Greek debt are zero. Their percentage of assets in Spanish debt has declined to 0.2 percent from 3.3 percent in 2008.

“With very few exceptions, the money market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems,” Ben S. Bernanke, the Federal Reserve chairman, said last week. “They do have substantial exposure to European banks in the so-called core countries: Germany, France, etc. So to the extent that there is indirect impact on the core European banks, that does pose some concern to money market mutual funds.”

Underscoring those worries, the president of the Federal Reserve Bank of St. Louis, James Bullard, told Dow Jones New_swires on Tuesday that the bank planned to keep open its dollar lending program with the European Central Bank and other central banks beyond the Aug. 1 expiration date. That move should help ease some of the pressure on European banks by providing an alternative to money market funds to help them fund their daily operations in dollars. 

 In his earlier remarks, Mr. Bernanke said the industry was still working on reforms to make money market funds safer. After the financial crisis of 2008, the Securities and Exchange Commission put in tougher regulations, cutting to 60 days from 90 days the average maturity of debt that the funds can hold so that they can get out of bad loans more quickly.

Article source: http://www.nytimes.com/2011/06/29/business/global/29money.html?partner=rss&emc=rss

BP Profit Falls Despite Higher Oil Prices

But there are signs that the high prices have started to hurt demand in the United States and other developed countries, which could start pushing prices down again. Lower prices could make the rest of 2011 more difficult for BP and other big oil companies.

BP’s rivals, including Royal Dutch Shell and Exxon Mobil, are still expected to report strong results when they release their first-quarter performances on Thursday.

But some analysts said oil prices could drop about $20 a barrel in the near term, raising questions about whether such companies could keep up the stellar profit growth of last year.

“Concern about supply might fade, and there is a possibility that the world economy will slow,” putting pressure on the price of oil, said Julian Jessop, chief international economist at Capital Economics in London.

But “the future is still bright for oil companies,” he added. “Oil prices will fall back but remain historically high.”

An improving world economy returned oil prices to higher levels in 2010 after a sharp drop in 2009. Exxon Mobil, the largest American oil company, reported a 53 percent increase in profit for the fourth quarter of last year. Chevron earnings in that period rose 72 percent, and ConocoPhillips reported a 46 percent rise.

On Wednesday, BP was the first of the largest publicly traded oil companies to report first-quarter earnings.

For BP, a higher oil price was offset by asset sales to pay for the repercussions from the Gulf of Mexico oil spill. Earnings were $5.48 billion in the first three months of this year, down from $5.6 billion in the period a year earlier.

The company has sold more than $24 billion of assets to raise money to cover the oil spill costs, and production fell as a result. Including lost production from the Gulf accident, production fell 11 percent in the first quarter from a year earlier.

BP set aside an additional $384 million for the oil spill in the first quarter, bringing the total to $41 billion.

BP’s shares have fallen 23 percent over the last 12 months, while those of its largest competitors have risen at least 18 percent.

To win back investors, the company focused on exploration and signed cooperation agreements in India and Russia. But its Russian deal with the government-owned Rosneft had to be held up this year because of a legal challenge from its Russian shareholders, a group of billionaires.

Other oil companies, including Shell, considered cooperation agreements with national oil companies as one of the few options for obtaining access to unexplored areas like the Russian Arctic. Russia has surpassed Saudi Arabia as the biggest oil producer in the world. New oil from the region could play an important part in ensuring sufficient supplies and the future level of oil prices.

Those analysts who predict a decline in the price of oil said concerns about political tensions in North Africa and the Middle East had increased oil prices but were likely to fade. At the same time, there are signs that high oil prices discourage consumers from filling their tanks just as the summer vacation season starts in the northern hemisphere.

“The oil price is, to an extent, too high at the moment,” said Christopher Wheaton, a director at the asset management firm RCM in London. “We are at the point at which we get demand destruction.”

Still, oil prices are expected to remain high enough for companies to increase investments in new drilling projects aimed at increasing production in the longer term. Exxon Mobil said last month that it planned to spend about $100 million a day for the next six years on new oil and gas projects.

The drilling for reserves in more remote and harder-to-reach areas has increased costs for oil companies as they compete for talent and technology. The Gulf of Mexico oil spill also led regulators to tighten safety rules and delay decisions on exploration permits, often further increasing costs for oil companies.

One year after the rig explosion that led to the spill in the Gulf of Mexico, BP is still seeking to resume drilling in the region’s waters, and investors continue to wait for BP to give a total figure for the costs of the spill.

Article source: http://feeds.nytimes.com/click.phdo?i=f485bfb51b24d420c4353342ae63a3d9