Earnings for Most Major Banks Forecast Up in 2008

The table above shows 2007 EPS (actual) and 2008 EPS estimates for 17 of the largest U.S. commercial and investment banks. (Taken from Finance.yahoo.com)

Conclusions:

1. Every Major Commercial bank was profitable previous year.

2. Merrill Lynch is the only major investment bank to report negative earnings in 2007, and all other banks above were profitable last year. For 2008, $5.22 EPS is forecast for Merrill Lynch.

3. For 2008, all 17 banks are expected to be profitable, and EPS for 12 out of 17 banks are expected to increase from 2007.

I think future of banking lies with the firms that successfully combine commercial banking and investment banking; these are the banks that will walk away with the prize...

FBI investigates sub-prime crisis

The Federal Bureau of Investigation has initiated criminal inquiries into 14 companies for possible accounting fraud, Insider trading and violations in connection with loans made to borrowers with weak credit history.

Subprime companies are already under scrutiny by the Securities & Exchange Commission as well as several state attorneys general; however the prospect of criminal charges raises the stakes.

The agency did not identify the companies under investigation, but Bear Stearns Cos., Goldman Sachs Group Inc. and Morgan Stanley separately acknowledged in their 10-K that government investigators were asking for information about their subprime lending practices.

The investigation goes through entire process from where the loans were created, whether there was fraud in their creation, or misrepresentation as to the quality of the loans in the sales process - as they moved through the value chain.

There are two key questions here:
1) What information (loan originators or securitizers) had about the quality of the loans.
2) Whether that was consistent with statements they made to others.

Investigators are also examining whether mortgage-backed securities are being properly valued, including the assumptions being used in the banks.

Prosecutors and regulators are also looking closely at whether any executives involved in the securitization chain may have used inside information to sell shares before the extent of the problems became clear

The F.B.I. has been warning for years that mortgage fraud is a significant and growing problem.

F.B.I. is cooperating with the SEC, which is conducting about three dozen civil investigations into how subprime loans were made and packaged, and how securities backed by them were valued.

In Dec-07 Cuomo has subpoenaed several big Wall Street banks, including Merrill Lynch & Co., Bear Stearns Co. and Deutsche Bank, to look into how Wall Street bought and re-packaged these mortgages to sell to other investors, and whether they properly disclosed the risk that many of the underlying mortgages could suffer high default rates.

John Thain say's Merrill “very well positioned” for growth in 2008

Despite a $9.8 billion fourth-quarter loss, Merrill Lynch chief executive John Thain said his firm is “very well positioned” for growth in 2008.

Mr. Thain gave his optimistic assessment for the New York-based firm during an interview at the World Economic Forum in Switzerland on Jan. 25, Bloomberg reported.

``The market volatility has been very good for our business,” said Thain in the interview.

“Merrill Lynch is looking to grow in markets including Brazil, Russia, India and China.”

Thain has replaced senior executives and taken steps to replenish capital during the past month by raising $12 billion from outside investors.

Thain joined Merrill Nov-07, replacing Stan O'Neal, whose gamble on building the subprime- mortgage business backfired as U.S. homeowner defaults surged to a 20-year high.

Mr. Thain also appointed Noel Donohoe to be the firm’s co-chief risk officer on Jan. 17 to work alongside Edmond Moriarty.

On Jan 28, Merrill Lynch & Co Co-President Ahmass Fakahany was set to resign. Fakahany oversaw Merrill's market risk management from March 2005 until May 2007, when he was named co-president with Greg Fleming, a star investment banker at the company.

French Bank Societe General uncovers $7.14 bn fraud

Societe Generale, France's second-largest bank, announced that a single trader had cost it 4.9 billion euros ($7.1 billion) in one of the largest ever frauds by a rogue employee.

SocGen accused the trader of taking "massive fraudulent" positions in 2007 and 2008 on European equity market indices, leaving them nursing 4.9 billion euros of losses as they unwound the positions.

The trader later identified as Jerome Kerviel, joined SocGen in 2002 and was trading in one of the most basic financial instruments in the complex world of derivatives -- futures contracts on European equity indices.

It appears that he bet massively and mistakenly on a rise of European equity indices.

As a junior staffer, there were strict limits on the positions he could take, but he knew how to bypass these controls because of five years spent at the back and middle office of the bank at the start of his career.

"He managed to conceal these positions through a scheme of elaborate fictitious transactions," SocGen said in a statement.

Officials said there was no indication he was trying to steal money from the company, or was working with anyone else.

The Question is, how just one trader, all alone in the corner, could have beaten all those whiz kids in Societe Generale.

Soc Gen has a world-leading equity derivatives business, which regularly produces about a third of its overall profits, and a best in the industry return on equity at its investment bank. The discovery of a rogue trade in the heart of its equity derivatives business could be a serious blow to one of its most attractive assets.

The scandal raises serious questions about SocGen's risk control and balance-sheet transparency. It has lost its credibility making a takeover target, with U.K. bank Barclays PLC and other European rivals already being reported as potential acquirers.

CEO Daniel Bouton said “Societe Generale will launch a capital increase in the coming days in order to support capital adequacy levels and maintain external ratings at the highest international standards. The capital increase is fully guaranteed, and will offset the loss generated by the fraud.”

Banking profits 'to double' after market turmoil

MCKinsey said that aftermath of credit crisis banking sector will rebound strongly and double profits within eight years.

The report said banking profits will continue to grow faster than gross domestic product and in 2016 the sector's total market capitalization will be $12 trillion (€8 trillion) higher than it is today.

The report, entitled 'What’s in store for global banking' said: “With the midsummer credit crunch taking its toll, 2007 turned into a bleak year for the world’s big financial institutions and 2008 may not be much better. As executives respond to the immediate pressures however, they should maintain a clear perspective on the long-term outlook, which in our view is considerably brighter.”

McKinsey predicts banking revenues will grow by 7.5% a year from 2006 to 2016 and by the end of 2016 the sector will generate $5.7 trillion in revenues and $1.8 trillion in after-tax profits - more than twice the levels at the end of 2006. Roughly half of the growth in revenues will come from emerging markets, led by Russia and China.

Profit at Bank of America falls 95% in Q4-07

Bank of America has reported a 95% fall in its fourth-quarter profit as a result

of write-downs and rising credit losses.

Net income at Bank of America fell to $268m in the last three months of 2007, from $5.26bn a year ago.

Earnings at the bank over the last quarter had fallen from $5.26 billion in 2006 down to $268 million, due to the growing requirement for writedowns and losses derived from devaluations of assets within the sub-prime sector.

Its results also included $5.44bn of trading losses, reflecting a $5.28bn write-down related to weakening credit markets.

"We certainly are not pleased with our performance," said chief executive Kenneth Lewis. Calling the last few quarters “the toughest environment since I have been C.E.O.,” who took the job in 2001.

Looking ahead to 2008, Lewis said he expected the company to report full-year earnings "well above" $4 a share, but warned that credit quality would remain a headwind in the coming year.

Mr. Lewis said he was cautiously optimistic about 2008, predicting economic growth would be positive, albeit “anemic,” in the first half of the year.

Even after writing down more than $5.28 billion in the value of the C.D.O. securities, the bank still has $8 billion of them, $4 billion of which are covered in some part by insurance.

During a conference call with analysts, Lewis said he was "comfortable" with the valuation of these mortgage-related securities, but ultimately left the door open to another writedown, saying their value was "subject to change."

On top of the troubling times, Bank of America recently agreed to purchase mortgage giant Countrywide Financial. If B of A gets the go-ahead from regulators, it would become the nation's largest mortgage lender by far -- which could end up being a windfall if and when the real estate market rebounds, or a nightmare if mortgage-backed debt continues to sour.

At the end of the year, Bank of America's so-called tier 1 capital ratio - a key measure of its ability to absorb losses - stood at 6.87 percent, down from 8.22 percent in the previous quarter and below its internal target level of 8 percent.

Lewis blamed the deterioration on the company's recent acquisition of LaSalle Bank and last year's lower profits, but said the company remained committed to maintaining its dividend and would look to raise capital through other means.

Paying for 'Goldman Envy'

Rush Into Risky Endeavors Is Costly for Some Rivals; Beware Chimps on Steroids

Why did some banks and brokerage firms get so badly scorched by the subprime debacle and others come through relatively untouched? What's the difference between Citigroup and J.P. Morgan Chase? Morgan Stanley and Goldman Sachs? UBS and Deutsche Bank? Merrill Lynch and Lehman Brothers?

On the face of things, these companies may look quite similar to those they're paired with. But Citi, Morgan Stanley, UBS and Merrill have among them written off $65 billion so far because of the credit crisis. Meanwhile, J.P. Morgan Chase, Goldman, Deutsche and Lehman have racked up write-downs totaling around $9 billion.

There are several reasons for this. One is luck. But something else explains a lot of the difference.

One common response among those lagging behind has been to try to emulate the alpha males of the banking world -- in particular by increasing their bets in the once-booming fixed-income market.

The losers were infected by what one could call Goldman envy.

Former Merrill boss Stan O'Neal would frequently berate his subordinates for not delivering Goldman-like results. Morgan Stanley's ex-second-in-command Zoe Cruz was constantly using Goldman as the yardstick for her firm's performance. And Citi executives described the megabank as a growth stock until just recently, putting its businesses under pressure to show commensurate earnings growth.

The snag is that mere desire doesn't turn a chimpanzee into a gorilla. Building successful operations takes time. Part of Goldman's success comes from the fact that its risk-taking approach -- and the accompanying discipline of risk management -- derives in part from betting its employees' money.

But desire can drive reckless growth. Take Citi and Merrill. Five years ago, neither was a big player in underwriting subprime-mortgage bonds and collateralized debt obligations, or loans often tied to risky mortgages, that were repackaged into different levels of risk. But by 2006, they were at or near the top of the league tables for both markets.

The snag is that a bank is unlikely to manage things well when it's expanding rapidly and doesn't have experience. It may put the wrong people in place, not institute the right controls and implement the wrong incentive schemes.

The banks and brokers with the biggest problems seem to have made such mistakes. UBS, for example, quickly ramped up its residential-mortgage business. But not because there was any strategic value in being in that market. Rather, it decided it wanted to bulk up in the hot securitization business, and trading and underwriting residential mortgages and CDOs was the easiest part of the market to enter.

So why were others relatively immune to Goldman envy? Well, Lehman had a big, lucrative mortgage-lending and structuring business, so it didn't need to engage in a breakneck game of catch-up. Deutsche arguably also had a more ingrained risk-taking culture. Meanwhile, J.P. Morgan had more market-savvy leadership in James Dimon than, say, Citi had in Charles Prince.

All this suggests two lessons. If you are a chimp, don't try to kid yourself that you're a gorilla. And, if you see a chimp pumping itself frantically with steroids, sell its stock.