Citigroup and Bank of America led the markets lower in the morning; however, a midday reversal (for the second day in a row) helped stocks finish in the green. The financials are to blame for the steep declines in the stock market as concerns mount about the health of these large institutions.
Let’s wind the clock back to November 4 when the S&P 500 closed at 1,005.75. Everyone was concerned about Citigroup’s capital position, and on November 21 when the government finally stepped in to help Citigroup the market bottomed at 741.02 – a 26.3% decline. During this same time shares of Citigroup were down 74.3%.
We have recently found ourselves in a similar situation, this time it involves Bank of America and its need to raise more capital to help with its acquisition of Merrill Lynch. Also, concerns at Citigroup about selling assets to raise capital have weighed on the market. On January 6, the S&P 500 closed at 934.70. On Thursday the market bottomed at 820 – a 12.3% decline. During this same time shares of Bank of America were down 49.7% and shares of Citigroup were down 53.1%.
Here’s the news:
- Citigroup announced that it will split into two companies, Citicorp (good bank) and Citi Holdings (bad bank). “Citicorp will be home to the company's retail banking and credit card businesses, its corporate and investment bank, Citi Private Bank and a transaction services unit. Citi Holdings would house brokerage and asset management units…and a 49 percent stake in a new brokerage venture with Morgan Stanley. It would also hold local consumer finance operations…Citi Holdings would house $301 billion in assets that received government backing in a November rescue package.”
- Citigroup also reported a quarterly loss of $1.72 per share. Analysts were predicting a loss of $1.32 per share.
- Bank of America (BAC) received $20 billion in TARP money and a guarantee from the government on $118 billion of its assets. BAC received this money to help with its Merrill Lynch acquisition.
- Bank of America reported a quarterly loss of $1.79 billion and Merrill Lynch (B of A’s newest acquisition) reported a quarterly loss of $15.31 billion. BAC also reduced its quarterly dividend to $0.01 from $0.32 to preserve cash. Some are questioning whether or not the CEO’s knew that the Merrill results were going to be horrific and why they would let the acquisition get done. Merrill lost $16.4 billion in failed hedges.
Is the worst behind us? Or is there more pain to come from the banks? The talk is that Wells Fargo (WFC) will need to raise more capital to help with its acquisition of Wachovia. WFC reports its quarterly results on January 28. On December 1, the well-renowned analyst Meredith Whitney was asked if she could sell one bank which one would it be. Her response was Wells Fargo. On January 14, Whitney reiterated her negativity towards the financials. In other news…
- Chrysler Financial received a five-year $1.5 billion loan from the government in order to entice buyers with no-interest financing.
- Circuit City will close all of its stores after it failed to find a buyer.
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