Friday, January 16, 2009

US Economic Crisis Bulletin: Big Losses Intensify Turmoil For Banks; Circuit City Liquidates; Pfizer Announces Over 3,000 Lay-offs

Big losses intensify turmoil for banks

By Francesco Guerrera and Greg Farrell in New York and Jane Croft in London
January 16 2009 19:18

The turmoil in banking intensified on Friday as US-based Citigroup and Merrill Lynch – owned by Bank of America – reported huge losses and shares in Britain’s Barclays plummeted amid fears it might need more capital.

The grim news from some of the biggest names in global finance stoked investor fears of another round of capital-raisings, triggering another sell-off in bank shares.

The disclosure that Merrill Lynch, once one of Wall Street’s most formidable institutions, had suffered a $21.5bn operating loss as the value of mortgage-backed assets plunged in the last three months of 2008, came as BofA secured a $138bn bail-out from the US government.

The US bank, which finalised an $18.8bn all-share takeover of Merrill two weeks ago, received a $20bn capital infusion and a backstop on $118bn of troubled assets, most of which were in the investment bank. BofA told the government in December that it would not be able to close the deal without help.

Shares in BofA, which reported a $2.4bn loss in a quarter marred by Merrill’s disastrous performance, were down more than 14 per cent in early afternoon.

Citigroup underlined the depth of problems facing banks by reporting an $8.3bn net loss, its fifth quarter in the red.

The troubled financial group suffered nearly $28bn in writedowns and loan loss provisions in the quarter as the price of mortgage securities plummeted.

Citi’s loss for the year was more than $18bn. The company confirmed its plan to isolate some $800bn-worth of unwanted assets and businesses into a non-core unit called Citi Holdings.

In Europe, Barclays fell 25 per cent to 98p – its lowest level since 1993 – amid fears that the bank might have to raise more capital in the event of further writedowns on structured credit products. Barclays, with a market value of £8.2bn at Friday’s close, opted to stay outside the UK government’s bank bail-out, raising £7bn of capital from mostly Middle Eastern investors.

Barclays said it knew of no reason why its share price had fallen. The UK ban on short selling of stocks ended on Friday, prompting speculation that Barclays might have been targeted.

Copyright The Financial Times Limited 2009

Bank of America gets $138bn lifeline

By Sundeep Tucker in Hong Kong
January 16 2009 15:59

Bank of America will on Friday receive $20bn in fresh capital from the US government and a guarantee on most of a further $118bn of potential losses on toxic assets.

The emergency bail-out will help to cushion the blow from a deteriorating balance sheet at Merrill Lynch, the brokerage BofA acquired earlier this month.

Details of the BofA rescue package were released in Washington DC in the early hours of Friday morning US time, in a joint statement from the US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation.

The capital injection comes the day after US lawmakers voted to release a second tranche of funding under the $700bn troubled asset relief programme (Tarp), and just hours before BofA reported a fourth-quarter loss of $2.39bn – its first loss since 1991.

Merrill Lynch lost a record $15.31bn in the quarter, though its results are not included in BofA’s figures.

The results came as rival Citigroup confirmed it would break itself up by separating higher-risk US consumer finance and securities businesses from its global commercial banking operations in an attempt to ensure its survival. The bank reported a fourth-quarter loss of $8.29bn.

The BofA rescue package is on top of the $25bn the bank received from Tarp funds last October, and underscores the depth of the financial difficulties affecting the world’s leading banks. A US housing crisis and credit-led recession has thrown the balance sheets of its top financial institutions in turmoil.

Under the terms of the deal BofA will receive $20bn in exchange for preferred stock paying a dividend of 8 per cent.

BofA will absorb the first $10bn loss on a pool of $118bn of toxic assets and the Treasury and FDIC the next $10bn. Ninety per cent of losses beyond that will be absorbed through a loan from the Federal Reserve. The assets are largely mortgage-related securities inherited from Merrill Lynch.

In return for the financial assistance, BofA has agreed to cut its dividend to 1 cent a share from 32 cents and cap executive pay.

The guarantee on toxic assets mirrors the $300bn backstop provided by the US government last November to Citigroup, which is also scheduled to report its fourth quarter earnings on Friday.

Asian stock markets rallied on the news from Washington, with Japan’s Nikkei average climbing 3.1 per cent. European bank shares were also lifted. Shares in BofA itself were 1.1 per cent lower to $8.23 in early Wall Street trading.

The intensified government support for banks came after a day of market turbulence on both sides of the Atlantic on Thursday that saw Ireland nationalise its third-biggest lender while BofA shares fell 18 per cent and Citigroup dropped 15 per cent.

The market turmoil was fed by rumours that a big US bank such as Citi could be nationalised. Sheila Bair, head of the FDIC, played down such speculation, telling reporters: “I’d be very surprised if that happened.”

The Senate earlier voted 52-42 to approve the second half of emergency Tarp funds following intensive lobbying on Capitol Hill by officials from Barack Obama’s transition team.

Mr Obama, who had threatened to veto the bill if the vote went the other way, promised Democratic waverers that he would use up to $100bn of the second tranche in “a sweeping effort” to help struggling homeowners.

“We will implement smart, aggressive policies to reduce the number of preventable foreclosures,” said Lawrence Summers, who will head Mr Obama’s National Economic Council, in a letter to lawmakers on Thursday.

Lawmakers from both parties praised Mr Obama for having consulted them extensively and given undertakings that disbursement of Tarp II would be more transparent and accountable than the first half.

Ireland nationalised Anglo Irish Bank after the share price of the country’s third-largest lender had collapsed in recent days amid reports of large-scale withdrawals.

Additional reporting by Neil Dennis in London, John Murray-Brown in Dublin and Francesco Guerrera in New York.

Copyright The Financial Times Limited 2009

Circuit City to liquidate remaining US stores

Associated Press

Bankrupt Circuit City Stores Inc., the nation's second-biggest consumer electronics retailer, said Friday it failed to find a buyer and will liquidate its 567 U.S. stores. The closures could send another 30,000 people into the ranks of the unemployed.

"This is the only possible path for our company," James A. Marcum, acting chief executive, said in a statement. "We are extremely disappointed by this outcome."

The company had been seeking a buyer or a deal to refinance its debt, but the hobbled credit market and consumer worries proved insurmountable.

The liquidation of Circuit City is the latest fallout from the worst holiday shopping season in four decases. People have slashed their spending since the financial meltdown in September as they worry about their job security and declining retirement funds.

Other recent casualties include KB Toys, which filed for bankruptcy in December and is liquidating stores. Department store chains Goody's Family Clothing and Gottschalks Inc. both filed for bankruptcy this week — Goody's plans to liquidate, while Gottschalks hopes to reorganize.

Industry experts expect more bad news in the coming months as spending likely will deteriorate further.

Circuit City said in court papers it has appointed Great American Group LLC, Hudson Capital Partners LLC, SB Capital Group LLC and Tiger Capital Group LLC as liquidators.

"Regrettably for the more than 30,000 employees of Circuit City and our loyal customers, we were unable to reach an agreement with our creditors and lenders," Marcum said.

Shareholders are likely to receive nothing, as is typical in bankruptcy cases. It was unclear what would happen to the company's 765 retail stores and dealer outlets in Canada.

"Very, very sad," said Alan L. Wurtzel, the son of company founder Samuel S. Wurtzel, and the chief executive from 1972 to 1986, board chairman from 1986 to 1994 and vice chairman until 2001. "I feel particularly badly for the people are employed or until recently were employed."

Wurtzel has previously said Circuit City didn't take the threat of rival Best Buy Co. seriously enough and, at some points, were too focused on making a profit in the short term instead of building long-term value.

Circuit City filed for Chapter 11 bankruptcy protection in November as vendors started to restrict the flow of merchandise ahead of the busy holiday shopping season.

It had been exploring strategic alternatives since May, when it opened its books to Blockbuster Inc. The Dallas-based movie-rental chain made a takeover bid of more than $1 billion with plans to create a 9,300-store chain to sell electronic gadgets and rent movies and games. Blockbuster withdrew the bid in July because of market conditions.

Circuit City, which said it had $3.4 billion in assets and $2.32 billion in liabilities as of Aug. 31, said in its initial filings that it planned to emerge from court protection in the first half of this year.

Under court protection, Circuit City has broken 150 leases at locations where it no longer operates stores. The company already closed 155 stores in the U.S. in November and December.

U.S. Bankruptcy Judge Kevin Huennekens had given the company permission to liquidate if a buyout was not achieved. The company still needs final approval of a liquidation from the court.

The liquidation is the latest big blow to the nation's malls, which have suffered from a rise in vacancies as a slew of chains from Mervyns LLC to Linens 'N Things have liquidated. But analysts say that the demise of Circuit City, whose stores range in size from 20,000 to 25,000 square feet, will hurt the fortunes of mall operators even more.

"It will bring to market a glut of big box spaces across the country," said John Bemis, head of Jones Lang LaSalle Inc.'s retail leasing team. "It will have one of the largest impacts on big box real estate across the country."

AP Retail Writer Anne D'Innocenzio contributed to this report.

Report: Pfizer cutting up to 2,400 sales jobs

NEW YORK (AP) — Drug giant Pfizer Inc. plans to lay off nearly a third of its 8,000 salespeople, according to published reports.

Media outlets Bloomberg News and the Wall Street Journal report Pfizer will cut as many as 2,400 sales representatives.

New York-based Pfizer Inc., the world's No. 1 drugmaker by revenue, declined to comment on the reports, which come the same week as it confirmed it is cutting the jobs of up to 800 scientists and other research staff.

The latest sales division cuts would follow elimination of roughly 2,000 sales jobs under a massive restructuring that began two years ago and resulted in about 14,600 jobs being slashed.

"We don't comment on rumors or speculation," company spokesman Ray Kerins said in a statement.

"We will continually look for ways to operate our business in a more effective and efficient way," he said.

Pfizer has been working to lower costs ahead of generic competition expected in late 2011 for its blockbuster cholesterol drug Lipitor, which brings in nearly $13 billion a year. Competition is likely to cut sales drastically.

The company is widely expected to make an official announcement about layoffs when it reports on its 2008 fourth-quarter and full-year financial results, on Jan. 28.

Last October, Pfizer said that it was replacing its current geographic divisions with new ones centered on primary care, specialty care and operations in emerging markets. At the time, Kerins said that that shift would not involve layoffs, but that he could not speculate on what would happen in the future.

The prior month, Pfizer announced it was narrowing its research focus to six disease areas — Alzheimer's, cancer, schizophrenia, pain, inflammation and diabetes — and abandoning new research in other areas, including cardiovascular research.

Pfizer had been one of the dominant companies in that field with Lipitor, the world's top-selling drug.

In early afternoon trading, Pfizer shares were down 14 cents at $17.25.

No comments: