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FEATURE STORY
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Down
Market Sparks Federal Suits
By Halah Touryalai
The market is volatile, to say the least, and investors and
shareholders are on edge. And why shouldn't they be? Between the failure
of the auction-rate securities market, sub-prime woes and hedge fund and
investment bank implosions, the market sometimes looks a bit like a
winter graveyard. Many investors are looking for someone to blame, and
seeking justice in the form of securities class-action lawsuits.
Of course, this is par for the course: Unforgiving markets typically
breed unforgiving investors, who then pile into securities lawsuits
(this is not to say that financial services firms, their advisors and
the public companies on the market don't deserve some of the blame).
Last year was no exception. The number of federal class-action
securities lawsuits filed in 2007 was up nearly 50 percent versus 2006
to 163 cases, reversing a two-year decline, according to a recent
PricewaterhouseCoopers Securities Litigation and Investigations Practice
study. (That said, the number of overall class-action securities
lawsuits-including federal and state cases-dropped to 169 in 2007 from
219 in 2006.)
The vast majority of the class-action securities suits brought in 2007
were related to the sub-prime mess. "Without a doubt, most notable in
2007 was the escalation of what has been termed the 'sub-prime crisis,'
the full implications of which have yet to be seen in the financial and
legal worlds," says Grace Lamont, a partner at PricewaterhouseCoopers.
Read the full story here.
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Top News of the Week
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BofA
Earnings Tank, Retail Brokerage Steady
By Christina Mucciolo
Bank of America posted a whopping 77-percent drop in first quarter
net income today, down to $1.21 billion, or 23 cents a share. The sharp
drop in earnings was the result of $1.9 billion in write-downs for the
quarter—$1.47 billion on collateralized-debt obligations (CDOs) and
$439 million on leveraged loans—as well as an increase in capital
provisions to cover future potential credit losses, which rose to $6.01
billion from a $1.23 billion a year ago, according to the firm’s earnings
release.
But the bank’s retail brokerage unit, Banc of America Investment
Services Inc., which is part of its Premiere Banking Investment
division, did all right, posting a 10-percent increase in revenue to
$170 million from $154 million in the same period last year. The firm
does not break out its profit numbers for the retail brokerage unit, but
the entire Premier Banking and Investment division generated after-tax
profits of $104 million on net revenue of $841 million.
The Premier Banking and Investments division manages $21 billion in
client assets, up just barely from the year ago period’s $20 billion.
Meanwhile, the 1,952 financial advisors in the full-service brokerage
unit generated average annualized production of $472,000 per advisor.
Read the full story here.
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Citigroup
Posts Q1 Loss; Smith Barney Unit Lackluster, Too
By John Churchill
Citigroup reported a net loss of $5.1 billion or $1.02 per share,
$0.07 per share worse than consensus analyst expectations, according to
Thomson Financial. Unlike, say, Merrill Lynch, Smith Barney’s Global
Wealth Management unit (retail brokerage), one of the centerpieces in
CEO Vikram Pandit’s revival, did poorly too. (Merrill reported earnings
yesterday, and despite CDO woes, its retail brokerage did pretty well.)
The bank’s first quarter results include another $15.2 billion in
write-downs, including: $6 billion for direct sub-prime related
exposures, $3.1 billion on leveraged finance commitments, $1.5 billion
on its auction-rate securities inventory, $1.5 billion related to credit
exposure to monoline insurers and a $3.1 billion increase in credit
costs in the global-consumer division. This week Pandit rejected talk of
a break-up in an interview
with Business Week, saying he “couldn’t get a better set of
assets.” (That said, Pandit is getting rid of non-core businesses,
such as its Diners Club International credit-card network, which it sold
last week. Yesterday, Citi announced it would sell its North American
commercial-lending and leasing business.)
In the release, Pandit notes that the firm is still in recovery mode:
“Our financial results reflect the continuation of the unprecedented
market and credit environment and its impact on hour historical risk
positions.” “Despite the negative factors in the broader markets, we
continue to see strong momentum throughout the organization with robust
volumes in many of our products and regions.”
Read the full story here.
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Merrill:
An Able Foil To Bear?
By Christina Mucciolo
Merrill Lynch’s streak continues. The Wall Street giant posted a
first quarter net loss of $1.97 billion, primarily due to net
write-downs totaling $1.5 billion related to collateralized-debt
obligations (CDOs). This is the third quarter in a row the firm has
reported a loss.
The firm plans to cut 4,000 employees, a 10-percent reduction. The cuts
will cost the firm $350 million in restructuring charges, and are
targeted at the Global Markets and Investment Banking (GMI) divisions
and support areas—in other words, retail financial advisors are
exempt. Yet, argues says John Thain, chairman and CEO in the earnings
release, “Despite this quarter’s loss, Merrill Lynch’s underlying
businesses produced solid results in a difficult market environment.”
The Global Wealth Management division continues to hum. GWM includes the
retail brokerage unit (Global Private Group)—which accounts for nearly
all the unit’s revenues—and investment management (Global Investment
Management). In the first quarter, GWM grossed $3.6 billion, an
8-percent increase from the same quarter last year. Of that total,
Global Private Client accounted for $3.3 billion, a 7-percent increase
from the same period a year ago. Pre-tax profits in GWM were $720
million, down 8 percent from the same period last year. The pre-tax
profit margin for the division slipped to 20 percent from 23.5 percent a
year ago.
Read the full story here.
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