The Wall Street Journal-20080116-Credit Crunch- No -Fun-- Bank of America Pulls Back- Investment Unit Is Streamlined- A -Simpler World-
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Credit Crunch: No 'Fun': Bank of America Pulls Back; Investment Unit Is Streamlined; A 'Simpler World'
Battered by dismal market results, the two biggest U.S. banks are fundamentally re-evaluating their investment-banking strategies.
Reconsidering the business of advising on mergers and other deals, as well as high-stakes trading, is part of a broad reassessment among Wall Street securities firms of the risks they took in boom times and the boundaries they need now to repair the resulting damage.
Bank of America Corp. -- whose chairman last year had said he'd sustained all the "fun" he could in the business -- outlined a streamlined corporate- and investment-banking unit yesterday that guards the functions most closely aligned with serving large businesses but eliminates or shrinks exotic trading functions.
Citigroup Inc. is expected to start laying off bankers as soon as today in its investment-banking unit, which is far bigger than Bank of America's. Many of the details aren't known, but Chief Executive Vikram Pandit has said the company is conducting a top-to-bottom review of every line of business.
Bank of America Chairman and CEO Kenneth D. Lewis said he is retooling the business for what promises to be a "simpler world" in the foreseeable future.
In a rare briefing with reporters, Mr. Lewis said the strategy is a course correction, not a wholesale retreat from Wall Street. "Would you want the company to be a monolith and not react to market conditions? Or would you rather have a company that's nimble," and will react to meet future needs, he said.
The Charlotte, N.C., bank also intends to sell its equities prime brokerage, which provides basic brokerage services to hedge funds. No buyer or price has been announced. The company doesn't break out revenue or profit results for the unit.
Bank of America is gutting certain trading activities, such as metals in its trading unit, drastically reducing structured products such as asset-backed securities and shutting down collateralized debt obligations, which have dried up in the credit crunch.
Bank of America plans to keep investment bankers in specialties where it has thrived, such as advising health-care, commercial-real- estate, restaurant and retail companies. But the bank is substantially scaling back its investment-banking presence in poorer-performing or new specialties, such as defense and heavy industry, and in Europe, where it had recently touted its growing presence.
Bank of America expects to cut 650 jobs in its global corporate and investment bank in the coming weeks, in addition to 500 layoffs announced in October after the unit posted disastrous third-quarter results. The bank was reeling from a $1.45 billion loss in its trading account, which triggered a 32% drop in net income, the poorest results of Mr. Lewis's seven-year tenure.
The result of the moves is that Bank of America's corporate and investment bank will be almost 20% smaller in employee head count than it was last year and reduced in scope, a significant retrenchment, though smaller cutbacks than some on Wall Street predicted in the fall when Mr. Lewis expressed frustration with the unit's volatility.
Mr. Lewis said in October that he had had "all the fun" he could stand in investment banking, in a terse response to an analyst's question about whether he would buy a big domestic investment bank. The oft-repeated remark led clients and employees to question the bank's commitment to trading and investment banking.
"I wish I had said it differently," Mr. Lewis said yesterday. "It gave a misperception about the whole business."
Bank of America shares fell $1.34, or 3.4%, to $37.88, and Citigroup shares fell $2.12, or 7.3%, to $26.94, both on the New York Stock Exchange.
While many of the cuts at Citi are expected in the fixed-income side of the investment-banking business, the restructuring will also affect all sectors of the unit, including the mergers-and-acquisitions department, according to people familiar with the plan.
The changes mirror deeper hand-wringing about the bank's role in investment banking. Much of the bank's pitch to clients was that it could provide "full service" banking, involving hundreds of billions of dollars of lending, tied to an array of services such as mergers advice, hedging strategies and currency management. Now that much of the lending has dried up, investment bankers have to figure out how to reapproach clients. "What are we?" one asked.
Bank of America has struggled for a decade with its investment- banking unit. Predecessor NationsBank Corp. paid $1.2 billion for Montgomery Securities in 1997, but a culture clash led to a personnel exodus. The company invested $675 million in hiring employees just three years ago.
The restructured unit is being led by Brian Moynihan, a veteran of the bank's 2003 acquisition of FleetBoston Financial Corp. who is credited with improving efficiency at Bank of America's wealth- management unit.
The moves, in addition to the planned acquisition of Countrywide, show Bank of America's willingness to bet big on consumer and domestic banking, while some competitors focus on international expansion.
Mr. Lewis said he is happy with the company's strategic investments in Mexico, China and Brazil. "It's not like we have our head in the sand overseas," he said. "It's different and it's kind of hard to explain, but we do have an international strategy."
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Dennis K. Berman contributed to this article.
