The Write-Down and Layoff Roundup

The news on Wall Street has been pretty grim, no doubt about it. Here, in the manner in which we would normally bow our heads for a moment of silence, we recap the avalanche of write-downs and looming layoffs announced by major financial institutions this week.

On Tuesday, January 15, 2008, Citi dropped the bomb that it would be writing down $18 billion in the fourth quarter because of its subprime mortgage exposure. The Glass Hammer published an article in November about star analyst Meredith Whitney of CIBC World Markets and her prediction that Citi would be forced to cut dividends in the wake of the subprime debacle. At the time, this call was met with stiff denials by Gary Crittenden, Citi’s CFO, during a November 5 conference call and a general backlash by other investors. However, as reported in the New York Times Dealbook blog, Citi was forced to eat a huge slice of humble pie yesterday when it announced that it would cut its dividend by a whopping 41% in order to shore up capital.

Oh, and as if that weren’t bad enough, Citi is likely to announce job cuts of about 4,000 positions, many of which will be in investment banking. That would follow the bank’s announcement that it was cutting 17,000 jobs in April 2007. At the end of 2006, Citi had about 327,000 employees.

Despite Bank of America’s $4 billion deal to buy floundering mortgage giant Countrywide this week, the bank announced a 32% drop in third quarter profits, a 93% hit to investment banking profits and big layoffs to come. In light of this, in a much maligned and scoffed at cost-cutting measure, BofA released a memo indicating that it would no longer be stocking its office kitchenettes with the following items, “soup, crackers, flavored teas, sugar free hot chocolate, and soap.” What? This American banking giant can’t spring for soap anymore? Can a sister get some Purell around here? However, BofA spin managers responded to the outrage by promising to bring back the soap. Still, this sign of the times is too depressing.

Is there a light at the end of the tunnel? If so, it’s probably in the form of a sovereign wealth fund. Citigroup and Merrill Lynch both announced on Tuesday that they would raise a combined $19.1 billion from government-backed funds in Korea and Kuwait. Never thought you’d see the day when Japan, Saudi Arabia, Kuwait, Singapore, Korea and China joined forces to bail out America’s largest investment banks? Well then you might be the only one on Wall Street who’s having a lucky day.

According to New York Times Dealbook article “A Guide to Speed Dating with Soveign Funds,” since December 2007, sovereign funds have been the unlikely savior of American capital markets, to the tune of billions of dollars. A fund owned by the government of Singapore bought a 9.4% interest in Merrill Lynch for $4.4 billion. The China Investment Corporation bought 9.9% of Morgan Stanley for $5.579 billion in securities. The Abu Dhabi Authority bought a 4.9% stake in Citigroup for $7.5 billion, and Citi is now working on a new sovereign fund deal with Korea, among other players, to raise $12.5 billion in capital.

So what exactly is a sovereign wealth fund? These funds are the investment arms of foreign governments, many of whom have huge capital reserves at their disposal. According to a recent speech given by SEC General Counsel Brian Cartwright, sovereign wealth funds will have about $12 trillion in investable capital by 2015. While Congress is supposed to keep a watchful eye on transactions with such funds under the terms of the National Security Foreign Investment Reform and Strengthened Transparency Act, the current review process is not structured to review the typical sovereign wealth investments whereby a fund buys a stake of 10% or less of a company, which is a nonvoting share.

However, since these funds may make investment decisions for geopolitical or strategic reasons in a way that a strictly profit-motivated fund might not, it is not always possible to divine their motives or strategy. With billions, perhaps trillions of dollars of capital dependent on these investors, the lack of transparency is a troubling trade-off that American financial institutions are seemingly willing to make in order to stay afloat.

The Glass Hammer hopes to have some more cheerful financial news to report in the near future. In the meantime, don’t shoot the messenger.