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Dismal bank earnings presage more trouble ahead

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[January 17, 2009]  NEW YORK (AP) -- The hemorrhaging among the nation's biggest banks was supposed to have subsided after the government doled out $350 billion in federal bailout money last fall. That hasn't happened.

Instead, both Bank of America Corp. and Citigroup Inc. have had to turn to the government for more cash as losses related to toxic assets, souring consumer loans and the sinking economy blow holes in already flimsy financial balance sheets.

Hardware"The banks are still bleeding, just maybe not as such an advanced rate," said Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh

In a reminder of how bad things are, Citigroup on Friday reported a $8.29 billion loss in the fourth quarter and announced it was splitting itself in two. Bank of America reported a $2.39 billion fourth-quarter loss, hours after ironing out a deal for a fresh multibillion-dollar lifeline needed to digest troubled brokerage Merrill Lynch. Both banks have now taken $45 billion apiece in bailout money.

The ongoing losses and scramble for more cash have sent bank stocks into a free fall in recent days as investors worry about more problems ahead - and the ramifications of an even bigger government role in trying to solve them.

More federal rescue money is on the way after the Senate on Thursday approved the release of another $350 billion for the ailing financial sector. But experts say even that won't prevent more bank losses stemming from the still-unfolding credit crisis.


The problem, analysts say, is that banks are still saddled with shoddy assets associated with subprime home mortgages, commercial mortgages and leveraged loans. As the economy gets worse and sheds more jobs, consumers and businesses increasingly are defaulting on these loans, eliminating revenue streams for banks and forcing them to mark down the value of those assets.

"The banks still have to account for sins of the past - the bad assets," said Bert Ely, an independent bank analyst. "Now with the bad economy, that causes even more losses and you get bigger and bigger holes in the balance sheets."

For the October-December quarter, Citigroup marked down $7.8 billion in securities and banking revenue, and $5.3 billion on the value of credit derivatives. It also lost $2.5 billion in private equity and equity investments, $2 billion in restructuring costs, and $6 billion to add to reserves. Citigroup shares fell 8.62 percent to close at $3.50.

Citigroup officials expect losses to grow as the economy worsens. One area of concern is credit cards - the biggest source of cash for many consumers after their job. As unemployment grows, more people will have to rely on credit cards but will have less income to pay them off.

"There are some things you can influence, but there are environmental factors," Citigroup Chief Financial Officer Gary Crittenden said on a conference call with investors. He said the rising unemployment rate might not peak until mid-2010.

By splitting itself into two parts, Citigroup hopes to streamline its management and restore what was the nation's largest bank by assets to its former glory. Citicorp will focus on traditional banking around the world, while Citi Holdings will manage the company's riskier assets and investments.


Another area of worry for banks is commercial real estate.

JPMorgan mostly blamed commercial real estate for the $1.1 billion in mortgage-related write-downs it took in the fourth quarter. Bank of America recorded $853 million in commercial mortgage markdowns; Citigroup recorded $991 million; and Merrill Lynch had $1.13 billion.

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Those write-downs are likely to grow as commercial mortgage delinquencies rise amid the recession. Landlords are facing a triple-whammy of shrinking rents, rising vacancies and plunging property values at the same time many of them desperately need to refinance.

"Commercial real estate could be the next shoe to drop for banks," Caughey said.

Bank of America blamed its fourth-quarter losses on rising credit costs, large writedowns and trading losses amid the worsening recession. Merrill Lynch, meanwhile, posted a loss of $15.31 billion, or $9.62 per share, for the period - underscoring Bank of America's assertion that it needed extra U.S. aid in order to absorb the investment bank's bad mortgage bets.

Bank of America shares ended 13.7 percent lower at $7.18.

"Our core businesses at Bank of America continue to operate well," Chief Executive Ken Lewis said during the conference call. "The recession and credit crisis will end someday and people will remember that our company was there for them in hard times."

The government's agreement to give Bank of America another $20 billion will help it manage losses stemming from its takeover of Merrill Lynch, which the company acquired Jan. 1. Bank of America has already received $25 billion in bailout funds.

In return for the new infusion, Bank of America slashed its quarterly dividend to a penny from 32 cents, agreed to further limit executive pay and work more intensively to modify the mortgages of distressed homeowners.


Investors, however, have reacted warily to the government taking an even bigger role in the finances of major banks. Some have even likened the government's latest aid to Citigroup and Bank of America as a partial nationalization of the banks, even though the government didn't take larger stakes in the companies in exchange for the funds.

"But the numbers are getting so big," said Christopher Whalen, managing director of Institutional Risk Analytics, who has been critical of the government's policy of giving bailout money to banks. "We're not going to be able to subsidize operating losses much longer, because that's what we're doing."


AP Business writers Madlen Read and J.W. Elphinstone in New York and Ieva M. Augstums in Charlotte, N.C. contributed to this report.

[Associated Press; By STEVENSON JACOBS]

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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