Arguments are over. No time for either of us to do that. I did want to post an article from The Wall Street Journal regarding the firm at which Keith Benjamin is employed:
"BankAmerica Stock Plunges 11%
On Unexpectedly Sharp Drop in Net
By RICK BROOKS and MITCHELL PACELLE
Staff Reporters of THE WALL STREET JOURNAL
BankAmerica Corp., the giant bank formed by last month's merger of
NationsBank Corp. and the former BankAmerica, reported an unexpectedly
steep 78% plunge in third-quarter earnings, with most of the damage coming
from volatile global markets and a surprisingly large loss tied to a
securities-trading account shared with a New York investment firm.
The Charlotte, N.C., bank said profit fell to $374 million, or 21 cents a share,
including a merger-related restructuring charge of $519 million, or 29 cents a
share. A year earlier, on a pro forma basis, BankAmerica had net income of
$1.73 billion, or 96 cents a share.
Eroded Earnings
The new BankAmerica Corp. reported net income of $374 million for the third
quarter, compared with pro forma net income a year earlier of $1.7 billion.
Among the factors battering earnings:
THE WRITEDOWN OF $372 million out of a $1.4 billion loan to
D.E. Shaw & Co., a New York investment firm.
THE WRITEDOWN OF $250 million in the value of a
mortgage-servicing portfolio that wasn't previously hedged against
declining interest rates.
A PROVISION OF $500 million against potential future losses
arising from 'uncertainties in global economic conditions' that
occurred in the third quarter.
AN AFTER-TAX CHARGE OF $519 million to cover costs from
merger with NationsBank.
The extent of the earnings decline was much worse than either BankAmerica
or NationsBank publicly indicated as recently as this week, after the two were
merged. By far the biggest shock was the $372 million write-down of a loan
to D.E. Shaw & Co., a New York investment firm that formed a joint venture
with the former BankAmerica last year to invest in stocks and bonds.
In addition, BankAmerica said it recorded a $250 million write-down in the
value of a mortgage-servicing portfolio that also belonged to the former
BankAmerica. The bank hadn't hedged the risk of the portfolio with offsetting
trades, as most big banks do, and the value of the portfolio dropped with a
decline in interest rates.
Both write-downs raised questions among analysts about the former
BankAmerica's risk-management practices and about whether those portfolios
will affect future earnings at the newly merged entity. Additional losses tied
to the Shaw account are possible if there are further declines in the securities
contained in the portfolio, according to a bank spokesman.
Rating Cut
"In our assessment, the new BankAmerica appears to be out of control with
large losses in several trading areas ... as well as extreme weakness in
mortgage banking," said Thomas Hanley, a banking analyst at Warburg Dillon
Read, who cut his rating on BankAmerica to "reduce" from "strong buy."
Investors reacted angrily, dumping BankAmerica shares in an all-day sell-off
that ended with the stock price at $48.0625, down $5.875 or 11%, in
composite trading on the New York Stock Exchange.
The Shaw loss occurred in a trading account set up with an unsecured $1.4
billion loan from the former BankAmerica. Shaw managed the account, doing
sophisticated fixed-income and equity trades tied to spreads between different
securities, including the Treasury market, according to a bank spokesman.
Under the terms of the account, both the bank and Shaw shared in the profits
or losses from the trades. According to people familiar with the situation, the
account collapsed in late September when yields on U.S. Treasurys fell
sharply.
To stem any further damage, BankAmerica has agreed to take over $20
billion of fixed-income securities in the account, and plans to unwind those
positions "in an orderly fashion," according to a BankAmerica spokesman.
Shaw, which also operates a hedge fund that is separate from the
BankAmerica venture, declined to disclose any details about the account. Shaw
has denied rumors in recent weeks that it is having any sort of liquidity
crunch, saying in a statement Wednesday that it has $1.4 billion in capital.
It isn't known when NationsBank, which closed its $43 billion merger with
BankAmerica on Sept. 30, found out about the losses. BankAmerica Chairman
and CEO Hugh McColl Jr. , in an interview Oct. 1, said he wasn't aware of
any more significant losses following BankAmerica's earlier disclosure about
two weeks earlier of $330 million trading losses related to turmoil in overseas
and domestic markets.
BankAmerica's problems with Shaw coincide with severe problems for a
number of hedge funds brought on by turmoil in global stock, bond, and
currency markets, including the near-collapse of Long-Term Capital
Management LP, the Greenwich, Conn., hedge fund that was bailed out last
month by a consortium of investors. Earlier this week, lenders seeking more
collateral forced the liquidation of $1 billion of bonds held by Ellington
Management Group, an Old Greenwich, Conn., hedge fund that specialized in
mortgage-backed securities.
D.E. Shaw's hedge fund was down 12.6% for the year through last week,
according to several people familiar with its results. It is unclear whether that
fund is under any pressure from lenders.
'Financial Distress' Denied
Shaw said Wednesday that the losses in the BankAmerica venture, D.E. Shaw
Securities Trading, were larger than those of its hedge fund, although a
spokesman declined to elaborate. That joint venture, which received financing
from BankAmerica in March 1997, trades D.E. Shaw's own capital, makes
markets in stocks, and deals equity derivatives. In its statement, the firm
maintained that neither the securities arm nor the hedge fund is "in a state of
financial distress."
"The D.E. Shaw group currently has aggregate capital of approximately $1.4
billion, and its U.S. and U.K. regulated broker-dealer subsidiaries have capital
of approximately $400 million -- a figure far in excess of all applicable
regulatory requirements -- available to support transactions with their
customers," the company said.
D.E. Shaw & Co., founded in 1989 by David Shaw, a former Columbia
University computer science professor, has branched out in recent years from
managing its hedge fund into a variety of other businesses, ranging from the
securities venture with BankAmerica to FarSight Financial Services, an
Internet-based retail brokerage and banking business.
Impact on Executive
Analysts predicted the damage from BankAmerica's relationship with Shaw
could hurt David A. Coulter, chairman and chief executive of the former
BankAmerica, who is president of the merged company. When the merger
was announced, the two companies identified Mr. Coulter as the most likely
successor to Mr. McColl.
"His position certainly hasn't been strengthened," said Sally Pope Davis, a
banking analyst at Goldman, Sachs & Co. "Almost every miss we're seeing is
on the BankAmerica side."
Mr. Coulter's role in the Shaw relationship wasn't clear. He hailed the
arrangement with Shaw when it was announced in March of 1997. The intent
at that time was to give the bank's customers access to equity derivatives and
other sophisticated investments through Shaw. The announcement back then
didn't mention anything about the bank having its own trading account,
though it did mention a "financing relationship."
In a news release to announce the joint venture that now will likely haunt him,
Mr. Coulter described the relationship with Shaw as "unique" and said it
would allow the bank's multinational client base to "benefit from extremely
creative, client-focused bankers and the cutting-edge capabilities of a firm at
the forefront of the quantitative and technological revolution now
transforming the global capital markets."
Mr. Coulter couldn't be reached for comment Wednesday.
Meanwhile, a spokesman for the Comptroller of the Currency, which
regulates the bank, declined to comment on when the regulators were
informed of BankAmerica's problems, saying that the comptroller's office
cannot publicly discuss specific transactions.
The only good news for BankAmerica was that it reported solid growth in its
plain-vanilla banking businesses, ranging from loans to deposit accounts. With
the exception of the Shaw and mortgage portfolio write-offs, loan quality also
remained high.
But that wasn't enough to stop jittery analysts from slashing their earnings
estimates as they wondered if more trading-related turmoil is coming in
future quarters.
"I wish I could sugarcoat it," said Thomas Theurkauf Jr. of Keefe Bruyette &
Woods, who reduced his 1999 earnings estimate to $4.60 per share from the
previous $5.25 per share. "But the exposure to Shaw was irresponsibly large,
and the trading results were poor. I think the bank has to have a rather sober
outlook regarding its emerging-markets activities and all market-sensitive
businesses." |
