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Biz Links Current Issue Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Prior Financial Services Updates August 2004 July 2004 June 2004 May 2004 Feb 2004 Jan 2004 Dec 2003 Nov 2003 Oct 2003 |
NOTE: Please confirm through your own research any numbers on which you are to make a buy, sell or hold decision. Monthly Sector Summary During the month of October, the year-to-date sector price performance went from a loss of 0.32% to a 1.95% gain, 04 EPS growth estimates went from 15.37% to 14.18%, and yields [which would have rose slightly due to WB's dividend increase] staid at 3.34% due to rising prices. The 10-year Treasury note yielded 4.06% on 10-29 [vs 4.19% last month - down 13 basis points for the month]. BK's Profit Rises 36%, But Falls Short of Expectations Jonathan Stempel, Reuters 10-20-2004 Bank of New York, which operates the oldest U.S. bank, on Wednesday said Q3 profit rose 36%, helped by cost-cutting in what it termed a weak capital markets environment. The No. 9 U.S. bank said net income rose to $354 million, or 46 cents per share, from $260 million, or 34 cents per share, a year earlier. Analysts polled by Reuters Estimates on average forecast 47 cents per share. "The market environment this quarter was weak, continuing a trend we first saw in June which intensified through the seasonally slow months," said Chief Executive Thomas Renyi in a statement. "Our equity-linked and foreign exchange businesses were most directly affected, yet our fixed income-linked and asset management areas performed reasonably well," he added. "Expense control was important to our performance this quarter, and will continue to be a major focus." Bank of New York generates much of its business from securities processing, rather than branch banking. It said securities servicing fees rose 4 percent from a year earlier to $685 million, but fell 4 percent from the second quarter. This included a 3 percent year-over-year drop in execution and clearing services revenue to $262 million. The bank said private client services and asset management fees rose 16% to $113 million, foreign exchange and trading income fell 27% to $67 million and global payment services fees rose 5% to $84 million. Service charges and fees rose 10 percent to $98 million, and the bank posted a $14 million gain from securities sales. Revenue rose 6% to $1.75 billion. Bank of New York said noninterest income rose 4% from a year earlier to $1.11 billion, but fell 5% from Q2-04. Noninterest expense fell 4% from a year earlier to $999 million. Lending income rose 5% to $435 million. The bank set aside nothing for bad loans, and said net charge-offs, or loans the bank does not expect to be repaid, fell 60 percent to $19 million. Nonperforming assets fell 26 percent to $287 million. Deposits fell 1% to $58.4 billion, loans fell 1% to $37.1 billion and assets fell 2% to $93.2 billion. Net interest margin rose to 1.88% from 1.87%. Citigroup Profit Climbs by 13% On Retail Strength Mitchell Pacelle, WSJ 10-15-2004 Citigroup said strong consumer results compensated for disappointing investment-banking returns during Q3, lifting net income 13% to a record level. The ability of the world's largest financial-services firm to generate earnings growth during a period of "sluggish capital-markets activity" demonstrated the benefits of a "diversified business platform," Chief Executive Charles Prince said. Morgan Stanley and Merrill Lynch are among the Wall Street firms to report declines in third-quarter income because of lackluster global stock markets and a tricky interest-rate environment. Citigroup said it was hurt by the same forces, with fixed-income revenue alone falling by $720 million from the second quarter. But its consumer operations permitted it to weather the storm. Citigroup reported net income of $5.31 billion, or $1.02 a share, up from $4.69 billion, or 90 cents a share, a year earlier. The results follow Citigroup's worst quarter in years, when a $4.95 billion litigation charge related to WorldCom and others caused it to report Q2 net income of $1.14 billion. Revenue edged up 6% to $20.51 billion, led by Citigroup's sprawling consumer business. The per-share earnings of $1.02 exceeded the 99 cents forecast by analysts, but revenue came up short of expectations. "Revenues were lower than what was expected," said Todd Thomson, Citigroup's chief financial officer. Revenues fell for capital-markets and banking operations, particularly fixed-income trading, as well as for private banking and proprietary investments. "It's not really a Citigroup problem," said analyst Jeffery Harte, who follows Citigroup for Sandler O'Neill & Partners. "We knew we had a difficult summer on our hands for anything capital-markets based." Citigroup's quarterly results also were lifted by $686 million of pretax gains related to what it said were improvements in credit quality. Continued improvements in corporate-loan quality, it said, led to the release of $250 million of loan-loss reserves. It released an additional $436 million of credit reserves, it said, because of improvements in its consumer credit-card portfolio, retail banking and consumer finance. Reserve releases are customary in an improving credit environment, but they nevertheless often spark questions about the quality of earnings. Mr. Thomson said that determining the releases was an "analytic, data-driven process," and not an "end-of-the-quarter process." Following recent disclosures about regulatory problems in Japan and controversial bond trading in Europe, Mr. Prince used a conference call with analysts to reiterate a previous pledge to improve oversight of Citigroup's far-flung operations. Citigroup recently agreed to shutter its private bank in Japan because of numerous regulatory lapses, and said it regretted conducting controversial bond trades in London that roiled the market. "This is something that will not continue in this company, certainly not while I'm in charge," Mr. Prince said. Citigroup has dismissed or disciplined several employees in Japan, but Mr. Prince said there would be "more to come" in the way of an internal response, although he declined to elaborate. He said Citigroup also is reviewing the conduct of employees involved in the European bond trading, but declined to say what might result. Income from Citigroup's consumer operations increased 23% to $3.07 billion. Income from global credit-card operations grew 29% on gains in North America and world-wide. J.P. Morgan Results To Draw Focus on Cost Cuts Robin Sidel, WSJ 10-20-2004 It has been only three months since J.P. Morgan Chase completed its $58 billion acquisition of Bank One, but investors are already looking for signs that future boss James Dimon is living up to his reputation for belt-tightening. The newly combined company makes its earnings debut today. Shareholders and analysts will be scouring the results to see if Mr. Dimon's penchant for cost cutting and his conservative approach to risk have started showing up on the bottom line. Odds are that they will have to dig pretty deep. The big bank's quarterly results will be cluttered with a handful of big items related to the Bank One deal, including hundreds of millions of dollars in charges for both previously announced merger costs and moves to make the accounting policies of both banks consistent, particularly in the credit-card business. Furthermore, the Q3 results at J.P. Morgan -- which is the nation's second-largest bank after Citigroup Inc. -- are vulnerable to some of the same factors that whacked earnings at some other Wall Street firms, including a continued slowdown in the mortgage business and bad bets in the bond market. Indeed, the overall banking sector remains somewhat sluggish due to volatile trading markets and sluggish demand for corporate loans. On the positive side, J.P, Morgan's earnings could benefit if improving credit-quality prompts the bank to release loan-loss reserves. Analysts polled by Thomson First Call expect the bank to earn 74 cents a share after the charges. Cost cutting is one of the biggest issues on the minds of investors as Mr. Dimon, who is president and chief operating officer of the combined company, takes aim at expenses. The merger agreement between the banks calls for Mr. Dimon, formerly the top executive at Bank One, to take over as chief executive of J.P. Morgan in 2006. He already has started the attack: J.P. Morgan last month terminated a $5 billion technology outsourcing pact with International Business Machines Corp., opting to bring back the work in-house. "Certainly, the market is looking for signs that the promised cost reductions are beginning to come through," says David Hilder, a banking analyst at Bear Stearns. Still, even those expense figures may be difficult to parse because increased marketing and technology costs at the combined bank could actually send the overall third-quarter expense level higher. "If expenses are lower, it will be viewed as positive because Jamie Dimon is doing his job, If expenses are higher, it means he is spending for the future and cleaning things up so things will look better next year," says Andrew Collins, an analyst at Piper Jaffray. J.P. Morgan already has estimated about $500 million of merger-related cost savings in the second half of 2004, but it isn't clear how much of that will appear in today's earnings. In July, J.P. Morgan raised its projections for total cost savings from the deal: They are now expected to reach $3 billion a year by 2005, including some 12,000 jobs cut from the 175,000-member work force. Investors also are expected to pay close attention to trading revenue for indications about the bank's willingness to take on risk. Mr. Dimon is well known for being somewhat cautious. J.P. Morgan began laying the groundwork for the first combined earnings report earlier this month. The bank filed an 80-page document with the Securities and Exchange Commission that combined the results of the two companies for the past six quarters -- starting in January 2003. The goal: to give investors and analysts a glimpse of what the company's finances would have looked like if the two banks had been merged at that time. That will make comparisons easier when the company reports third-quarter numbers today. In the filing, J.P. Morgan established seven new lines of business for the combined company, including investment banking, treasury and securities services, card services, commercial banking, retail financial services, asset and wealth management and corporate operations. The combined bank would have recorded net income of $433 million on revenues of $13.3 billion in the second quarter, according to the SEC filing. For some investors, the best sense of J.P. Morgan's progress won't be coming from the balance sheet at all. "I want to hear what management has to say more than I want to see the numbers," says Robert M. Maneri, a portfolio manager at Victory Capital Management in Cleveland, which owns J.P. Morgan shares. "I want to know what kinds of opportunities they are seeing and I want to know how the two groups are playing together," The bank's top ranks already have seen some reshuffling since the Bank One deal was completed. Dina Dublon, a longtime J.P. Morgan executive and chief financial officer, announced plans to resign at the end of the year. She is being succeeded by Michael Cavanagh, a former executive of Bank One and Citigroup who is also a close ally of Mr. Dimon. Also, longtime banking veteran David Coulter, chairman of the investment-banking operations, is relinquishing the title and moving to Los Angeles, where he will be chairman of the bank's West Coast operations. J.P. Morgan Reports Big Drop in Earnings Timonthy O'Brein, WSJ 10-xx-2004 J.P. Morgan Chase, the nation's second-largest bank, surprised Wall Street today with a sharp drop in Q3 earnings, attributing the weaker performance to poor results in fixed-income trading. The bank said profits in the quarter were $1.4 billion, or 39 cents a share, down about 13 percent from earnings of $1.6 billion, or 78 cents a share, in the same period last year. Excluding one-time, after-tax charges and accounting changes of $741 million related to the completion of its July merger with the Bank One, J.P. Morgan would have posted profits of $2.2 billion, or 60 cents a share in the quarter. Last year's Q3 earnings did not include any contributions from Bank One. Analysts had been expecting the bank to post earnings of about 74 cents a share, according to a Reuters survey of analysts' third-quarter estimates for J.P. Morgan. In mid-day trading on the New York Stock Exchange, Morgan's shares were down about 86 cents, or 2.3 percent, to $37.12. "I am pleased with the progress to date on merger integration, but current operating results were below expectations primarily due to weak trading results in the investment bank," said William B. Harrison, Jr., the bank's chief executive, in a press statement. "However, I am pleased with the strong results and growth exhibited in the retail banking and credit card businesses." Susan Roth, a banking analyst with Credit Suisse First Boston, lowered her overall 2005 earnings estimate for Morgan to $3.45 cents a share from $3.55 a share based on the weaknesses she sees in this quarter's results. In a research note to investors, Ms. Roth said that Morgan's credit quality was a "highlight of the quarter" but that its earnings shortfall bodes poorly for the bank if a tougher operating environment emerges in the future. She said that she anticipates that Morgan will encounter a "slower capital markets recovery, less credit benefit, and more investment spending going forward." Like Mr. Harrison, analysts identified weak fixed-income trading as the main culprit pulling down Morgan's profits in the quarter. Morgan said that its fixed-income trading revenues, hammered by last summer's volatile markets, fell 23 percent to $1.1 billion. "Trading was a lot softer than expected and expenses were a tad higher," said Jason Goldberg, a Lehman Brothers analyst. "But the company continues to be on target with its merger integration long term." Morgan reported revenue of $12.5 billion in the quarter, up from $7.8 billion last year. The bank said that despite its weak trading results, it posted higher investment banking fees in the quarter. It also said that its retail banking operation showed account, deposit and loan growth and that its credit card business benefited from higher charge volume. Morgan has cited improved cost controls as a key goal of its merger with Bank One, but the bank said that expenses in the quarter rose six percent to $1.9 billion due to the Bank One acquisition and higher personnel, technology and legal costs. It said those increases were partly offset by lower performance-based compensation for the bank's employees. Wells Fargo and U.S. Bancorp Both Post 12% Increase in Profit Joseph T. Hallinan, WSJ 10-20-2004 Two big U.S. banks, bolstered by improving credit quality and strong loan demand, reported double-digit increases in profit for the third quarter. But Wall Street wasn't impressed, sending both stocks lower on a down day for the exchanges. Wells Fargo & Co. of San Francisco, the nation's fifth-largest bank by assets, said net income climbed 12% to $1.75 billion, or $1.02 a share, from $1.56 billion, or 92 cents a share, a year earlier. Nonetheless, the bank's earnings still came in below analysts' estimates of $1.06 a share, according to Thomson First Call, prompting some investors to sell shares. In 4 p.m. New York Stock Exchange composite trading, Wells stock was down 80 cents to $59.35 a share. Revenue of $7.32 billion for the quarter was flat compared with a year earlier, reflecting lower revenue from Wells's home-mortgage unit. Home-mortgage revenue plunged $623 million, or 41%, to $900 million. The decline was because of a 58% drop in mortgage originations as long-term interest rates rose. Loan demand was strong. Average loans increased 27% to $274.3 billion. Average commercial and commercial real-estate loans increased 9% from a year ago. Wells Chief Financial Officer Howard Atkins said commercial loans grew across most segments and the company was "particularly pleased" with continued middle-market loan growth. The bank said much of its earnings growth came from selling products such as credit and debit cards and online banking to existing customers. Wells is bulking up for an even bigger push to get new business. Compared with the third quarter of last year, for instance, the company has more than three times as many bankers licensed to sell products such as mutual funds and annuities. It also has long-term plans to double the number of commission-based home-mortgage consultants, which total 10,000. U.S. Bancorp of Minneapolis, the nation's seventh-largest bank by assets, said earnings for the third quarter rose 12% to $1.07 billion, or 56 cents a share, from $950.9 million, or 49 cents a share, a year earlier. Net revenue rose 10% to $3.31 billion. But the stock fell 99 cents to $28.45 on the NYSE. The results primarily were due to lower credit costs and growth in fee-based products and services, such as debit-card transactions. Included in the quarter were gains of $87.3 million on the sale of securities. Excluding securities gains and losses, total net revenue in the third quarter increased 3.4% from the year-earlier period. Commercial lending remained weak, as the bank cut back on some high-risk borrowers. Average commercial loans declined 6.8% to $34.46 billion. Mellon Financial's Q3 net income barely budged, rising to $183 million, or 43 cents a share, from $181 million, or 42 cents a share, a year earlier. The Pittsburgh financial-services firm said total revenue sank 1.2% to $1.04 billion. Fee revenue rose 3% to $930 million because of increases in trust and investment-fee revenue. At Sept. 30, assets under management totaled $670 billion, up 7.2% from $625 billion a year before, but down from $679 billion at the end of Q2. Banks & Dividend Hikes Shirley Lazo, Barrons 10-25-2004 Dividend hikes are a frequentoccurrence among banks. Last week's standout was Charlotte, N.C.-based Wachovia, which on Monday boosted its quarterly common payout 15%, to 46 cents a share from 40 cents -- the second increase in 2004 and the fifth in two years. The first payment will be made Dec. 15 to investors on the books Nov. 30. Yield: 3.9%. Dividends have been ongoing since 1914. Chief Executive G. Kennedy Thompson said the dividend enhancement "reflects our board's confidence in Wachovia's...ability to consistently grow earnings while maintaining a strong capital position." The company was pleased, Thompson said, "to ensure that our shareholders benefit from the company's success." The Incredible Shrinking Investment Bank Landon Thomas, NY Times 10-17-2004 The ballroom at the Waldorf-Astoria was packed earlier this month as E. Stanley O'Neal, the chief executive of Merrill Lynch, strode to the podium to deliver opening remarks at a conference on investment opportunities in India. A taut 54-year-old man, Mr. O'Neal delivered his speech with dispatch and precision - extolling India's bright future and highlighting Merrill's influence in the region - before a crowd that included the Indian finance minister and corporate India's top leaders. "At Merrill Lynch, we believe that the growth and promise of India is only beginning," he concluded. A short while later, as the finance minister took his turn on stage, Mr. O'Neal, whose lean, hungry look in many ways mirrors the pared-down firm he leads, ducked out of the room. Perhaps in an earlier time, when Merrill truly saw itself as a global giant, its chief executive might have stuck around a bit - working the room, slapping an occasional back - in the hope of landing a bond or equity offering. Not now. India may well be growing, but Merrill Lynch has been shrinking, both in size and in market value. Under Mr. O'Neal, the firm has scaled back its global ambitions, shedding 23,000 jobs worldwide and pulling out of the retail brokerage business in Japan and Canada. At its peak, its total employment was 72,000. The immediate results were improvements in margins and a surge in the stock price, but the cuts have taken their toll. In the industry rankings known as league tables, Merrill has fallen in important categories, from stock underwriting in the United States to mergers and acquisitions advice. Its executives say the bottom line is more important than rankings, but profits, too, have been on the wane of late, as shown by an 8 percent decline reported last week for its Q3. At the same time, Merrill's shares have taken a beating. They now trade at 1.6 times book value, down from 4 in 2000. A low ratio can make a financial institution more vulnerable to a takeover, and Merrill's ratio is now the lowest among the major Wall Street houses. For years, analysts have said that Merrill, as well as Morgan Stanley, a similar stand-alone investment bank, may have to merge with a larger commercial bank. But in recent months, the hum of speculation has taken on a higher pitch. The talk comes as the two firms' stock prices continue to lag behind those of their peers: Merrill's is down 20% from its high this year, while Morgan Stanley's is off 23 percent from its 2004 peak. That both the future and the relevance of these two storied Wall Street institutions are being questioned at all is testimony to the broad changes in the financial landscape over the last few years. The Morgan Stanley name embodies the essence of white-shoe financial wisdom, dating to the 1930's, when the firm was carved out of the original J. P. Morgan. For its part, Merrill Lynch, as the first Wall Street firm to popularize the idea of marketing stocks and bonds to small investors, symbolizes the idea of democratized stock ownership in America. Universal banks like Citigroup and J. P. Morgan, with their swollen balance sheets and ripe ambitions, are encroaching more than ever on Merrill's and Morgan's turf. European banks like Barclays, Royal Bank of Scotland and HSBC are also looking to expand in the United States. Even onetime regional banks like Bank of America and Wachovia have been hiring droves of investment bankers and brokers. Merrill Lynch and Morgan Stanley, in other words, are being squeezed on all sides. "The business models of these firms may not be sustainable," said Richard Barrett, who runs the Credit Suisse First Boston investment banking unit, which is responsible for bank mergers. "Inevitably, Morgan Stanley and Merrill Lynch should align with the big balance-sheet providers." In some ways, speculating on a merger for Merrill or Morgan is like forecasting a World Series championship for the Red Sox: every year, the possibility emerges, gaining some momentum and passionate supporters, only to crumble at the last moment as the stakes and pressures build. All the same, many people continue to believe that some kind of deal is inevitable. Most investment bankers say the two firms are in similar quandaries, but they contend that Merrill faces the most pressure to merge, given how much smaller it has become. "Merrill is clearly a pale reflection of what it once was," said Jean Luc Servat, a former Merrill Lynch investment banker who now heads the financial institutions banking division at the Royal Bank of Canada. "Under Stan O'Neal, they have sold everything, down to the grandfather clock. And you only have to look at the league tables to see that their market position has slipped massively. The question may be, Will they be like Lehman Brothers: a terrific company but one that might get sold?" Bankers point to the coming public offering of DreamWorks SKG's animation unit as an example of how the big banks have used financial brawn, seasoned with a dose of deal-making skill, to muscle in on territory long owned by the investment banks. In a weak market for public offerings, the DreamWorks offering, at more than $700 million, was a high-cachet deal sought by most investment banks on Wall Street. But J. P. Morgan's balance sheet, and past relationship with DreamWorks, gave it the edge: back in 1994, James B. Lee Jr. of Chemical Bank, a predecessor of the current J. P. Morgan Chase, made a bet on the DreamWorks founders, David Geffen, Jeffrey Katzenberg and Steven Spielberg, by underwriting a $1 billion loan to get the nascent film studio up and running. Now, as part of the offering, J. P. Morgan will be a co-underwriter of an additional $200 million syndicated loan, and has secured the coveted co-lead role with Goldman Sachs. Left on the sidelines were Merrill Lynch, which has a less prominent, senior co-manager role on the deal, and Morgan Stanley, which has no role at all. Bankers see the DreamWorks deal as offering a window into how future deals on Wall Street will be done. J. P. Morgan, as the universal bank, takes one side of the offering because of its past and current lending relationship with the company, while Goldman takes the other, relying more on its gold-plated advice than its access to capital. Merrill and Morgan Stanley are increasingly finding themselves in no man's land, a number of bankers are saying. They are too big to be as nimble as, say, Bear Stearns, or to serve as a pure advisory boutique like Lazard. At the same time, they are too small to compete consistently with Citigroup or J. P. Morgan. A banker who competes against them and asked that his name not be used likened their plight to that of a competent but out-of-position tennis player: stuck in the middle of the court, and not making the put-away shots at the net or winning the deep rallies from the baseline. William B. Harrison, chief executive of J. P. Morgan, echoed that sentiment. "I think these broad-based platforms create a competitive advantage, and over time that will lead to further financial consolidation," Mr. Harrison said. "The trend is clear." Certainly, Philip J. Purcell, the chief executive of Morgan Stanley, has noticed the same trend. As the chief executive of Dean Witter in 1997, he merged it with Morgan Stanley in a landmark deal that many expected to lead to his ultimate aim: a partnership with a larger bank. So in early January, when Mr. Harrison and James Dimon beamed with pride over the union of J. P. Morgan and Bank One, investment bankers who know Mr. Purcell say his emotions may well have run in the opposite direction. "Phil Purcell was the most disappointed guy on Wall Street that day," said a person close to the merger who declined to be identified. Mr. Purcell, a former McKinsey & Company consultant, is regarded as a chief executive who spends more time contemplating broad strategic issues than pitching business to corporate clients. So it is easy to see why he may have reached out to Bank One, given the significant credit card operations of both banks. Bank One's lack of an investment banking and retail brokerage business would have also made for a complementary fit. (Mr. Purcell declined to comment for this article.) A merger with J. P. Morgan Chase would be a more dubious proposition. There would be significant overlap in the two banks' investment banking and capital markets units and, given the dislocations that occurred in the Chase-J. P. Morgan merger, Mr. Harrison and his board would be unlikely to support such a deal - notwithstanding benefits that would come from combining Morgan Stanley's Discover card with J. P. Morgan Chase's credit card business. So why was Mr. Purcell said to be disappointed about the Bank One deal? Morgan Stanley's market valuation, like that of Merrill Lynch, hovers close to $50 billion, a little more than a third that of J. P. Morgan and less than a quarter of Citigroup's. That is a far cry from the heady days of 2000, when the firm's market capitalization exceeded $100 billion. There was a time when Morgan Stanley and Merrill could punch above their own weight, given the stature of their brands and their tight-knit cultures. Perhaps Mr. Purcell, like Mr. O'Neal, understands that this is no longer the case. "The relevance of the stand-alone investment bank has diminished," said Robert E. Diamond Jr., a former Morgan Stanley investment banker who now runs Barclays Capital, the banking and trading arm of Barclays, the British commercial bank. "The integrated banking model, which combines the best of commercial and investment banking, is better. We hired 500 bankers and traders this year, which shows you that something is going on here." Bankers say the disappointing Q3 results from Merrill and Morgan Stanley, compared with better performances from Goldman and smaller firms like Bear Stearns and Lehman, underscore the problem. The prospect for growth in coming quarters seems all the more challenging, given weak deal markets and a difficult trading environment. "I think it is a much more even fight right now," said Carter McClelland, another former Morgan Stanley banker who now heads the rapidly growing investment banking unit of Bank of America. To be sure, investment bankers seldom shy away from criticizing the competition, so any jabs may be taken with a grain of salt. What's more, both Merrill and Morgan Stanley have businesses that the larger banks would love to have. Merrill's 14,000 retail brokers control more than $1.3 trillion in assets and represent the best medium on Wall Street for delivering stocks, bonds, mutual funds and other financial products to individual investors throughout the world. Despite its market-share erosion, Merrill has advised on some big deals recently, including the $63 billion Sanofi-Aventis merger, in which it had a lead financing role. As for Morgan Stanley, its investment banking franchise remains the best in its class, and the firm retains a top ranking in global equity underwriting. Morgan Stanley executives acknowledge that the big banks have made inroads, but they say the firm can still chart its own path. "Is the impact of the banks something we think about? Absolutely," said Stephen S. Crawford, a top adviser to Mr. Purcell on strategic issues. "But we don't worry about our ability to compete, and we don't think a merger is necessary for continued success." But as any good poker player knows, a gambler wants to use his chips when they hold their greatest value, and before they start to dwindle. That is what Mr. Purcell did in 1997, when he offered up to Morgan Stanley the lure of his fleet of Dean Witter brokers as a means to distribute Morgan Stanley deals. Little did Morgan Stanley executives know that within five years, the Dean Witter model of funneling in-house mutual funds to a mid-income investor base would become strategically out of vogue as well as a regulatory albatross. Now Mr. Purcell is forced to rely on Morgan Stanley's trading and banking business to compensate for his brokerage network, which in recent quarters has struggled to stay out of the red. So the question remains: What do Mr. Purcell and Mr. O'Neal plan to do? Merrill Lynch declined to comment for this article, but people who know Mr. O'Neal describe him as a man in a hurry who welcomes the chance to prove wrong those who underestimate him. He has spoken openly about a growth path for Merrill, but aside from hiring more brokers and pushing into commodities trading and the servicing of hedge funds, he has offered few specifics. Some people contend that his cost cuts are a prelude to a sale, and that the noncompete contracts that he and his top executives signed last month reinforce that notion. Merrill watchers also point to the fact that Jerome P. Kenney, a longtime strategic adviser, has recently returned to the firm to work full time. Mr. Kenney counseled Mr. O'Neal's predecessor, David H. Komansky, on the firm's purchase of Smith New Court (a deal widely seen as a coup) and its acquisition of Mercury Asset Management (a deal widely seen as a disaster). In Mr. O'Neal's inner circle, Mr. Kenney joins Gregory J. Fleming, co-head of the firm's institutional trading and banking division, who previously advised on bank deals. Mr. Fleming made his name with one signature deal, by counseling G. Kennedy Thompson, then the chief executive of First Union, in its merger with Wachovia in 2001. The relationship with Mr. Thompson endures, people who know Mr. Fleming say, leading to idle speculation about a merger of equals between Wachovia and Merrill Lynch. Still, while bankers acknowledge that the deal looks good on paper, there is a powerful mitigating factor: both Mr. Thompson and Mr. O'Neal are ambitious, strong-willed men in their early 50's who seem disinclined to play second fiddle. There has also been speculation that Mr. O'Neal has met within the last year with Kenneth Lewis, the chief executive of Bank of America, and with John Bond, the chairman of HSBC, to discuss strategy. Mr. Purcell has been just as reticent with regard to Morgan Stanley's future. He has told people close to him that he intends to stay on the job for five more years. Some bankers say that the longer Mr. O'Neal and Mr. Purcell wait, the more the prospect of masterminding the ideal merger fades. But, the bankers say, maybe that is the way the executives want it. "There's a lot to be said for being the chief executive of a $50 billion bank," said Herbert A. Lurie, who ran the division at Merrill responsible for financial institution mergers before leaving in 2001 to get his doctorate in psychology at Columbia. "Being the No. 1 guy in the No. 1 bank is not the priority for some, as opposed to others. As a result, you don't see the same sense of urgency in how they take advantage of strategic opportunities." Collins at Piper Jaffray Likes Banks Andrew T. Gillies, Forbes 11-15-2004 Bancorp Piper Jaffray Senior Financial Institutions Analyst Andrew Collins suggests bank revenues usually advance at a 3% to 5% annual rate; he's expecting 6% to 8% in 2005, largely on strengthening fee income. He also thinks capital markets will see a rebound. "That'll put the cherry on the cake for banks involved in brokerage activities," he adds. At the moment Collins likes the prospects for Wachovia, whose earnings per share should get a bump from cost cuts and share buybacks following the proposed merger with SouthTrust, set to close in early November. A trouble spot: Chicago's Northern Trust. His 2005 call of $2.45 per share falls 5% below the consensus. [From John H. Christy, Forbes 11-15] Brian McMahon, president of Thornburg Asset Management and manager of the firm's Investment Income Builder Fund, likes Citigroup and Bank of America, which yield 3.7% and 4.1%, respectively. Banks, McMahon says, are better able to support high dividends since their capital spending needs tend to be low. Wachovia's 3Q Profits Increase 14%, Rasies Dividend Paul Nowell, AP 11-16-2004 Wachovia Corp. said Friday that Q3 earnings rose 14% to $1.26 billion, or 96 cents a share, on gains in its wealth management and investment banking businesses. The results compared with a profits of $1.11 billion, or 83 cents per share, in the same period a year ago. Excluding merger and restructuring charges, Wachovia posted earnings of $1.32 billion, or $1 per share in Q3, compared with merger-adjusted earnings of $1.17 billion, or 88 cents per share, a year ago. The adjusted earnings were a penny ahead of the 99 cents expected by analysts surveyed by research firm Thomson First Call. Revenues for the July-September period increased to $5.62 billion from $5.33 billion last year. "Our third-quarter earnings were excellent," Wachovia chief executive and chairman Ken Thompson told analysts on a conference call after the earnings were posted. "We had record net income . . . and EPS was up 16%. This is our ninth straight quarter of double-digit EPS growth." Thompson said three of the bank's four main businesses were performing well, with the exception of its retail brokerage business. "While the financial markets remain challenging for this business, we feel great about its long-term growth," he said. The Charlotte-based bank said it expects to close its $14.3 billion merger with Alabama-based SouthTrust Corp. in the fourth quarter. Both banks have already announced plans to hold shareholder meetings on Oct. 28 to seek approval of the merger. For the first nine months of the year, earnings were $3.77 billion or $2.85 a share, up 19 percent from $3.16 billion or $2.35 a share in 2003. Wachovia increased its quarterly dividend 15 percent to 46 cents from 40 cents. Month Ending Sector Summary During the month of October, the year-to-date sector price losses fell [there were LESS losses] from a decrease of 6.56% to a decrease of 0.89% and 04 EPS growth estimates rose from 20.48% to 22.25%. Yields went from 1.07% to 0.97% Lehman Gambles on Going Solo - Firm Built on Bonds Susanne Craig, WSJ 10-13-2004 Last year, data-storage firm EMC Corp. decided to give a big investment-banking assignment to Goldman Sachs Group Inc., bypassing rival Lehman Brothers Holdings Inc. Richard Fuld, Lehman's chief executive, was determined that wouldn't happen again. A few months later, when EMC was looking for bankers on another deal, Mr. Fuld flew to Boston in one of Lehman's private jets to make the pitch in person. "It was very influential," says EMC Chief Executive Joseph Tucci. That level of attention, unusual for what was a relatively small deal, helped win Lehman the business. Despite a long and storied history, Lehman is not a heavyweight, with net revenue almost half that of Goldman Sachs and a reputation as a rough-and-tumble bond trader. In competing with Wall Street's top tier, Mr. Fuld is defying conventional wisdom that says smaller firms have to sell out to conglomerates to survive. Lehman is betting it can be a potent rival to investment banks including Goldman Sachs and Morgan Stanley by burnishing its credentials in businesses such as investment banking, Wall Street's biggest money maker. The man making the gamble is Mr. Fuld, 58 years old, a former competitive squash player who once reveled in being nicknamed "the gorilla," a moniker that stemmed from his no-nonsense style. At work, he personally demanded that his bankers type up a "deals done away" list -- Wall Street lingo for lost business -- that explains to higher-ups why Lehman didn't get transactions snared by rivals. On the home front, Mr. Fuld used to tape critiques of his son's hockey performance while watching the game from the bleachers. Lehman, founded in 1850 as an Alabama cotton trader, has in the past seven years beefed up stock trading and research businesses and expanded asset-management services for wealthy individuals. Rather than trying to cover all bases, Lehman initially focused on specific areas, such as technology, telecommunications and health care, and is now extending its reach. It has also pushed to expand its investment-banking franchise, one of the most prestigious businesses for Wall Street banks, but progress there has been harder. While Lehman has more than doubled its share of the U.S. mergers-and-acquisition business since 2000, it's still overshadowed by the market leader, Goldman Sachs. Last year, Lehman captured 19.1% of that business, compared with 9.6% in 2000, according to financial-information provider Thomson Financial. The growth came largely at the expense of Morgan Stanley, whose share fell to 22.8% from 32.7% in the same period. Goldman slipped slightly to 42.8%. Lehman's top clients now include SBC Communications Inc., Kohlberg Kravis Roberts & Co. and MetLife Inc. Lehman's bid to challenge Wall Street's largest firms will soon be tested. Despite its advances, two-thirds of Lehman's 2003 revenue came from bond-related businesses such as trading in mortgage-backed securities and selling corporate debt. That market, which boomed as stocks swooned after the Internet bubble, is now a dicier proposition. Many on Wall Street think a bond-market retreat is likely, although such predictions have yet to materialize. Lehman has continued to make money in the bond market even as rivals stumble. There are few Wall Street firms that have managed to diversify without teaming up with a larger rival or becoming part of a conglomerate. Venerable names that used to compete with Lehman such as Salomon Bros., Kidder Peabody and Donaldson, Lufkin & Jenrette have been swallowed up by bigger firms or disappeared altogether. To succeed, Lehman must break some of the seemingly impenetrable ties that bind many of the world's most-desirable corporate clients to its rivals. Ford, for example, has given Lehman some work over the years but the auto maker has a close relationship with Goldman, which led Ford's initial public offering of stock in 1956. When Lehman banking chief Skip McGee made a recent courtesy call to try winning more business, he was gently rebuffed. "You know we like you, but there are a lot of mouths to feed," Ford's Treasurer Malcolm Macdonald told Mr. McGee, both men recall. Mr. Fuld says the firm has already managed to break some of those key relationships. "We're not there yet," he acknowledges. "But today we are now a top-tier player, which is something no one on Wall Street would have said about us even four years ago." Lehman is the only firm for which Mr. Fuld has worked, dating back to his days as a student at the University of Colorado in 1967. In Boulder, he did everything from photo-copying documents to helping create financial spreadsheets. In 1969, he moved to New York for a full-time job trading corporate debt. He earned an M.B.A. attending night classes at New York University, and landed his first big assignment in 1972, running the desk that traded in real-estate investment trusts. Raucous Culture At that time, Lehman was infamous for the jocular, often raucous culture typical of bond-trading firms. The 1989 book "Liar's Poker," written by former Salomon salesman Michael Lewis, told of traders at that firm throwing phones at each other and swearing constantly. Former Lehman CEO Lewis Glucksman is well-known on Wall Street for tearing off his shirt in a rage on the trading floor. Mr. Fuld fitted neatly into that culture and for years kept a stuffed gorilla in his office as a wink to his nickname. Saul Cohen, a former Lehman general counsel, recalls Mr. Fuld in the 1980s offering to "smack" someone on his behalf. Mr. Cohen declines to say who, but adds that Mr. Fuld "was quite sincere about it." Mr. Fuld doesn't remember the incident but concedes he could have said something along those lines as a joke. Lehman almost didn't survive the 1980s after a bitter fight between the firm's bankers and traders led to its being acquired by American Express Co. Mr. Fuld, who at the time was head of Lehman's capital-markets division, opposed the merger, arguing that Lehman should hang onto its independence. Life under the financial-services giant was little better. Lehman staffers, used to running their own show, bridled at being part of a rigid corporate structure. One year, Lehman left its parent's name off the cover of its annual report. It took American Express nine years to realize the combination wasn't working. With its commitment to the financial-supermarket concept flagging, American Express sold its stockbroking unit and spun off Lehman. The company that emerged was a shell of its former self and Mr. Fuld, who by then had been made CEO, says it was apparent the securities firm needed to wean itself off dependency on bond revenue to survive. His first task was to heal Lehman's rifts. Mr. Fuld used a point system he developed in the mid-1990s to teach his son Richie the value of teamwork. After recording notes on tape during Richie's hockey games, Mr. Fuld would award one point for a goal but two for an assist. Richie's reward at the end of season based on his score: cash or Lehman stock. He took the latter. At Lehman, Mr. Fuld set up a similar compensation plan whereby the company's senior managers were paid roughly the same and were rewarded on their teams' performances. He also decided to increase the use of stock to pay other employees, hoping to align their interests with that of the firm. Today, 33% of the firm is employee-owned. To counter Lehman's image as a scrappy bond house, Mr. Fuld overruled a unanimous decision by the firm's executive committee, at the height of the dot-com boom, to allow for casual dress on Fridays. He even showed up to a Saturday rehearsal for Lehman's annual meeting in a suit, while his colleagues dressed in weekend attire. The overhaul began in earnest in 1996, when Mr. Fuld tapped two top bond managers to fix the firm's money-losing stock operations, an area that includes stock research and sales. "Figure it out," Mr. Fuld says he told the two executives. "It was the ultimate losing locker room," Lehman's now-president, Joe Gregory, says of the stock-trading floor. Mr. Gregory, one of the two picked for the task, recalls looking at the beige stained carpet and the tattered chairs. Lehman knew it couldn't compete with bigger, more-established rivals on every front. So Mr. Fuld picked spots, specifically growth sectors such as telecommunications, technology, energy and health care, where Goldman and Morgan Stanley didn't have their deepest relationships. One of Mr. Gregory's first moves was to fire 25 of the division's 29 managers. Then he turned his attention to filling those seats. Salomon had just merged with Smith Barney and employees there were restless. "This is a great opportunity to get some of the best people in the industry," Mr. Fuld recalls telling a group huddled in a conference room on the 10th floor of Lehman's old headquarters in Manhattan's World Financial Center. In the following months, Lehman hired at least 50 people from Salomon, including top stock analysts covering wireless, energy and retail companies. Lehman's nascent recovery took a dent in 1998 as financial markets around the world were roiled by a Russian debt default and the near collapse of hedge fund Long Term Capital Management. Although Lehman's financial health was sound, rumors began to spread on Wall Street that it was on the brink of bankruptcy as investors worried about the ripple effects of the market turmoil. Lehman shareholders put pressure on Mr. Fuld to consider selling the firm to a bigger, more-diversified rival. A number of financial firms, including Germany's Deutsche Bank AG, approached Lehman but Mr. Fuld deflected the advances. In a 1998 executive-committee meeting, Lehman's then chief financial officer, John Cecil, said the firm needed "to consider that we may need to merge with someone else to get more capital," according to several people who were there. "This is going to be a short discussion because this firm is not for sale," Mr. Fuld shot back. Pressure to Cut Staff Two years later, the collapse of the Internet bubble put pressure on the CEO to cut staff just as his expansion into stock-related businesses was taking hold. Trading activity collapsed across Wall Street as did the mergers-and-acquisitions business. Two of Lehman's favored sectors, telecom and tech, were particularly hard hit. Rather than follow other firms in slashing jobs across the board, Mr. Fuld made cuts in hard-hit areas such as investment banking while increasing Lehman's total number of employees. Between 2000 and 2002 total headcount rose nearly 9% as Mr. Fuld argued that Lehman didn't add as many staff during the Internet bubble as many of its rivals. In the same period, Goldman lowered staff levels by 13% while Morgan Stanley chopped 14%. After the terrorist attacks of Sept. 11, 2001, Lehman's bankers were forced to move from their offices opposite the World Trade Center and set up temporary quarters at a Sheraton Hotel in midtown, ripping out beds to make room for desks. Less than a month after the attacks, Mr. Fuld negotiated a deal to buy a new, never-occupied building in midtown from rival Morgan Stanley. Lost in the old downtown offices was Mr. Fuld's stuffed gorilla. It wasn't replaced. "I think we've moved beyond that image," Lehman President Mr. Gregory told Mr. Fuld, both men recall. Lehman bought the brokerage business of SG Cowen Securities Corp. in 2000 and went further into that market in July 2003 with its largest acquisition ever: a $2.63 billion deal for Neuberger Berman Inc., a well-heeled money manager. "This is our first large deal -- one of what could be many -- and we can't afford to screw this up," Mr. Fuld recalls telling the two firms' executives during a lunch at the Park Avenue Cafe on Manhattan's Upper East Side. Lehman is now in talks to buy London-based hedge fund GLG Partners, according to people familiar with the matter. Meanwhile, the company's investment-banking business has moved ahead in fits and starts. To excel on Wall Street, a brokerage house needs a top-flight investment-banking franchise. Woody Young, one of Lehman's top investment bankers, recalls getting an 11 p.m. call at home on May 10, 1998, from Ameritech Corp. Chairman Richard Notebaert, informing him that Ameritech had chosen Goldman as its banker for a proposed $62 billion merger with SBC Communications, cutting Lehman out of a big payday. Nonetheless, Mr. Young attended the news conference at the Waldorf-Astoria Hotel announcing the deal. He snagged a front-row seat alongside the Goldman bankers and Mr. Notebaert. Mr. Young says he wanted Ameritech to know that Lehman was still interested in a long-term relationship, despite being shut out of the deal. Mr. Young kept in touch with Mr. Notebaert, who is now chairman of Qwest Communications International Inc. Lehman is now one of Qwest's top bankers. Last year, Lehman advised the telecom-equipment maker on its $7.1 billion sale of a yellow-page subsidiary. "In 1998, some of us felt Lehman didn't have the presence they needed," Mr. Notebaert says. "But I think they have come a long way under Dick Fuld." Lehman's Has Become a Dealmaking Power Emily Thornton, BusinessWeek 1-19-2004 It was late December, but the holidays were not on the mind of Lehman Brothers Chairman and Chief Executive Richard S. Fuld Jr. In 2003, Lehman had catapulted ahead of a slew of Wall Street rivals to become a serious investment-banking power, and Fuld was not letting up. On his desk, next to a tall Starbucks Mocha Frapuccino, was a list of hundreds of banking clients. He was determined to reach every person by New Year's Day. "When something is on my list," he says, "it will get done." Well before the ball dropped at midnight a few blocks from his midtown Manhattan office, Fuld had reached almost everyone, just as the final results for 2003 were coming in. Lehman advised on $99 billion in U.S. mergers and acquisitions announced last year, raising its market share by an enormous 6.2 points, to 18.9%, according to Thomson Financial. In the process, Lehman leapfrogged over Credit Suisse First Boston, Merrill Lynch, and J.P. Morgan Chase, and grabbed fourth place among major Wall Street firms, up from ninth in 2002. Last year, Lehman also raised $314 billion in debt and equity issues for companies, making it the No. 2 underwriter of securities in the U.S. -- behind only Citigroup -- up from No. 4 in 2002. "It's pretty rare now that we open the paper and there's a big transaction that we're surprised by," says Hugh E. "Skip" McGee, Lehman's head of investment banking. That hasn't always been the case. The firm's recent successes are the result of years of effort to transform Lehman into more than just a bond house. Despite the three-year deal drought, Fuld stubbornly built the firm's banking capabilities. He poached seasoned bankers from rivals. He shook up Lehman's culture by melding its debt and equity underwriting businesses. And he started holding senior bankers more accountable for bringing in big deals. The transformation is crucial. As the economy improves and equity issuance picks up, bond issuance is expected to soften. And more than many others firms on Wall Street during the bear market, Lehman benefited greatly from the debt-issuance boom. Fixed-income sales and trading accounted for $4.4 billion of the firm's $8.6 billion in revenue last year. But with Lehman's investment-banking operation running full tilt, a downturn in bonds may not even be noticed. Indeed, Moody's Investors Service (MCO ) raised Lehman's long-term credit rating to A1 from A2 in October to acknowledge the firm's efforts to broaden its business reach. "It is a much more diversified shop than it was five or six years ago, and it operates in an extremely disciplined fashion," says Blaine A. Frantz, a senior credit officer. Fuld, 57, is still charging ahead. To keep up with the firm's growth, he is naming four new members to the executive committee, bringing the total to 13. And he plans to continue adding troops to his current total of 16,000. These moves will give Lehman added heft in areas such as equity issuance, derivatives, convertibles, and merger advice, and help it maintain strength in debt issuance. Fuld's pitch is basic: He wants to advise clients on everything from mergers and raising capital to hedging risk and making debt payments. Clients are noticing the difference. "When you need to count on them, they're there," says Henry R. Kravis, founding partner of Kohlberg Kravis Roberts & Co. "In today's Wall Street world, I can't say the same about every firm." Lehman's success is all the more surprising given that for much of the '90s, it was considered takeover bait for one of the bigger and better-capitalized Wall Street houses. For years the firm suffered from internal warfare, ending up a not-so-happy unit of American Express Co. (AXP ). AmEx spun Lehman off in 1994, but that left the firm as merely a bond house -- the lowest form of creature in Wall Street's pecking order -- with virtually no retail or asset-management operations. Fuld, 57 now, who started at Lehman as a commercial-paper trader in 1969, became CEO -- and knew he faced long years of rebuilding. Ironically, Lehman's investment-banking business began to gel as the bank faced its most severe crisis: the loss of its World Financial Center headquarters in downtown New York after the terrorist attacks on September 11, 2001. Setting up temporary quarters at a Sheraton Hotel in midtown, Chief Operating Officer Bradley H. Jack, then head of investment banking, grouped his bankers by the industry they focused on, not by what type of financing they specialized in, the industry's usual practice. So, for the first time, the bankers who underwrite debt and the ones who put together stock offerings were sitting together -- in the cocktail lounge on the fifth floor. When the firm moved to its new headquarters in 2002, Jack kept the industry groups together. Now, bankers specializing in everything from stocks to bonds to convertibles sit next to each other in rows known as "pods," each representing a different industry. The goal is simple: more communication among bankers working for the same clients, and perhaps more creative financing solutions. "Before the spin-off, success was measured more by what each individual accomplished," says Fuld. "Today, it's all about the team." The strategy paid off big in the summer of 2002. Tulsa energy trader Williams, which was teetering near bankruptcy, asked Lehman to help it raise $3.4 billion. McGee, then the head of Lehman's energy-banking group in Houston, raced against the clock with a swat team of 30 bankers, working from 7 a.m. to 2 a.m. for days to figure out how to resuscitate the company even as lawyers prepared its bankruptcy filings. In just over a week, Lehman arranged the sale of billions of dollars of assets such as pipelines while organizing financing from Warren E. Buffett and banks secured by natural-gas reserves. Some Williams staffers were in tears; secretaries hugged bankers. Last January, McGee moved to New York as head of investment banking, and preparations for the long-awaited upturn in investment banking gained momentum. Fuld put McGee in charge of equity and debt issuance as well as M&A. That paved the way for one of McGee's first major moves: rewarding bankers for solving clients' problems rather than selling specific products. McGee also urged his senior bankers to spend less time managing their teams and more time as road warriors, bringing in more deals. "We've had much more of an orientation toward execution rather than going out and getting business," says McGee. When they hit the road, they carry plastic cards listing golden rules for investment banking that McGee and a group of senior bankers drew up. (Rule No. 1: "Investment banking is a team sport -- use all resources.") Lehman made another decision during the deal slump that left it well-positioned for better times. While other firms laid off as many as half their bankers, Lehman let go only about 15%. "As others were downsizing, we stayed the course, and that has benefited us," says McGee. Adds Sean Foley, treasurer of Cingular Wireless LLC, which selected Lehman as its adviser when it bought wireless licenses from Nextwave last year: "Lehman has been able to maintain continuity, and that helps." McGee also made key hires. In April, the firm nabbed Mark G. Shafir from Thomas Weisel Partners LLC and made him head of M&A. In August, he hired Casey Safreno, one of Merrill's top bankers in health care. Safreno promptly helped Lehman land one side of the biggest M&A deal announced in the U.S. last year -- Wellpoint Health Networks' $16 billion sale to Anthem. The moves have boosted Lehman's stock price and profits. The shares rose 40% over the past 12 months, to $79, and net income soared 74% in 2003, to reach $1.7 billion. Analysts think the firm will do better still once the benefits of its effort to retool the investment-banking operation, plus the $2.6 billion purchase of asset manager Neuberger Berman LLC last year, kick in. Fuld isn't the only Wall Street chief who believes that being able to deliver more than just one product is critical to winning deals. Two other banks, Morgan Stanley and Goldman, Sachs, also used the last few years to better integrate their debt and equity divisions so they can offer chief financial officers a broader range of advice. In August, 2002, Morgan Stanley merged its debt and equity capital-markets businesses so that one banker can advise a corporate client on a suite of financing options. Goldman has taken a similar approach in Japan. In December, Morgan also freed 10 senior bankers, including dealmaking hotshot Joseph R. Perella, from management responsibilities to let them spend more time with clients. Morgan and Goldman happen to be two of the firms blocking Lehman's path to the top U.S. M&A ranking, along with Citigroup, which beat out Lehman for third place by $686 million last year. For all of Lehman's success in the U.S., it's still an also-ran overseas. The firm did gain ground in debt and equity underwriting worldwide in 2003, but it slipped in the global rankings for announced mergers, from No. 8 to No. 9. Fuld hopes to strengthen the firm's overseas franchise in part by adding two top execs in Asia and Europe to the executive committee. If these steps pay off, Fuld could be adding more international names to his long list of calls next December. Lehman Brothers Settles Enron Lawsuit AP 10-29-2004 Wall Street brokerage house Lehman Brothers Holdings Corp. has agreed to pay $222.5 million to settle a class-action lawsuit alleging that it and other banks and brokerages helped the failed energy giant Enron Corp. mislead investors. The University of California, lead plaintiff in the case filed in Houston, announced the settlement Friday. The settlement will be shared among the thousands of institutional and individual investors. The university alone lost nearly $150 million when Enron imploded. Bank of America Corp. in July agreed to pay $69 million to settle similar allegations. Lehman and Bank of America weren't accused of defrauding the energy company's shareholders. They were sued in their capacity as underwriters for some Enron and Enron-related debt offerings. The suit was filed on behalf of large investors, which lost millions of dollars when Enron collapsed. Other banks and brokerages named as defendants in the lawsuit include Wall Street titans Citigroup and J.P. Morgan Chase. Merrill's Net Falls 8.3% Susanne Craig, WSJ 10-13-2004 Lackluster global stock markets took a slice out of Merrill Lynch's Q3 earnings, knocking the Wall Street firm's quarterly profit below $1 billion for the first time in more than a year. Merrill posted net income for the three months ended Sept. 24 of $920 million, or 93 cents a share, down 8.3% from $1 billion, or $1 a share, a year earlier. The figures also were down from Q2, when the firm reported net income of $1.08 billion, or $1.06 a share. The most recent results weren't unexpected; stock analysts had been ratcheting down their expectations for Merrill for months. Merrill's stock rose nearly 3% on the New York Stock Exchange. Securities firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., which weighed in with third-quarter earnings last month, set the tone for Merrill's results. The rivals' results were solid, but thanks to a difficult stock-trading environment and other issues, were down from earlier this year. "I would say that, all in all, the results aren't great, but fine considering the environment these firms are operating in," said Glenn Schorr, an analyst at UBS. He added that Merrill's results were helped by a lower effective tax rate and a lower compensation ratio. The question going forward, he said, is whether it can continue to keep those two numbers low. The firm's third-quarter net revenue, or revenue minus items such as interest expense, was $4.84 billion, down 3.2% from $5 billion in the year-earlier period and 8.7% from $5.3 billion in the previous quarter. Most of Merrill's divisions reported a profit drop. "The environment this quarter was challenging, as expected," Merrill Lynch Chief Financial Officer Ahmass Fakahany said on the firm's earnings conference call. Net revenue in the firm's so-called global-markets division, which includes revenue from stock and bond trading, was $1.68 billion, down 13% from the year before and 15% from the prior quarter. Conditions remained tough in investment banking, Wall Street's biggest moneymaker. Merrill's unit managed a 3.6% increase in net revenue from the year-earlier period, to $575 million, though the revenue was down 17% from the previous quarter. Net revenue in the firm's global private-client division, which includes stockbrokers who advise clients on their investments, was a bright spot. Holding its ground despite a difficult stock-trading environment, the division reported net revenue of $2.31 billion, steady with last year's results and down just slightly from the prior quarter. On Wall Street, firms spend about half of their net revenue on compensation. In the most recent quarter, Merrill's compensation ratio was 47%, compared with 49% in the year-earlier period. Income taxes paid fell to $284 million, down 30% from a year earlier, largely because more of Merrill's revenue was generated outside of the U.S. in jurisdictions with lower tax rates, the firm said. Merrill added money to reserves for litigation costs, contributing to an increase in its "other" expenses to $231 million, up from $118 million the year before. More on Merrill Lynch - Q3 EPS was 93c Vs $1.00 in Q3-03 Dow Jones Newswires 10-12-2004 Hurt by reduced trading levels, Merrill Lynch reported lower Q3 earnings as net revenue slid 3%, affecting its global markets and investment banking business. The company earned $920 million, or 93 cents a share, for the three months ended Sept. 24, a penny better than consensus estimates, according to Thomson First call. The latest quarter was 8% below last year's earnings of $1 billion, or $1 a share. Net revenue fell to $4.84 billion from $5 billion a year ago. Merrill Lynch's global markets and investment banking segment together posted a 9% drop in net revenue. Pretax earnings fell 22% to $771 million. Oil prices, interest rates, low volatility and geopolitical uncertainty affected its latest results, Merrill said in a press release Tuesday. "The slowing of the activity typical of the summer months was more pronounced than usual," the company added. Merrill's global markets' reported a 13% decline in net revenue while investment banking net revenue increased 4%. Equity markets net revenue dropped 15%, mostly from lower cash and equity-linked trading revenue, which more than offset increased net revenue from equity financing and services. The company's global private-client business had net revenue of $2.3 billion, unchanged from a year ago, while pretax earnings dropped 10% to $409 million. Commission revenue was $1.1 billion, unchanged from last year, as lower equity commissions were offset by higher mutual-fund and insurance commissions. Principal transactions revenue were $390 million, 45% lower than last year while investment banking revenue fell slightly to $666 million. Asset management and portfolio service fees were $1.3 billion, up 13%. Charles Schwab Swings To a Loss in Q3 Gaston F. Ceron, Dow Jones Newswires 10-15-2004 Charles Schwab swung to a $41 million net loss in Q3, as charges related to the securities firm's cost-cutting drive and a loss from the pending sale of its capital-markets unit all weighed on the bottom line. On a per-share basis, Schwab posted a loss of three cents a share, compared with net income of $127 million, or nine cents a share, in Q3-03. Revenue increased slightly, rising by $3 million to $1 billion. But Schwab's trading revenue fell 29%, hurt by the company's move in June to cut its online-trading fees and by lower trading volumes from its individual-investor customers. In the third quarter, Schwab averaged 128,100 revenue-producing trades a day, down from 142,200 in the second quarter and off from 145,100 in the third quarter of 2003. To be sure, some of the decline is seasonal, as the summer tends to be a slow time for stock traders. But there were other problems that gave investors pause, such as concerns about terrorism, the situation in Iraq, high oil prices and the tight U.S. presidential contest. Schwab saw a pickup in trading activity in the early part of October. "Whether or not that is a function of coming out of the summer months or going into [corporate] earnings season, and whether it can continue, that remains to be seen," said Chief Financial Officer Christopher Dodds. "The big question mark [in the fourth quarter] is the sentiment and level of engagement among individual investors." The approaching election should hopefully dispel some of the political uncertainty that is making investors gun-shy, Mr. Dodds said in a telephone interview Friday. Schwab shares were recently up 31 cents, or 3.7%, to $8.78. Over the past 52 weeks, the shares have traded as high as $14.20, on Oct. 15 of last year, and as low as $8.25, on July 19. The third quarter was a turbulent time at Schwab. In July, the company abruptly ousted David Pottruck as its chief executive, replacing him with founder and Chairman Charles Schwab. In August, the company struck a deal to sell its capital-markets business to Swiss bank UBS AG. The transaction, for $265 million in cash, is expected to close in the fourth quarter. Schwab's Q3 results included $87 million in after-tax losses from discontinued operations, nearly all of which was related to the capital-markets sale, as well as $70 million in after-tax charges from Schwab's effort to lower costs. The quarter also included an investment-sale gain of $9 million, after taxes. Schwab projects that its expense-cutting moves -- which, as previously reported, include layoffs -- will lower costs by about $275 million a year. The full benefit of the savings should be seen next year, when Schwab also expects more cost-reduction efforts. But achieving those savings has been painful, as the company again had to resort to job cuts. Schwab's payroll ended Q3 at 14,800 people, down 1,500 from Q2. About two-thirds of that 1,500 figure came from layoffs, Mr. Dodds said. "We expect headcount to decline further," he said, noting that the company plans to shed another 400 to 500 jobs in the fourth quarter. E*Trade's Net Income Rises 29% Mike Lucas, Dow Jones Newswires 10-19-2004 E*Trade Finanicial said its Q3 profit rose 29% on improved efficiency, despite a decline in revenue and seasonal weakness in its brokerage business. The electronic brokerage firm said Monday net income rose to $79.3 million, or 21 cents a share, three cents ahead of Wall Street's view, and up from year-earlier earnings of $61.4 million, or 17 cents a share. But revenue fell 12% to $337.1 million from $386 million last year. Analysts expected revenue of $360.8 million, according to Thomson First Call. The company raised the lower end of its 2004 earnings outlook to 92 cents to 97 cents a share, from 87 cents to 97 cents a share, and predicted fourth-quarter earnings of 17 cents to 22 cents a share. Analysts, on average, expect 21 cents a share for the fourth quarter and 86 cents a share for the year. E*Trade Chief Executive Mitchell H. Caplan said that greater integration of the company's trading, investing, banking and lending operations strengthened its strategic position, while greater operational efficiencies resulted in the higher earnings. Net brokerage revenue fell 21% in the third quarter, to $185.9 million from $237.8 million a year earlier, while net banking revenue fell 2% to $151.2 million from $148.2 million a year earlier. T. Rowe Price's Net Rises 24% as Fund Sales Grow press release of 10-26-2004 For the first nine months of 2004, year-to-date results include net revenues of nearly $932 million, net income of $240 million, and diluted earnings per share of $1.80, all records for the first nine months of a year. Investment advisory revenues were up 24% or $49.5 million in the third quarter of 2004 versus the 2003 quarter. Increased assets under management was the primary cause of the change as average mutual fund assets under management exceeded $126 billion, nearly $23 billion higher than the $103 billion average of Q3-03. Average assets in other managed portfolios were $78.4 billion in the third quarter of 2004, up $15.4 billion versus the average of $63.0 billion in the 2003 quarter. The $212 billion of assets under management at September 30, 2004 include $130.3 billion in the T. Rowe Price mutual funds distributed in the United States and $81.7 billion in other managed portfolios consisting of institutional separate accounts, sub-advised funds, sponsored mutual funds which are offered to non-U.S. investors, and variable annuity portfolios. The $5.2 billion increase in assets under management from $206.8 billion at June 30, 2004 includes $5.8 billion of net investor inflows, with almost $2.8 billion added to the mutual funds and more than $3.0 billion to other managed portfolios, and net market depreciation during the third quarter of nearly $600 million. When added to the first half of 2004, net cash flows total $16.4 billion for the year-to-date period, with $9.3 billion into the mutual funds and $7.1 billion into the other managed investment portfolios. Assets under management have increased 11.6% from the beginning of 2004, including 8.6% from net cash flows during the first nine months of 2004. Mutual fund net inflows in the 2004 third quarter were supported broadly by the individual direct, defined contribution retirement plans, and financial intermediary channels, and were concentrated in the U.S. domestic stock mutual funds with over 75% of the total going to the Growth Stock, Equity Income, Mid-Cap Value and Capital Appreciation funds, each rated either four or five stars by Morningstar. Strong net cash inflows into other managed portfolios resulted from increased investment activity through financial intermediaries in the United States and Japan, and from institutional investors in Australia and Europe. Operating expenses in the third quarter of 2004 increased $32.6 million from the previous year's quarter to $185.3 million. Increases in compensation and related employment costs, in advertising and promotion costs, and in other operating expenses were the primary reasons for the change. On a sequential basis, operating expenses were up about $3.7 million from the second quarter of 2004, as increases in compensation costs were partially offset by reductions of other expenses, primarily advertising and promotion. At September 30, 2004, the firm employed more than 4,000 associates, up almost 7% since the beginning of the year to accommodate increased volume-related activities across the firm. The firm expects its advertising and promotion expenditures in the fourth quarter of 2004 will be up about 15% versus the comparable 2003 fourth quarter. The firm continues to monitor financial market conditions and will adjust its future advertising and promotion spending accordingly. To Boost Trades, Firms Use Price Cuts & Perks Ruth Simon & Jennifer Saranow, WSJ 10-26-2004 With trading volume down and competition heating up, online brokers are devising new ways to attract investors. At Charles Schwab, employees have been phoning former and current customers who are thinking about defecting in an effort to win back or retain their business. Fidelity Investments is teaming up with online auctioneer eBay Inc. in a partnership that gives special rewards to eBay members who open Fidelity accounts. And E*Trade and Schwab recently have launched credit cards that reward users with free stock trades. The latest moves come at a time when anemic trading levels have put pressure on brokerage firms' bottom lines. For most online brokers, trading activity slipped 20% to 25% in Q3 compared with the previous quarter, according to Richard Repetto, an analyst at Sandler O'Neill & Partners. With stock prices sagging, many investors are making fewer trades, while others have stopped trading online altogether. Just 5.9% of U.S. households will trade online this year, according to Forrester Research, down from 7.2% in 2000. Schwab has closed or consolidated more than 55 branches this year as part of its continuing cost-cutting efforts. But some of its competitors are moving in the opposite direction. Ameritrade Holding Corp. opened its first branch in February and has since added three more. Scottrade plans to add 43 branches in the fiscal year ending next September. E*Trade plans to roughly triple its branch locations over the next two years. Legg Mason's EPS Up 31%; Assets Under Management Up 31% press release of 10-21-2004 Net revenues for the quarter ended 9-30-04 were $568.0 million, up 24% from the September 2003 quarter. The previous record, set in the March 2004 quarter, was $559.6 million. Net earnings were $91.7 million, up 38% from a year ago, and down slightly from the record of $91.9 million set in the March 2004 quarter. Diluted earnings per share were $0.81, up 31% from a year ago. The previous record was $0.80 per share, set in the March 2004 quarter. Investment advisory and related fees were $393.9 million, up 40% from a year ago, and up 7% from $368.8 million in the June 2004 quarter, which was the previous record. Investment advisory and related fees for the quarter ended September 30, 2004 set a new record this quarter, up 40% from the year ago quarter and up 7% from June, the prior record. Revenues from retail and institutional securities brokerage, which includes commissions and principal transaction revenues, totaled $122.9 million, down 2% from a year ago. Commission revenues declined by 1%, as a decline in over-the-counter agency commissions more than offset increases in non-proprietary mutual fund and listed commissions. Commissions represented 15% of the firm's consolidated net revenues in the current quarter, down from 18% a year ago. Principal transaction revenues were down 3%, as increases in over-the-counter and European markets and institutional taxable fixed income transactions were more than offset by a decline in retail fixed income volume. Investment banking revenues were down 21% from a year ago, as a result of substantial decreases in retail selling concessions and corporate advisory fees. Net interest profit was $7.9 million, up 57% from a year ago, primarily due to higher average customer margin account balances and higher average interest rates earned on margin and firm investment balances, partially offset by an increase in the interest rates credited on lower customer credit balances. Other revenues were up 86%, primarily due to realized declines in the value of firm investments in the prior year quarter. The pre-tax profit margin on net revenues was 26.2% in the current quarter, up from 21.1% a year ago, and the effective tax rate decreased slightly, to 38.3% from 38.6%. The annualized return on equity increased to 21.7% from 17.5%. Home Page Factoids Previous Update
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