Reps at Smith Barney, Merrill hunker down
Despite the huge losses reported by Merrill Lynch and Smith Barney parent Citigroup, brokers at the firms remain surprisingly positive.
Despite the huge losses reported by Merrill Lynch and Smith Barney parent Citigroup, brokers at the firms remain surprisingly positive.
Representatives feel that the companies will be able to work through losses on subprime mortgages and other debt, and repair their tattered balance sheets.
“We’re rolling with the punches,” said a Smith Barney rep in Southern California, who asked not to be identified.
Together, New York-based Merrill Lynch & Co. Inc. and Citigroup Inc. announced write-offs last week of $32.6 billion. The firms have also raised $21 billion of new capital in recent weeks by selling equity stakes.
In discussing fourth-quarter results, Citigroup executives said the economic environment continues to worsen. Likewise, John Thain, Merrill’s chief executive, told CNBC last week: “There’s no question the U.S. economy is going to slow [and the business environment] will be less attractive” this year.
“I’ve never seen anything like this, including the savings-and-loan crisis from the early ’90s,” said Elaine Horton, co-founder of The Horton Group Inc., a Studio City, Calif., industry recruitment firm.
“This is scary. Brokers are battered,” she said.
The turmoil today is different from the S&L crisis and the research scandal earlier this decade, when “brokers felt betrayed,” said a Smith Barney broker based in the mid-Atlantic region, who asked not to be identified.
For brokers, there’s “just this head-shaking disappointment [in management],” he said. “They ask, ‘How can you be so damned dumb not to see the housing bubble deflating?’”
CLEANING HOUSE
Despite warnings by the firms that conditions could worsen, producers feel that Mr. Thain and Vikram Pandit, the new head at Citigroup, dug deep to maximize the firms’ write-offs in the fourth quarter.
Mr. Thain told CNBC that Merrill wrote off “as much as we can” and that the problems in collateralized debt obligations and subprime debt are “behind us.”
At the same time, he acknowledged there could be further write-offs.
LOOKING TO THE EAST
The Smith Barney rep in the mid-Atlantic region said he’s been asking his executive clients what they would do to fix Citigroup.
“Everybody says [they’d] write off [as much as possible], blame the old [management], cut the dividend and set [themselves] up next year for a big fat raise,” this rep said.
“Absolutely that’s what [Citigroup] did” in coming up with the losses it announced last week, he added.
In addition, as the two firms, among others, raise capital from sovereign-investment funds, some critics outside the industry have raised questions about the politics of such financing.
But brokers see no problem.
One Merrill rep in the Southeast pointed to Merrill’s deal with Korea Investment Corp. and noted that Asia is “where the greatest growth is. That’s where they went for capital [and] they opened themselves up to [getting more] business down the road” from Asian investors, he said.
Some have raised concerns about the terms these outside in-vestors have received, but those concerns subsided somewhat as the market continued to slide, taking the stocks of financial firms down further.
Brokers realize the companies need to raise capital wherever they can get it.
“It speaks volumes about [Mr. Pandit and Mr. Thain] that they could raise multiple billions of dollars” in a short time, said Niels Leppert, managing director at Accella Research LLC in Orlando, Fla., a recruitment firm.
RUMORS PERSIST
Many brokers dismiss continuing speculation that Citigroup might have to dump Smith Barney to raise yet more capital or that Merrill will be forced to finally sell out.
The retail businesses at both firms remains strong — a point executives stressed during analyst calls last week — and a sale at this point would be something like selling the family jewels, observers say.
Still, some wonder about the future.
“I do think they’ve got to be shopping the company,” said the Southern California Smith Barney rep. “Anybody in [Mr. Pandit’s] situation would be looking to sell Smith Barney for some badly needed cash.”
Because brokers’ deferred compensation would vest if Smith Barney were sold, “there’s not a great fear about” a sale, said the Smith Barney rep based in the mid-Atlantic region.
At the New York Stock Exchange Inc., Mr. Thain was “a deal guy,” said a Merrill broker in the Southwest, who asked not to be identified. This rep said he wouldn’t be surprised to see a transaction.
But “there are not a lot of obvious good choices for a new owner,” Mr. Leppert said
“Smith Barney and Merrill Lynch are venerable brands and they couldn’t be sold without major ramifications.”
Meanwhile, with things going well in retail, “we figure [Merrill management] is not going to change the things we do,” said the Southeast rep at the firm.
“They’re not going to mess with our compensation or anything like that.”
Brokers said a few clients have expressed worries about the financial strength of the firms. However, for the most part customers are more worried about the market heading south and the impact of a recession.
Clients “understand there’s not a link between the ability to manage [their] money and the subprime meltdown,” Mr. Leppert said.
“Our phones are not ringing off the hook,” said the Smith Barney broker based in the mid-Atlantic region.
Dan Jamieson can be reached at [email protected].
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