- Morgan Stanley Smith Barney. Citigroup (NYSE:C) and Morgan Stanley (NYSE:MS) confirmed they're merging their wealth management units into Morgan Stanley Smith Barney. Morgan will pay $2.7B for a 51% stake with the option of taking full control after five years. Citi will book a pre-tax gain of $9.5B, and an after-tax gain of $5.8B. The joint venture will employ 20,390 brokers in over 1,000 firms, surpassing the 16,000-strong 'thundering herd' of brokers that Bank of America (NYSE:BAC) acquired in Merrill Lynch. However, some question the timing of the deal, wondering if creating the largest group of financial advisers is prudent when many investors and brokers are shying away from Wall Street giants and analysts expect a resurgence of 'boutique' brokerage firms.
- Citi keeps shrinking. Citigroup's (C) deal with Morgan Stanley (MS) is just one part of its radical restructuring operation. Abandoning the much-touted 'financial supermarket,' sources say Citi is preparing to break the mega-bank into investment and commercial units, essentially dismantling the 1998 merger between Citicorp and Travelers that created Citigroup. It will jettison several business units and scale down its proprietary trading, shrinking itself by about a third and focusing on large corporations and wealthy individuals instead of less-affluent customers. Sources say the changes will be unveiled when Citi released Q4 earnings next week. Citigroup declined to comment.
- Bernanke backs new efforts for toxic assets. In a speech at the London School of Economics yesterday, the Fed's Bernanke threw his support behind a big U.S. stimulus plan, saying "a substantial fiscal package... could provide a significant boost to economic activity." However, he also said that Obama's plan is 'unlikely' to revive growth on its own without 'a comprehensive plan to stabilize the financial system and restore normal flows of credit.' To that end, he raised three options for Obama's Treasury in the event that it actually decides to address troubled assets with TARP money: 1) public purchases of troubled assets, as previously proposed by Paulson, 2) government provision of asset guarantees in return for warrants, or 3) creating and capitalizing 'bad banks' that would purchase assets from financial institutions in exchange for cash and equity in them. (Read the full text of Bernanke's speech)
- HSBC at risk. Shares of HSBC (HBC) fell 7.3% in London after analysts at Morgan Stanley said Europe's largest bank may be forced to raise up to $30B and cut its dividend in half. Unlike most rivals, HSBC has not had to raise capital during the financial crisis, but the analysts warned its capital position has eroded: "Historically, HSBC has carried about 120 basis points of surplus capital at the group level - this has now all but gone at a time when we think it better for the buffer to have increased," they said, adding it now has "one of the weaker capital ratios in Europe and the second weakest in Asia."
- Yahoo turns to Bartz for rescue. Yahoo (YHOO) named Carol Bartz its new CEO, as expected, and announced that President Sue Decker is resigning. Talking up Bartz, chairman Roy Bostock said "she is the exact combination of seasoned technology executive and savvy leader that the board was looking for." Not everyone agrees. Bartz's appointment is largely viewed by Wall Street as safe but unspectacular, and some worry about her lack of professional experience with internet companies and online advertising. Known as a tough-talking straight-shooter, Bartz will be under immediate pressure from investors who have watched Yahoo's share price erode over the last year. Bartz was previously executive chairwoman of Autodesk (NASDAQ:ADSK) and had served as its CEO for 14 years.
- Deutsche's major Q4 loss. Deutsche Bank (NYSE:DB) warned of a loss of roughly €4.8B ($6.4B) in Q4 vs. profits of around €1B a year earlier. Germany's biggest bank, Deutsche lost around $1B on bad bets involving CDS-hedged bonds, and another $500M trading equities. CEO Josef Ackermann released a statement Deutsche Bank has "scaled back or exited trading strategies most affected by market turbulence." The bank cited 'exceptional market conditions' for its poor performance, notably in credit trading, equity derivatives and equities proprietary trading. Its official Q4 FY '08 earnings report is due Feb. 5. Shares -11% premarket (7:00 ET).
- Quotables. "I’ve never quite been in this situation before of getting a massive pay cut, no bonus, no longer allowed to stay in decent hotels, no corporate airplane," complained Bob Lutz, General Motor’s (NYSE:GM) Vice Chairman. "I have to stand in line at the Northwest counter. I’ve never quite experienced this before." Poor guy.
- Barclays lays off workers, again. Barclays (NYSE:BCS) is cutting around 2,100 jobs globally in its investment banking and money management units. The bank had built these units aggressively over the last five years but now says it wants to be 'appropriately sized, given the current market conditions.' The move will likely raise speculation about further cost-cutting in Barclays' retail and corporate banking division. Shares -14% premarket (7:00 ET).
- RBS sells China stake. In line with yesterday's whispers from unnamed sources, Royal Bank of Scotland (NYSE:RBS) confirmed it has sold its 4.26% equity stake in Bank of China for around $2.3B. "The decision to sell the stake forms part of the ongoing strategic review of the group's businesses announced in October," RBS said in a statement.
- U.S. keeps its Triple-A. S&P affirmed its AAA rating for the U.S., but said risks to the country's top sovereign rating have increased "noticeably" since September. S&P's "reasonable worst-case scenario" sees net general government debt rising from its 2008 level of 42% of GDP to as much as 75% by 2011. On the plus side, S&P said U.S. strengths include one of the most flexible economies of any nation and the fact the U.S. dollar is one of the world's most used currencies.
- Retail sales drop. Retail chain store sales fell 2.3% from a week ago, ICSC reported, and fell 2.2% Y/Y. "A seasonal weakening in traffic, less gift-card redemption and adverse weather all came together to weaken demand sharply for the first full week of 2009." Redbook reported a 2.3% decline in the first week of January vs. the previous month, while sales were down 1.9% Y/Y.
- Budget deficit balloons. The U.S. Budget Deficit swelled to a record $485B in FQ1, compared to a deficit of $455B for all of fiscal 2008. December's budget shortfall was $83.6B, vs. a $48.3B surplus a year ago. Congressional estimators project an unparalleled deficit of $1.2T for 2009, not including any Obama stimulus.
- Consumer confidence? What's that? A whopping 65% of Americans now rate the economy as 'poor,' a record in 23 years of weekly polls, according to ABC News. Another 29% say it's 'not so good' for a net negative rating of 94% - matching the all-time high. ABC's Consumer Comfort Index remains at a dismal -49.
- Trade balance. November's Trade Balance of -$40.4B, down from October's -$56.7B, was less than economists' $51B forecast. Exports: $142B (-$8.7B); imports: $183B (-$26B). For now, the global slowdown is crimping U.S. demand for exports more than it is foreign demand for U.S. products.
- Asia markets closed in the green. Nikkei +0.3% to 8,438. Hang Seng +0.3% to 13,705. Shanghai +3.5% to 1,929. BSE +3.3% to 9,370.
- In Europe at midday, London -2.3%. Paris -1.3%. Frankfurt -1.95%.
- U.S. futures: Dow -0.7%. S&P -0.8%. Nasdaq -0.85%. Crude +3.1% to $38.94. Gold +0.7% to $826.30.
Wednesday's Economic Calendar
7:00 MBA Mortgage Applications
8:30 Retail Sales
8:30 Import/Export Prices
10:00 Business Inventories
10:30 EIA Petroleum Status
1:00 PM Fed's Stern speaks on macroeconomic policy
2:00 PM Fed's Beige Book
Notable earnings after Wednesday's close: XLNX
Seeking Alpha editor Eli Hoffmann contributed to this post.
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