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Systemwide crisis leaves Hub banks hobbling

By Steven Syre
Globe Staff / January 22, 2009
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Boston's biggest banks have big problems.

In just the last few days, Bank of America, which controls 20 cents of every deposit dollar in Massachusetts, received another bailout from the US government and analysts now believe it may need billions more in additional support. This week's news from State Street Corp. was so bad the company lost more than half its stock market value in a single day.

Citizens Bank appears to be on solid ground, but its distressed Scottish corporate parent is under increasing pressure and may have to sell the American banking unit to raise money. Sovereign Bancorp, the third-biggest bank in Massachusetts measured by deposits, is about to be sold to a foreign owner and may scale back its banking operations after the transaction closes.

Each of these institutions faces serious financial problems stemming, one way or another, from the credit crisis plaguing the nation's banking system. Assets they own, loans to individuals and businesses, or securities backed by those loans keep losing value as the economy worsens, forcing the institutions to carry ever-larger losses on their books.

Bankers had hoped asset values would stabilize after US Treasury and Federal Reserve officials bought securities and invested directly in financial institutions last fall. So far, that government support has not worked, and worsening economic conditions among their customers have only increased the prospects of losses on loans and other businesses these institutions conduct.

Analysts say none of the banks face problems that threaten their survival and customers' deposits are not at risk. But shareholders could lose even more money on their investment and ownership could possibly change hands. Job cuts at banks could increase.

"They're not in danger of ceasing to function," says Gerard Cassidy of RBC Capital Markets. "It's just, who is going to be the owner? The shareholders have taken it on the chin, and there may be more damage to come."

State Street, Citizens, and Sovereign declined to comment. Bank of America did not return calls seeking comment.

Bank of America reported a $1.8 billion quarterly loss last week, the first time the company lost money since 1991. The nation's largest bank by assets struggled with its own problems and huge losses at Merrill Lynch, the famous brokerage it acquired this month.

In October, Bank of America was among the first institutions to receive money from the government as part of the industry bailout. The $25 billion investment, in exchange for preferred shares, was supposed to bolster the bank's financial position and help it extend new loans.

But the scale of losses it reported last week showed just how much the value of its investments deteriorated in the last few months. So, for the second time, federal officials stepped in to help, with another $20 billion purchase of preferred shares and financial guarantees for $118 billion of Merrill Lynch assets.

Bank of America's problems are far from over. Last week, chief executive Ken Lewis warned of more red ink in the immediate future. Analyst Paul Miller of FBR Capital Markets said his "best-case scenario is that [Bank of America] does not return to profitability until the second half of 2009."

One response to Bank of America's money problems: job cuts. The bank had previously disclosed plans to eliminate 35,000 jobs over the next three years. It is now expected to fire 1,000 employees of its investment banking business this week.

State Street Corp. shares plunged 59 percent on Tuesday after the company warned shareholders that investments it holds are now worth $9.1 billion less. State Street argued that most of those investments were performing well and their prices should recover. But stockholders fear the big financial exposure could force the company to build a greater capital cushion to absorb losses, which would reduce the value of the shares they own.

"The concern is that because of the impact of these [potential] securities losses they are now undercapitalized," said analyst Nancy Bush of NAB Research. "Does that make a difference in the day-to-day operations of State Street? Not really." But someone will have to pay if State Street's potential investment losses turned into the real thing.

The day-to-day operations of State Street are unlike those of most banks that count on loans and deposits for business. State Street makes most of its money by serving other investment companies, acting as a custodian for securities and managing money for large institutions.

State Street is also on track to eliminate 1,600 to 1,800 jobs, or about 6 percent of the workforce.

Citizens Bank, which offers loans and deposits in 259 Massachusetts branches, is in relatively good shape, but its corporate owner, the Royal Bank of Scotland, has suffered massive losses.

The British government acquired 58 percent ownership of the Royal last October when it injected billions into the banking giant laid low by huge losses from debt securities. The bank warned on Monday that it may report a staggering $41 billion loss; its shares plunged 71 percent. The British government offered another round of aid which, if the Royal accepted, would result in taxpayers owning 70 percent of the company.

Most analysts believe the Royal will be forced to pull back its global banking franchise and look to sell whatever it can to raise money. Citizens appears to be high on the list of businesses that might attract buyers.

"Sometimes when your back is against the wall, you have to sell your best and most marketable asset," said Cassidy. "Citizens may be the most marketable asset they own."

Sovereign, expected to soon complete its sale to Spanish banking giant Banco Santander, has suffered through loan and investment losses, including a massive loss of nearly $1 billion on debt securities and shares of Fannie Mae and Freddie Mac. The company's stock has sunk 77 percent in the past year.

Last month, Sovereign revealed plans to cut 1,000 jobs by the end of 2009. Analyst Jim Sinegal of Morningstar Inc. said he wouldn't be surprised to see Sovereign pull back on lending.

Steven Syre can be reached at syre@globe.com.

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