Monday, November 12, 2007

Investment Banks - Strategic Issues

Bank of America CEO committed to investment bank

NEW YORK, Nov 1 (Reuters) - Bank of America Corp Chief Executive Kenneth Lewis said he is committed to retaining an investment banking platform, after poor trading results contributed to a 93 percent slump in third-quarter profit from corporate and investment banking.

Lewis' comments, in a speech to be delivered Thursday, may dampen speculation that the second-largest U.S. bank might consider closing or jettisoning its investment bank.

Quarterly corporate and investment banking profit fell to $100 million from $1.43 billion a year earlier, hurt by a $1.46 billion trading loss. Several top executives at the unit are leaving the company, including President Gene Taylor, as part of 3,000 job cuts companywide.

Lewis said Bank of America is studying changes in commercial, corporate and investment banking, but said: "I want to be very clear on this point: We are in the investment banking business for our clients and our shareholders. (The) platform that emerges from this process will be the right platform for our business, the right platform for our clients, and one that enables us to deliver the returns our shareholders expect and deserve."

NEW YORK (MarketWatch) -- Bank of America Corp.after suffering through a third quarter in which its investment bank dragged down the company's profits, is planning potentially major strategic changes to the division, Chief Executive Ken Lewis said Thursday.
"What I can't say is that we'll stay the course," Lewis said on a conference call with analysts. "The probability of changes and eliminations of some businesses and very high."
He added that "some scaling back" is in order. "I've had all of the fun I can stand in investment banking at the moment," he said. "So to get bigger in it is not something I really want to do."
Lewis said he expects to complete an internal review this month and will publicly outline his plans for the investment bank's future either later this year or in January when the bank reports fourth-quarter results. In the meantime, he warned analysts that the investment bank's results are unlikely to return to the lucrative levels of earlier this year.
Charlotte-based Bank of America has been pouring money into building out its investment bank. In the first half of the year, it added $3.2 billion to the bank's bottom line. But its profits shriveled to $100 million in the third quarter. The 93% drop stemmed from more than $1.4 billion in trading losses, especially in fixed income.
While most of Wall Street was hit hard by this summer's credit crunch, Bank of America suffered disproportionately. Its fixed-income trading losses, for example, appeared commensurate with those of much larger rivals such as Citigroup Inc. (C). The results deflated the company's overall earnings and helped push its shares down as much as 4% Thursday. Shares recently fell 2.9% to $48.58.
Lewis didn't offer excuses for the investment bank. Two-thirds of the third-quarter problems were caused by "mistakes in judgment," not the turbulent market environment that impacted banks across Wall Street, he said. "We bear a lot of the blame, much more so than just market conditions."
Joe Price, Bank of America's chief financial officer, said that the trading losses were largely a result of hedges that didn't work as intended. Most of the losses stemmed from trades the bank was executing on behalf of clients, although the bank's traders also placed a "couple" of their own bad directional bets, Price said.
Price suggested that Bank of America will rein in its risk appetite as a result of the losses. "While we're comfortable with our overall risk-management practices, these levels of breakdowns in traditional pricing relationships and correlations...will influence future determinations of how much risk we carry," he said.
Lewis said Bank of America is currently "in the throes of wrestling with" projections for a realistic level for investment-banking revenue. He said 2008 revenue will most likely fall between the levels of 2005 and 2006, which were well below the investment bank's performance in the first half of 2007.
While some parts of the debt markets are showing signs of life after this summer's freeze, other areas will be slower to recover, Price said, echoing comments this week from executives at other banks.
Price also provided details about the bank's remaining exposure to assets that have been in the spotlight since the recent credit crunch. He said that as of Sept. 30, the bank was holding about $28 billion in leveraged loans, many of which were made to finance the now-deceased buyout boom. The company has about $2 billion in subprime mortgage loans in its warehouse awaiting securitization. Its pipeline of collateralized debt obligations stood slightly above $1 billion at Sept. 30, Price said.
Separately, Bank of America, which beefed up its reserves for loan losses in the third quarter, said it is bracing for higher home-equity chargeoffs and expects losses to continue to rise in small-business loans. Those are both areas where Bank of America has been expanding aggressively in recent years.
Like many other banks, Bank of America is grappling with eroded capital levels, due to its acquisitions of U.S. Trust from Charles Schwab Corp. (SCHW) and LaSalle Bank from ABN Amro Holding NV (ABN). Price said that until those capital levels get replenished, likely late next year, the bank won't buy back many shares, except to offset stock that's issued to employees.

NEW YORK, March 19, 2007 (Reuters) - Top-ranking UBS dealmaker Ken Moelis resigned amid an internal debate over how aggressively the Swiss bank should pursue leveraged deals, UBS' chief of investment banking, Huw Jenkins, said on Monday.

But Jenkins said the bank remains a destination for top dealmakers, and one poised for its best year.

UBS has grown quickly in the past six years to become a top player in mergers and equity underwriting. But the bank lags U.S. rivals like Goldman Sachs ( in the lucrative realm of backing and investing in leveraged buyouts.

"The impact of Goldman Sachs on the marketplace and the desire for increased risk-taking is a very active debate within this place," Jenkins said in an interview. "Ken thought we could have been quicker about going into more illiquid markets than we particularly wanted to be. It was a case of speed versus any philosophical difference."

Earlier on Monday, UBS announced that Moelis, who helped build the bank into a force in U.S. mergers and acquisitions, has quit to pursue other opportunities. Terms of the separation have not been disclosed, but Moelis is expected to remain with the bank during a transition period. Moelis declined to comment.

By many standards the Swiss bank has achieved success on Wall Street that eluded other European banks, ending last year with the No. 4 share of banking fees. UBS now employs some 3,000 bankers and support staff worldwide.

Yet UBS has suffered a series of departures, including the resignation last week of global investment banking co-head Jeff McDermott, a Moelis lieutenant. Blair Effron, vice chair of investment banking, left last year to start a boutique advisory firm, while managing director Russell Chambers announced earlier this month he was heading to Credit Suisse

But Jenkins told Reuters he is confident the departures of Moelis and McDermott do not presage an exodus.

"Sure there are always differences of opinion on how to prioritize risk, there are always differences of opinion of how to go about creating more streamlined processes," Jenkins said. "But I think the senior bankers within the investment bank are more confident than ever about our ability to deliver on behalf of the client."

The debate comes as other Wall Street banks, watching Goldman reap billions by committing its own capital in deals, scramble to follow suit. Morgan Stanley and Merrill Lynch, for example, returned to the business years after exiting to avoid conflicts with banking clients.

UBS does not have a private equity business and last year spun off Dillon Read Capital Management. For now, the Swiss bank is not changing its stripes.

"We have a very client-centric model. We don't do principal investing," he said. "At the end of the day, you just have to respect that as a different business model. Some people will want to go to more of a principal investment model and we have to respect that decision."

Jenkins says UBS has taken steps to become more responsive. Moelis for example played a key role in a UBS plan to expand relationships with LBO firms and hedge funds. Those efforts are starting to pay off, evidenced by the bank's role in a number of highly leveraged transactions.

Still, Moelis departure reflected one individual's frustration with the pace of change, he said.

"Ken saw the opportunity to pursue that expansion more aggressively than perhaps the organization was willing to at this stage of the cycle," Jenkins said. "Is there something structurally wrong with the place or a malaise in the place? My view is absolutely not."

4. A Message from the President & CEO of Mizuho Corporate Bank, Ltd.

Building a Presence as a Global Investment Bank

As we accelerate the pace of the implementation of our global strategy, we are entering promising new business fields.

Building on our strong client base as the bank at the core of Mizuho's Global Corporate Group, as our "Investment Banking Declaration" and "Global Declaration" suggest, we are aiming to globally deploy a business model that promotes and combines our commercial banking and investment banking capabilities.

Our "Global Declaration" and Its Results
We followed the "Investment Banking Declaration" that we announced in 2005 with our "Global Declaration," which we announced in Jun 2006, and began initiatives to become a leading global bank.
In line with this objective, we opened a branch in New Delhi, India, in May 2006, and followed this by opening another five overseas branches and relevant office, and one representative office. In fiscal 2007, we are continuing these initiatives to expand our global network coverage. Moreover, on Jun 1, 2007, Mizuho Corporate Bank (China) began operations, thus making us the first Japanese bank to offer services through a banking subsidiary in China. The advantages of opening this subsidiary include the ability to provide services in yuan at all our branches in China. We also anticipate that this will make it easier for us to obtain authorization to open new branches and obtain licenses for entering new business activities in China.
On the other hand, for those geographic and product areas that our group's network does not cover, we are supplementing our capabilities through stronger strategic alliances with leading financial institutions by concluding business cooperation agreements and making equity investments in those institutions.
Another development important for the global expansion of our activities was the acquisition of financial holding company (FHC) status in the U.S., which we obtained from the U.S. Board of Governors of the Federal Reserve System in Dec 2006. As a result, by combining our banking and securities capabilities with those of Mizuho Securities, we will be able to expand the coverage of our investment banking operations from Japan, Europe, and Asia to the U.S. — the world's largest financial market.

Stepping Up Our Global Strategy
Looking at recent economic and financial market trends in Japan and overseas, the Japanese economy is continuing on a gradual expansionary trend. Our major Japanese corporate clients are clearly focusing on two strategic objectives. The first is to consolidate their marketing and operating positions in Japan and the second is to seek new growth in overseas markets. Overseas, along with the expansion in the international M&A market and in the volume of money in global funds, the markets for investment banking services in the U.S., Europe, and Asia are showing signs of significant growth.
With these recent developments in mind, we have resolved to implement a bold global strategy that will differentiate Mizuho and give us a competitive edge going forward.
Specifically, our global strategy has a number of key elements. The first is to proactively develop our investment banking operations on a global scale. We already have the top market share in Japan's syndicated loan market and are among the international market leaders in project finance (ranking number three internationally in 2006) and leveraged finance/management buyouts (ranking number five in Europe in 2006). Our next major initiative, subject to the approval from relevant authorities, will be to merge Mizuho Securities with Shinko Securities to form a full-service securities company that will rival the top three Japanese securities companies. In addition, our FHC status will enable us to offer a full line of securities services through Mizuho Securities (USA) in the U.S.
Building on our enhanced capabilities for offering financial products and stringent compliance systems, we will strengthen our ties with Mizuho Securities and offer cutting-edge, comprehensive financial solutions globally to meet the diverse and sophisticated financial needs of our clients.

Entering New Business Fields
The second element of our global strategy is to create and develop new business fields. Mizuho Corporate Bank was the first Japanese bank to make a full-scale entry into the alternative investment management business, offering these investment products to professional investors, including institutional investors and pension funds. Beginning in the current fiscal year, we have formed a specialized unit for alternative investments, and, in April, together with Mizuho Securities, we established Mizuho Alternative Investment in the U.S. as a strategic asset management subsidiary for dynamic development of this business. In addition, in our sales and trading departments, we have expanded our product lineup beyond interest-rate and currency products to span commodity and credit products.
The third element of our global strategy is to create a management infrastructure appropriate for the global development of our business mission. For example, to build a business platform to support our growth strategy, we are upgrading our information infrastructure and working to promote the speedy sharing of information within our organization as well as the transition to a "paperless" working environment. We are also implementing measures to enhance the sophistication of our decision-making flow.
In parallel with these initiatives, in personnel management also, we are executing changes to enable us to further evolve our business model. To train and recruit diverse human resources in Japan and overseas, we are enhancing policies aimed at further promoting the activities and contributions of national staff members and female employees.
Moreover, in the area of compliance, we are fully aware of our corporate social responsibilities as a financial institution, and are therefore putting into place measures to substantially strengthen our compliance management frameworks and make them fully capable of supporting business development on a global scale.

Competition among the world's financial institutions is growing ever more intense. To establish a presence as a global investment bank, it will be essential to structure a business model of our own founded on strong risk-management capabilities and a strict compliance framework. We will move into the full-scale implementation of the global strategy that I have outlined and take up the challenge of attaining the objective of "real globalization." The senior executive officers and employees of Mizuho Corporate Bank share a common awareness and will promote the development of the bank's model going forward. Accordingly, we look forward to earning your ongoing support as we work to building our presence as a world class, global investment bank.

Jul 2007
Hiroshi Saito
President & CEO
Mizuho Corporate Bank, Ltd.

Basic Strategy for the Securities Business
In order to pursue greater synergies by strengthening cooperation between group banks and securities companies and exploiting its overall strengths, the group has promoted integrated banking and securities operations based on customer segmentation, while ensuring that the securities companies make the most of their capabilities and advantages.

Strengths and Characteristics of the Group's Three Securities Companies
Mizuho Securities
MHSC is a wholesale securities company that offers high-quality, specialized solutions in response to the wide-ranging needs of domestic and international institutional investors, corporations, financial institutions and public sector entities.
It occupies a top position among the major securities companies in the area of bond underwriting, and boasts a strong presence in bond sales as well. In the equity-related business, it offers a full range of services and has raised its market standing to a position close to that of the major securities companies.
It has already established a top-level presence in the area of M&A and other financial advisory services for Japanese clients, and has a track record in structured finance that puts it among the market leaders in Japan.
MHSC also aims to satisfy the diversified needs of clients who are active at home and abroad by offering seamless domestic and overseas business services through its network of overseas securities subsidiaries.

Mizuho Investors Securities
MHIS is working to expand its cooperative channels with MHBK by establishing a network of 100 joint branches. It is also proactively strengthening ties with the group, promoting a securities sales agency business with MHBK, a trust business with MHTB as an agent, and its IPO business through cooperative efforts with other group companies. With this as its operational base, MHIS responds to customers' asset investment needs by offering various securities-related solutions, and to their funding needs by offering stock and bond underwriting services and consulting business in connection with their capital structure planning. In this way, it aims to become the customer's first choice as the most trusted securities company by providing carefully-tailored, high-quality products and securities services in a speedy manner.

Shinko Securities
Shinko Securities is a comprehensive securities company with a nationwide network that offers a full range of services from underwriting to brokerage. Through dynamic and efficient cooperation with group companies, it uses its full-line functions to provide middle market/retail customers with a wide selection of financial products and services.
Shinko Securities has started to handle wrap accounts in its securities sales agency business with MHBK, and has launched a trust business with MHTB as an agent.

Subject to the approval from relevant authorities, MHSC and Shinko Securities will merge as of a target date of Jan 1, 2008. Mizuho Securities, the merged new entity, will offer competitive cutting-edge financial services on a global basis through the combining of MHSC's global investment banking business platform and Shinko Securities' nationwide client base and business network as full-service securities company covering all of Japan.

Basic Strategy for the Asset Management Business
In the investment trust and pensions markets, we aim to become one of the world's leading players in terms of both quality of services and assets under management.
On Jul 1, 2007, Dai-Ichi Kangyo Asset Management and Fuji Investment Management merged to become Mizuho Asset Management.
Our asset management companies, Mizuho Asset Management and DLIBJ Asset Management, both make the most of their individual specialties in offering high-quality products and services to both group and non-group clients. In the distribution of investment trusts, they offer a widely varied line-up of products designed to meet the increasingly complex and sophisticated needs of clients.
In the Japanese defined contribution pension business, we are channeling our total resources into providing solutions for corporate management issues by supporting the formation of assets for individuals to enjoy in their retirement.

Basic Strategy for the Trust Business
The group recognizes that the asset management business is a growth sector and is working to deliver the best solutions to clients through MHTB, which offers a full range of trust services as the core Global Asset & Wealth Management Group, and Trust & Custody Services Bank (TCSB), which offers high-level custody services.
MHTB quickly and accurately responds to the increasingly diversified and sophisticated needs of today's clients by offering various products and services together with group companies through the agent system and with external entities through business tie-ups, and also by holding joint seminars.

Mizuho Trust & Banking
MHTB aims to become the most trusted trust bank by accurately meeting the diversified needs of clients through original products and services that draw on the high level of expertise and rich know-how it has built up over many years.
MHTB responds to the asset management and investment needs of a wide range of individual clients by offering consulting services in connection with assets in general, including financial assets and real estate. It also offers asset investment products such as "Always" and "Chochiku no Tatsujin" which are money trusts based on securitized automobile loan assets, and asset management products such as "Asset Management Trusts" for centralized management of financial assets.
In the area of testamentary trusts, MHTB's experienced professionals have earned an excellent reputation for their carefully-tailored services. MHTB is offering services to an even larger number of clients through its network of agents at MHBK, and has one of the highest balances of such trusts in the sector. For corporate clients, MHTB cooperates with group companies in offering optimal solutions in such areas as real estate, securitization, pensions, the stock transfer agency business and asset management. In particular, through its sophisticated consulting services, MHTB supports clients in formulating effective business strategies to deal with management issues arising from changes in accounting systems and revisions to the Company Law.
MHTB will continue to identify clients' needs and to satisfy them by proactively developing new products and services, and creating new trust business.

Trust & Custody Services Bank
Based on its advanced systems infrastructure and highly transparent internal control systems, TCSB provides financial institutions, institutional investors and other clients with high-quality, high value-added trust and custody services, and outsourcing for comprehensive asset administration services. TCSB also responds to clients' high-level custody requirements through participation in the "account-management institution business" developed in response to securities settlement systems and infrastructure reform in Japan, and through the provision of securities lending services.

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