Intensifying troubles at Bank of America Corp. and Citigroup are spawning new questions about a possible need for further government support, even for the likes of Wells Fargo & Co., which is perceived by many on Wall Street to be in relatively sound shape.
"I wouldn't be surprised at all if Wells Fargo comes back to the government for help," Jack Ablin, the chief investment officer at Bank of Montreal's Harris Private Bank, said in an interview Friday.
Other banking companies that closed major deals last year, including PNC Financial Services Group and JPMorgan Chase, might also be in line for taxpayer aid this year, Ablin said. "And I would think Treasury would look favorably on such requests," he said, "because regulators helped create this environment where a buyer is closing a deal after a few days of due diligence, when it normally would have spent months."
Such was the case when Wells agreed to buy Wachovia Corp. last fall, and it was the case when B of A sealed its deal to buy Merrill Lynch.
On Friday, Charlotte-based BofA confirmed it had turned to the government for a $20 billion lifeline to help it integrate Merrill, after the investment bank's assets plunged in value during the fourth quarter, catching BofA executives off guard.
B of A now has gone to the Treasury for $45 billion in total since last fall, matching the amount of taxpayer money pumped into Citi as its losses mounted over the course of 2008. The companies, which both operated in the red in the fourth quarter, reported combined losses of more than $10 billion on Friday.
Though analysts expect Wells to report a profit when it reports fourth-quarter results on Jan. 28, they have begun to question whether the blows that Wachovia will deliver to Wells' bottom line through the course of the year may worsen beyond initial expectations, given that Citi's worth continues to erode and now BofA finds itself saddled with heavier-than-forecast losses at Merrill.
Both Citi and BofA used their earnings presentations to disclose substantially more than bleak earnings. Citi confirmed widespread speculation that it would radically shrink itself and reorganize, and B of A revealed its need for government funds to help absorb Merrill.
"The market seems to be saying that" Wells may need to go back to the government, "given the movement in stock prices," Frederick Cannon, an analyst at KBW's Keefe, Bruyette & Woods, said Friday. Wells' stock fell 7.3% Friday. Citi lost 8.6%; BofA, 13.7%; JPMorgan Chase, 6.2%; and PNC, 9.9%.
"One of the key elements of the whole cycle is confidence and psychology," Cannon said. "The market has ranked and ordered the banks on overall capital strength and decided that, among the big banks, Citi is the weakest, then Bank of America. Wells and JPMorgan Chase are the next up. I'd say that the deal for Wachovia was much better priced than Bank of America-Merrill, but the economy is deteriorating so rapidly that there is no short answer" on whether more government capital or a backstop is needed.
Bob Meara, a senior analyst at Celent, the financial research arm of Marsh & McLennan Cos.'s Oliver Wyman consulting unit, said he agreed. It is "certainly conceivable and wouldn't be surprising" if Wells asked the government for more help, he said in an interview Friday.
"Wachovia is fundamentally different than Merrill, but evidence of growing unemployment could factor into a decision, if nothing else."
In an email Friday, Wells spokeswoman Julia Tunis declined to comment on the company's competitors but wrote that a key measure of the Wachovia deal's success will be integrating the company successfully in order to provide "outstanding service."
"Blending cultures; combining businesses, products, and systems; and changing names will take time two to three years because we want to do it right for our customers and team members," she wrote.
JPMorgan and PNC declined to comment. However, James Dimon, JPMorgan Chase's chief executive, apparently felt comfortable enough last week to defend his company's dividend despite citing higher credit costs in the fourth quarter and noting that Bear Stearns (acquired last year) cost the company "several billions" during the period.
"We never raised ours to a very high level," he said Thursday, "and we have an awful lot of earnings power to cover that dividend."
In an interview Friday, Citi's finance chief, Gary Crittenden, also declined to discuss the outlook for other companies. But he said, broadly, that he anticipates the government will step in again to help companies absorb unforeseen losses.
"The government will continue to play a pretty significant role," he said.
Some observers said that Wells, in particular, remains unlikely to need government aid to integrate Wachovia, even if the former Charlotte bank's troubled adjustable-rate mortgage portfolio weighs heavily on Wells' performance this year.
"It's impossible to know what's going to happen for sure, of course," Cassandra Toroian, the president and chief investment officer of Bell Rock Capital, said in an interview Friday. "But Wells is very, very conservative."
" I think concern about Wells, and there is that concern, is more about just pure fear that nobody is safe rather than any specific issue with the company," she said.
Moreover, Cannon said, barring any major surprises, Wells could, if needed, still take a key step to bolster capital and offset additional Wachovia-induced losses before turning to the government.