While Heads Roll, Debt Markets Quietly Heal

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On Thursday Citigroup became the latest bulge-bracket bank to shake up its management. A week after announcing a $5.9 billion third-quarter write-down, the company named Vikram Pandit, a former Morgan Stanley executive who joined Citi just six months ago, to head a newly created "institutional client group" that combines the investment banking and alternative investment units under one roof.

Three high-level casualties from Citi's reorganization are Randolph H. Barker and Geoffrey O. Coley, co-heads of global fixed income, and Thomas G. Maheras, a co-chief executive of the investment bank who oversaw fixed-income trading. Barker and Maheras are leaving the company, while Coley "was reassigned, given unspecified responsibilities," according to the New York Times.

The Times story says Citi wanted Maheras to stay on, but that he viewed the new structure as tantamount to a demotion. It also says that Maheras "retained the support of many traders and bankers underneath him," and suggests that those "loyalists" might ultimately decide to follow him out the door.

James A. Forese, who was head of global equities, was elevated to co-chief executive of Citi's investment bank, responsible for capital markets. Michael S. Klein remains as the investment bank's other co-chief executive.

Job Cuts at JPMorgan

Meanwhile, JPMorgan Chase said Thursday it's eliminating an unspecified number of jobs in its structured credit and leveraged finance businesses. An unofficial source told Associated Press the cuts are expected to represent less than 10 percent of headcount within the two units and the bank is trying to reassign the affected employees to other positions. The cuts won't include senior executives, AP said. The story says analysts estimate JPMorgan will take a $2 billion write-down for leveraged loans and mortgage investments, before any impact from hedging, when it reports third-quarter results next week.

Bank of America, like JPMorgan a major lender to private equity firms, is expected to take $1 billion in loan and debt write-downs when it reports on Oct. 18.

The downturn in high-risk credit markets that began with the sub-prime mortgage collapse has stuck Wall Street with an estimated $20 billion of asset write-downs and trading losses and some $300 billion of unwanted loans on the books.

Signs of Recovery

At the same time, however, there are several indications that the market for leveraged loans and other low-rated corporate debt has hit bottom and is gradually improving.

Wall Street has begun the arduous process of selling off the loans it had already committed to make when institutions' demand for such assets abruptly dried up in June and thereafter. The Wall Street Journal labeled the sale thus far of $30 billion of buyout-related loans "a surprising feat" on the part of the banks -- even though they had to slash prices on that debt by as much as 4 percent and reduce their fees in some cases, and another $280 billion or so of buyout loans remain to be sold.

A watershed may have come on Sept. 27, when banks led by Citi and Credit Suisse sold $9.4 billion of discounted loans from Kohlberg Kravis Roberts & Co.'s $26.4 billion buyout of First Data Corp. That was almost double the $5 billion that the banks had expected to sell.

Issuance of new collateralized loan obligations, a leading distribution channel for loans that finance private equity buyouts, also is on the mend. The $7.8 billion of CLO deals completed during September came close to last year's average monthly pace of $9 - $10 billion, Financial News reported last week. The low of $3.3 billion was reached in July.

Meanwhile, leveraged loan issuance soared nearly tenfold in September, to $16.5bn from $1.8bn in August, according to Financial News.

Small is Beautiful?

The buyout activity that generates the bulk of these loans has been rebounding too, although recently announced deals have been smaller than the $10 billion-plus mega-buyouts seen in 2006 and early 2007.

This past Tuesday, for example, KKR announced a $1.29 billion agreement to buy a Turkish shipping company. And a group of investors led by JPMorgan Chase agreed to acquire Britain's Southern Water Capital for $2.7 billion.

Those announcements "show that private equity firms are still able to raise money for takeovers and that confidence among chief executives to conclude deals remains strong," according to the New York Times.

Strong equity markets could reinforce that confidence. Both the Dow and the S&P 500 index set record highs in October.

All this offers hope that any further headcount reductions on Wall Street will be limited in number and won't extend into next year.

Do you think Wall Street has put the credit crunch behind it? Or is the worst yet to come? Add your comments below. Or, join our Debate on, "Are layoffs coming to Wall Street?"

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