Three major U.S. banks – including Fifth Third Bancorp. (FITB) and Wachovia Corp. (WB) – got clobbered in recent days on the news that they’ve lost another $1.6 billion by making investments in the Citigroup Inc. (C) Falcon hedge fund that lost 75% of its value earlier this year.

It’s just the latest chapter in a continuing credit-crisis saga that’s gone on for so long that many investors have become numb to the news: They regard all new developments with a kind of "so what" attitude, or just ignore the news completely.

Believe me when I say that such a response is easy to understand. But hear me out as I underscore why investors must continue to watch this financial-services-sector saga closely. It’ll keep you out of trouble.

Let me explain …

The banks had invested the premiums from so-called "Bank Owned Life Insurance Vehicles," or BOLIs, which are designed to pay off when key employees die.

BOLIs, in case you are not familiar with them, are specialized policies typically purchased as an employee benefit. Banks use them to fund such expected costs as employee compensation and the accompanying benefits. Like most life-insurance-type policies, BOLI policies contain both an investment feature and a death benefit.

And that’s why banks like them.

Not only does the bank accrue investment earnings revenue because they own the policies (bank-owned is the "BO" component of "BOLI"), the financial institution also receives the death benefit.

And since neither the death benefit nor the increase in the value of the investment vehicle is taxed, BOLIs became the mother of all tax shelters for banks.

And that brings us to the core problem.

You see, by taking the investment portion of the life insurance policies and moving them from traditional portfolio choices into more risky hedge funds, a bank, or in some cases the insurance company that sold the bank the BOLI policy, could increase its investment return with an almost-instantaneous, performance-enhancing boost that looked good to regulators and shareholders alike.

Of course, if you’re a baseball fan – as well as an investor – you know very well that there’s a downside to "performance-enhancing" boosts, even though the dramatic performance gains make that dark side very tough to resist.

That’s clearly why Fifth Third, Wachovia and a still-unnamed regional bank risked a reported $1.6 billion of their respective BOLI programs, an anonymous source close to the matter told MarketWatch.com. Many banks, presumably including these three, use BOLIs to offset the costs of their employee benefit programs.

And they’re not the only ones….

BOLIs have proven to be so popular that banks – always looking for additional ways to "rev up returns," according to one news report – had more than $120 billion invested in them as of the end of last year.

But now the chickens are coming home to roost.

Fifth Third is suing Transamerica Life Insurance Co. – which sold it the policies – on the grounds that these investments in the Falcon fund were much more risky than the bank allegedly thought. Fifth Third also named Clark Consulting Corp. as a party in the lawsuit. Both Transamerica and Clark are subsidiaries of the Netherlands-based Aegon NV (ADR: AEG).

"As with many other credit-based investment products, the Falcon’s returns have been hurt by one of the most volatile periods for fixed income in recent memory,” said Citigroup spokeswoman Danielle Romero-Apsilos, Bloomberg News reported.

Filing a lawsuit is the Corporate America’s version of a high-school kid telling his teacher "the dog ate my homework."

It seems to me that if you weren’t so greedy in the first place – and had simply stuck to your knitting with prudent, risk-averse choices that didn’t require all this creative accounting – you wouldn’t have had a care in the world when Citi’s Falcon Fund lost three-quarters of its value.

The bottom line: There could be an entirely new wave of write-downs encroaching onto financial-services firms’ corporate earnings reports in the next few quarters to come. And, as was the case with the initial part of the subprime-mortgage debacle, some investors are likely to be very surprised at the identities of the early casualties.

But other investors will continue to say "so what?"

Investors who continue to follow these developments will do so with the understanding that this, too, shall pass – and some pretty profit plays will ultimately start to show themselves.

We’ll be there to tell you when that happens.

And it’s likely to begin well before you’d expect it.

After all, as the old Wall Street adage says: "Buy when there’s blood in the streets."

And if you’ve been listening to what we say, you’ll be able to say with confidence that none of that blood is yours.

News and Related Story Links:

• TheStreet.com:
  Citi Fund’s Woes Hit Wachovia, Fifth Third.

• The Australian [Business News]:
  Plunging Citi hedge fund hurts three big US banks.

• FINAlternatives:
  Citigroup Bails Out Troubled Falcon Hedge Funds.

• FindLaw.com:
  Bank-Owned Life Insurance Presents a Window of Opportunity.

• MassMutual Financial Group:
  Business Solutions; Executive Benefits: BOLI.

• Blog Site:
  Baseball’s Steroid Era.

• Wikipedia:
  Banned Substances in Baseball.

• Insurance Business Review:
  Aegon agrees to acquire Clark.

• Bloomberg News:
  Wachovia, Fifth Third Face Losses Tied to Hedge Funds

The chief executive officer of HSBC Holdings PLC (ADR: HBC), Europe’s biggest lender, yesterday (Tuesday) called on the U.S. Federal Reserve and other central banks to make fighting inflation a priority.

"Inflation is a long-term problem because there is no long-term will to solve it," Chief Executive Officer Michael Geoghegan said during an informal shareholders meeting in Hong Kong.

He went on to criticize central banks that have kept interest rates low in response to curtailed economic growth and weak housing markets. But due in part to low interest rates, inflation has escalated as costs for food and energy soar, dampening consumer spending in such markets as the United States – and causing major food shortages in other markets around the world.

Geoghegan also said he expects that it will take three years for HSBC to return its U.S.-based consumer-lending unit to a profit. Its U.S. operations, acquired from Household International, was heavily exposed to the subprime-lending market and resulted in HSBC taking a $3.2 billion dollar write-down in the first quarter of 2008. That’s on top of a $4.6 billion dollar write-down in the fourth quarter last year.

Back in November 2006, HSBC was the first bank to acknowledge losses on subprime mortgages.

The world’s biggest banks have suffered about $383 billion in write-downs and credit losses since the subprime crisis began in earnest last year, and have raised about $270 billion to replenish capital, Bloomberg News reported yesterday.

Over the weekend, UBS AG (UBS) – the Swiss banking giant seeking to raise $15.6 billion from shareholders to replenish a capital base eviscerated by such write-downs – revealed that it faces more losses from its mortgage-related holdings in both the global and U.S. markets, Bloomberg said.

In a prospectus for the rights offering that was posted on its corporate Web site, the Zurich-based UBS said it had losses on non-U.S. residential and commercial real- estate securities in 2007 and in the first quarter of this year and said those losses "could increase in the future," the Bloomberg report stated.

In the United States, lending remains tight and home foreclosures are at a record high, as overextended homeowners are having difficulty obtaining favorable refinancing terms.

Almost two-thirds of U.S. banks have raised their lending standards for mortgages, even to their most creditworthy borrowers, Bloomberg reported. For those with limited or bad credit history – the so-called subprime borrowers – three-fourths of banks have raised lending requirements, according to a U.S. Federal Reserve survey of senior loan officers published May 5.

Lending also remains tight in the United Kingdom, where mortgage approvals continued to be low in April, the British Bankers’ Association announced yesterday.

Home mortgage approvals increased to 38,704 in April from March’s historic low of 35,546, however, approvals remain below the 42,000 six-month average.

"March was the record low and April is the second lowest ever, so you cannot call that a recovery," Michael Saunders at Citigroup Inc. (C) told Reuters.

Added Saunders: "The housing market remains extremely weak."

A Changing Industry

Inflation isn’t the only problem facing the financial industry, according to the HSBC chief executive.

"The investment-banking model is flawed," Geoghegan said. "If banks aren’t strong, they should be restructured or taken over."

HSBC has been able to weather the subprime crisis better than some of its competitors due to its heavy focus on the Asian and emerging markets. The London-based lender has only had to dismiss 90 employees, or 0.1% of its total staff, as a result of the global credit crunch, according to Bloomberg-compiled data.

The European lending firm’s employee retention stands in stark contrast to The Bear Stearns Cos. Inc. (BSC), which has had to let 66% of its employees go as it eliminated 9,160 jobs in the process of being acquired by JPMorgan Chase & Co. (JPM).

Traditional financial centers such as New York, London and Tokyo are shedding jobs, while up and coming cities like Dubai and Hong Kong continue to add to their financial ranks.

Credit Suisse Group (CS), Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup have all relocated top rainmakers to Hong Kong as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven’t been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

"Investment bankers follow the money," Scott Moeller, a professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

And even with the many job cuts and losses the financial industry has already suffered, some think the worst is still to come.

"We’ve never seen write-downs like we’re seeing now and such big losses," John Challenger, chief executive officer of Chicago-based outplacement firm Challenger, Gray & Christmas Inc., told Bloomberg. "More job cuts will come. Even with the market’s optimism recently, I don’t think we can safely say that we’re out of the woods yet."

News and Related Story Links:

• Reuters:
  HSBC CEO calls for higher rates to fight inflation

• Reuters UK:
  April mortgage approvals 2nd weakest on record

• Bloomberg News:
  Wall Street Dismissals, Not as Bad as ‘01, Signal Worst to Come

• Money Morning:
  Major Lending Pullback Predicted by Maverick Wall Street Analyst Could Have Dire Implications for U.S. Economy

• Money Morning:
  Home Foreclosures Continue to Rise, But Biggest Jump Still to Come

• Money Morning:
  U.S. Housing Prices Suffer Worst Quarterly Decline on Record

• Money Morning:
  Hong Kong Gaining Prominence as Leading Global Financial Center.

• Money Morning Special Investment Research Report:
  Six Ways to Protect Yourself – and Profit – From a Global Food Crisis That’s Here to Stay.

• Dow Jones News/Smart Money Magazine:
  HSBC CEO: U.S. Debt Write-offs Could Grow.

• Bloomberg News:
  UBS Says More Losses on U.S., Global Mortgage Markets Possible.

Shares Washington Mutual Inc. (WM) surged almost 30% yesterday (Monday) on news that the mortgage lender is close to a deal with private equity firm TPG Inc. that would boost its balance sheet by $5 billion.

Seattle-based WaMu, as the thrift is often called, is the latest financial firm to seek an outside capital infusion due to heavy subprime-related losses. For the fourth quarter, the firm took its first loss in 10 years with $3 billion of write-downs due to mortgage and loan losses.  

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WaMu is the sixth largest U.S. bank, based on bank deposit assets, with a 3.2% share behind Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Wachovia Corp. (WB), Wells Fargo & Co. (WFC) and Citigroup Inc. (C), Chief Executive Officer Kerry Killinger said in a Jan. 29 investor conference. WaMu had $194.3 billion in deposits as of Dec. 31, Bloomberg News reported.

Arnold Danielson, chairman of Vienna, Virginia-based Danielson Capital, an adviser for financial services companies, told Bloomberg that the possible investment suggests TPG’s David Bonderman views the slide in financial stocks may be nearing an end.

"They apparently view this as a way to invest in WaMu with the idea of looking for a good flip within two or three years," Danielson said. "WaMu is essentially a savings institution that has been trying to play with Bank of America and Wells Fargo and they can’t keep up."

Unidentified sources close to the matter told The Wall Street Journal that the U.S. government was not involved in negotiating the deal, as it was with The Bear Stearns Cos. Inc. (BSC) bailout.

Shares of WaMu gained $2.98, a 29.3% increase, to close at $13.15.

News and Related Story Links:

• Bloomberg:
  Washington Mutual Gains on Speculation of TPG Support

• MarketWatch:
  Washington Mutual rallies on report of cash infusion

• Reuters:
  Washington Mutual near $5 bln deal with TPG-sources

• Reuters:
  Stock Market News & Quotes

Fifth Third Bancorp (FITB) is eying larger rival National City Corp. (NCC), the ninth-largest U.S. bank with approximately $150 billion in assets, as a potential acquisition target, according to several media reports.

National City was forced to take a $333 million fourth quarter loss due to an ill-timed push into the residential mortgage market with a heavy emphasis on subprime loans. The Cincinnati-based bank also recently expanded its retail branch network into Florida, an area that has been hit particularly hard by the slowdown in the real estate market.

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Cleveland-based Fifth Third is the 12th-largest U.S. bank with $110 billion in assets. The two banks key market areas overlap and a merger could potentially offer a sizeable cost advantage.

KeyCorp (KEY), another Cleveland-based bank with about $100 billion in assets is also considering an offer for National City, with the backing of private equity firm Kohlberg Kravis Roberts & Co.

But KeyCorp has a sizeable portion of its business in the Northwest and Rocky Mountain region, potentially making it a less than perfect fit for a merger with National City. A Fifth Third/National City merger would prove a formidable rival.

"Both of those companies because of the overlap with National City would be able to cut costs," Terry McEvoy, an analyst at Oppenheimer & Co. (OPY) told Reuters, referring to KeyCorp and Fifth Third. "Cutting costs would support a higher price should the one option National City decides be to sell out."

Any potential merger would be complicated and a deal has yet to be reached.

"While we never comment on potential mergers, we have consistently said that we are focused on strategic opportunities for in-market consolidation," a Fifth Third representative said, The Wall Street Journal reported.

National City declined to comment, other than to say the bank was investigating options with the help of hired advisor, Goldman Sachs Group Inc. (GS).

News and Related Story Links:

• CNNMoney:
  Fifth Third mulling bid for National City: report

• The Wall Street Journal:
  Fifth Third Eyes National City

• Reuters:
  National City in talks with Fifth Third-sources

Oppenheimer & Co. (OPY) analyst Meredith Whitney has slashed first-quarter earnings outlooks for the four largest U.S. banks – Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), Wachovia Corp. (WB) and Citigroup Inc. (C).

Whitney said in a report that there is "no clear end in sight" for the troubles plaguing the financial industry, saying she anticipates "the current credit cycle to be the worst in generations," Reuters reported.

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In October, she correctly predicted that Citigroup would cut its dividend and raise $30 billion in capital.

This time, she said that Citigroup stands to lose as much as $1.15 a share in the first quarter, more than four times her original forecast loss of 28 cents per share. For the year, she expects the bank to lose 15 cents a share after seeing a 75-cent-per-share profit earlier in the year. 

Investors in the other banks will see profits, but not as much as Whitney originally predicted. Bank of America investors will see 35 cents per share profit (down from 92 cents); JPMorgan will earn 70 cents per share (down from 86 cents); and Wachovia will take home 55 cents per share (down from 78 cents), Whitney wrote.

She also cut her 2008 profit per share forecasts for the banks: $3.25 from $3.65 for Bank of America; $2.90 from $3.20 for JPMorgan, and to $2.70 from $3.05 for Wachovia.

"Despite cutting estimates for financials by over 30 times since November, we are confident this will not be our last reduction in 2008," Whitney wrote. "As key mark-to-market indices trend lower, the housing market worsens, and the U.S. consumer comes under increasing pressure, we anticipate further downside to both estimates and stock prices."

Much of these reductions will stem from billions more in first-quarter writedowns.

Whitney expects Citigroup to write down $13.12 billion in the first quarter, with as much as $9 billion of that stemming from collateralized debt obligations (CDOs), which Money Morning Contributing Editor Martin Hutchinson says are responsible for much of the current credit crisis.

Also, Bank of America could write down as much as $4.29 billion in the first quarter. JPMorgan could suffer $2.83 billion in write-downs. And Wachovia could face up to $1.53 billion in write-downs, Whitney said.

JPMorgan might suffer $2.83 billion of write-downs, with nearly half resulting from leveraged loans, while Wachovia faces a possible $1.53 billion of write-downs, with about half tied to commercial mortgages, she said.

Citigroup: Still a Turnaround Play?

This shouldn’t rattle long-term investors, as some of the world’s savviest investors have pumped billions into Citigroup in the last few months – speculating that the beleaguered company is near its bottom.

Citigroup has already received cash infusions totaling $30 billion from a variety of sovereign wealth funds including Abu Dhabi, Kuwait, Singapore and Saudi Prince Alwaleed bin Talal.

You many remember Prince Alwaleed from the early 1990s, when he bailed out then-downtrodden Citigroup with a $600 million investment. It turned the company around and pocketed him $1 billion in the process.

These investors of course don’t like to hear reports such as Whitney’s, which sent Citigroup’s shares down $1.35 to $22.07, but they aren’t in it to make a quick profit.

Money Morning Investment Director Keith Fitz-Gerald warned in November that Citigroup might suffer downgrades such as Whitney’s. 

"Any of these things will take a while to work through the system, and Citi’s share price will be volatile," Fitz-Gerald said. "But the company remains globally diversified, and many portions of its business still reflect double-digit growth rates, particularly when it comes to China and Eastern Europe. That’s something that most investors in their rush to judgment don’t properly understand." 

News and Related Story Links:

• Reuters:
  Four largest US banks’ outlooks slashed-Oppenheimer

• Money Morning:
  How Wall Street Bankers Helped Create the Current Credit Crisis

• Money Morning:
  Why Some of the World’s Savviest Investors Are Buying – Gasp! – Citigroup

For the first two months of 2008, the financial sector has already lost 22,000 jobs, many of which will never return.

On top of that, analysts say another 30,000 finance jobs could be lost by the end of this year, as the credit crisis continues to unfold.

"A lot of firms are going through periods of restructuring and whole teams are being axed, especially in the credit sector," Dean Looney, a recruiter at Huxley Associates, told Dow Jones.

The majority of the cuts have come in the hard-hit mortgage sector, which has born the brunt of the lay offs with 18,000 total jobs shed in January and February.

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"The pace of mortgage business is not coming back, so you don’t need all these people," John Silvia, chief economist for Wachovia Corp. (WB) told CNNMoney.com.

New York City, home to Wall Street firms such as The Bear Stearns Cos. Inc. (BSC) and Goldman Sachs Group, Inc. (GS), will suffer sizeable losses according to Marcia Van Wagner, deputy controller for the budget for the New York City comptroller’s office.

Other cities with major financial presences, such as London, are not immune either. Banks across Europe are paring jobs or instituting hiring freezes.

However, now is an excellent time to be searching for a finance job in Russia or the Middle East.

Russia’s annual lending growth is growing at a 45% clip, The Wall Street Journal reported, making it the fastest-growing banking market of the BRIC countries – Brazil, Russia, India and China.

Russia’s economy grew by 10%. And that prosperity is fueling the consumer lending business, as Russia’s emerging consumer class seeks auto loans, credit cards and mortgages, The Journal reported.

Just this month, Barclays Bank PLC (BCS) purchased Russian bank Expobank for $745 million. In February, Paris-based Societe Generale (OTC:SCGLY) increased its stake in OAO Rosbank.

Meanwhile, in the Middle East, Persian Gulf states are increasingly shifting their investment strategies to prepare for the day when the region’s oil reserves run dry.

Middle East sovereign wealth funds, or "Global Cash Barons" as we like to call them, have been investing in such alternative investments as high-risk hedge funds and other alternative investments. What’s more, as recent reports underscore, these venture funds are taking direct stakes in major corporations – especially financial-service firms.

But at least one firm is turning its eyes to the West. Barclays’ President Bob Diamond wants to use the weakness in the U.S. market to make a major move into the American market. Diamond recently told analysts at a conference that problems for the major U.S. investment banks have given Barclays Capital, the group’s investment banking arm, an opportunity to become more competitive in the States.

"All of a sudden the U.S. has moved very high on our priority list," Diamond said in February, Dow Jones reported.

News and Related Story Links:

• Bloomberg News:
  Citigroup Cuts 2,000 More Jobs in Securities Division

• CNNMoney.com:
  Wall Street’s pink slip parade

• Dow Jones Newswire:
  Bankers Sit Tight In Europe As Hiring Freezes, Job Losses Abound

• Money Morning:
  Barclays Latest European Bank to Buy in Russia

• Money Morning:
  Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"

It’s time to take a close look at Citigroup Inc. (C).

That’s been the mantra of several commentaries here at Money Morning.

But now, Punk, Ziegel & Co. LP analyst Richard X. Bove has made much the same recommendation. As readers know from our news stories and investment research reports, we don’t usually put a lot of stock in what Wall Street has to say. But in the last six months, when it comes to Citigroup specifically and the beleaguered banking sector in general, Bove seems to have consistently made the right calls.

And since his latest opinion is in agreement with ours, we thought it worthy of note. According to Bove’s most recent commentary, Citi shares were selling below expected revenue for 2010, and well below stated book value. The biggest U.S. bank by assets is making some shrewd strategic moves and the latest market scuttlebutt holds that Citi’s capital strength is actually stronger than most investors believe, Bove told Reuters.

If those rumors are true, Citigroup will not take "mammoth" write-offs in the first quarter, meaning that Bove’s earnings estimates also would prove to be too low. Bove also noted that the stock was now selling below expected revenue for 2010 and well below stated book value.

"This is simply ridiculous,” Bove said. “Fear has replaced logic. Buy it.”

[To read Money Morning Investment Director Keith Fitz-Gerald’s investment overview of Citigroup shares, please click here. The report is free of charge].

The Background on Bove

Citi shares closed Friday at $19.78, down $1.29, or 6.12%, each. Citigroup shares are down 64% from their 52-week trading high of $55.55. But they are barely above their 12-month low of  $19.54.
When it comes to Citigroup specifically and the banking sector in general, Bove is one of a very small group of Wall Street analysts whose opinion is well worth consideration. As Money Morning reported, back in early October, Bove took the unusual step of cutting his rating on Citigroup to "Sell" from "Market Perform," and lowered his target price on the stock to $43 from the prior target of $53.

But now Bove has reversed course. And with good reason.

Chief Executive Officer Vikram Pandit is scrutinizing operations throughout the bank in an attempt to cut costs and boost earnings.

Pandit isn’t just restructuring Citigroup’s businesses – he’s also taking steps to make sure there’s no repeat of the credit missteps that landed the bank in its current financial jackpot. Pandit is tweaking Citi’s risk-management operation and has taken the dramatic step of putting Chief Financial Officer Gary Crittenden in charge of efforts to simplify the company’s organization and enhance efficiency.
Last Thursday, the bank said it would cut its home loan exposure by $45 billion, or 20%, a move that would reduce risk reduce risk and save $200 million a year in an overhaul of its U.S. residential mortgage business. Citigroup, which suffered a $9.83 billion fourth-quarter loss tied largely to mortgages, said it plans to fold its Citi Home Equity and Citi Residential Lending businesses into its existing CitiMortgage Inc unit.

Pandit is putting his new operating program in place and more announcements are likely as he reshapes and strengthens Citigroup’s businesses, Bove said.

"What Mr. Pandit is not doing is breaking up Citigroup into a number of large separate businesses,” Bove said. “He is committed to developing working relationships or cross selling among the company’s existing operations.”

Once again, Bove called it correctly.

Citigroup’s Strategies

In a meeting with analysts late last week, Pandit confirmed that Citigroup that the bank plans to shed “hundreds of billions of dollars” in assets to support a turnaround that could take several years to engineer, the Dow Jones News Service reported.

The company has raised about $30 billion to shore up its capital from investors that include Abu Dhabi and Singapore.

The bank also is reviewing its leadership team and plans to make changes before its next meeting with investors, which is set for May 9. At that time, Citigroup expects to disclose more details of the company’s restructuring plan, including which businesses will be kept and which would be sold or wound down.

“We expect hundreds of billions in assets to be shed,” said Susan Roth Katzke, a Credit Suisse Group (CS) analyst who was among the dozen or more sell-side analysts who met with Pandit last Thursday night.

Pandit wouldn’t estimate the proceeds that Citi would reap from selling the non-essential assets. But he did speak “generically about a sizable benefit he expects,” UBS AG (UBS) analyst Glenn Schorr told Dow Jones.

In a research note to clients, Schorr wrote that “[Pandit] didn’t say it, but we got the impression that management thinks this, plus future earnings, adds up to enough capital relief to offset any future write-downs.”

Citigroup also has begun reorganizing its Japanese operations and plans to sell off its stake in Japanese mutual fund company Nikko Asset Management Co. Ltd. The firm also sold eight consumer banking branches in West Texas and closed several underperforming branches across the country.

Credit Suisse’s Katze also expects Pandit to realize that there is a need for a “massive amount of streamlining,” as well as an upgrade of technology and systems infrastructure across the bank.

And while major sections of Citigroup are apparently being put under the microscope, she said that analysts “did not walk away with the impression that management intended to exit any major business lines in whole. [Brokerage] Smith Barney will not be for sale anytime soon, if management has its say.”

Moving On

The challenge with a turnaround is that while the company is working to make itself over, it still has to operate its ongoing businesses profitably.

Citi is doing just that.

The banking giant recently said it plans to hire more people in its Asian commodities business over the next two years as global raw materials prices have soared to record levels because of supply shortages and demand out of China.

The bank expects to roll out more investment products and risk-management services in such areas as coal, freight, agriculture and emissions, said Ananth Doraswamy, the bank’s regional head of commodities.

The bank is "investing in areas of growth," Doraswamy told The Financial Express.

Citigroup is boosting its presence there at the perfect time. Right now, money managers in Asia invest less than 2% of their assets in commodities. That compares with as much as 10% in the United States and Europe. Commodities outperformed stocks and bonds in the past year.

The banking company currently has 17 people in energy and commodities in Asia, including seven in oil and metals trading. Oil, gold and wheat have jumped to their highest-ever levels as raw materials gained for the seventh-straight year.

News and Related Story Notes:

• Reuters: Punk Ziegel Says Buy Citi on Rumor of Further Capital Strength.
• The Financial Express: Citigroup to Hire More Commodities Staff in Asia.
• Money Morning Investment Analysis: Avoid the ‘Resurgent’ Homebuilding Sector and Go Global for Profits.
• Money Morning Investment Research Report: Citigroup: Why This Turnaround Play Has Legs – Big Ones.
• Money Morning Investment Research Report: Why Some of the World’s Savviest Investors are Buying – Gasp! – Citigroup.
• Money Morning Special Investment Report: Global Investing: Has Wall Street Rigged the Game?
• Money Morning Special Investment Report: International Investing: Why U.S. Investors are “Boxed Out” of Big Global Profits.
• Smart Money/Dow Jones News Service: Citigroup Chief Signals Major Asset Sales.

Despite racking up billions of dollars in write-downs from subprime-related assets, Wall Street bankers managed another record year in fee revenue.

According to Bloomberg’s annual ranking of the 20 highest-paid investment banks, the top 20 managed to rake in $86.9 billion in advising fees for 2007, a 22% increase over 2006’s fees of $71.0 billion. Citigroup Inc. (C) led the pack with Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), JPMorgan Chase & Co. (JPM) and Merrill Lynch & Co. Inc. (MER) rounding out the top five.

Investment banks earn consulting fees by acting as advisors during merger and acquisition activity, as well as advising on the underwriting of newly issued bonds and securities. And the first six months of 2007 set a record for M&A activity with $2.4 trillion in deals.

"It was an extremely active year," Franck Petitgas, Morgan Stanley’s co-head of investment banking, told Bloomberg News. "Plentiful and cheap credit allowed quick and large transactions."

Citigroup earned $6.88 billion in fees last year, according to Bloomberg data, a 19% increase from $5.79 billion in fees for 2006. Goldman Sachs earned the second-highest level of fees by bringing in $6.66 billion, an 18% percent in crease from the prior year.

Morgan Stanley came in third with a 22% increase to an estimated $6.36 billion, from $5.22 billion in 2006. In fourth and fifth, respectively, JPMorgan Chase earned $6.23 billion, up 33%, and Merrill Lynch billed $5.55 billion, up 23% from 2006.

Last year was the fourth consecutive year investment banks set a record for advising fees, but it is unlikely 2008 will be the fifth.

"The market is lumbering through a long, painful liquidity situation," Roy Smith, a former Goldman Sachs partner who now teaches finance at New York University, told Bloomberg. "Things are going to be moving very slowly for a while."

News and Related Story Links:

• Bloomberg News:
  Citigroup ‘07 Fees Led Banks Heading for Worst Year Since ‘01

Bank of China Ltd. (PINK:BACHF) is denying earlier claims that it would report a loss for 2007 due to a potential $8 billion in write-downs resulting from exposure to subprime U.S. mortgage assets.

"The Directors wish to clarify that the views expressed in the article are unfounded, and the Bank is unaware of the source upon which such statements are based," Bank of China said a press release filed through the Hong Kong Stock Exchange yesterday [Wednesday], Reuters reported.

Citing unnamed sources close to mainland China’s second largest bank [based on assets], South China Morning Post reported on Monday that the Bank of China’s profits for 2007 would be much lower than expectations due to subprime losses. The paper even went so far to suggest the bank would be forced to take a loss, causing shares to tumble 6% the day the story ran.

However, analysts find it unlikely that Bank of China would write-down the entire $7.95 billion reported in the story. That amount represents the bank’s entire subprime exposure, which will more likely be written down over the course of several quarters.

"Given the U.S. subprime crisis is getting worse, I expect Bank of China to raise its write-off to between $800 million and $1 billion in the fourth quarter," JP Morgan (JPM) banking analyst Samuel Chen told Forbes. "If the bank writes off more than $1 billion, there is a possibility that it will generate a fourth-quarter loss."

But that possibility is far from the certainty the South China Morning Post story seemed to suggest. The bank’s statement assured investors that based on its, as yet, unaudited accounts, 2007 profits have grown from the prior year.

Bank of China is not scheduled to release full-year earnings until April.

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Various industries in Iran are beginning to feel the pinch as bankers around the world have cut back lending to satisfy the U.S. government’s demands.

U.S. efforts to halt Iran’s uranium enrichment program stalled in the United Nations, thwarted by Russia and China. But U.S. Treasury officials Stuart Levey and Robert Kimmitt have spearheaded a campaign to curb lending to a country the United States perceives as a global threat.

Banks such as UBS AG (UBS), Deutsche Bank AG (DB), and HSBC Holdings PLC (HBC) have taken heed, reducing lending to Iran, and in some cases, cutting it off all together.

"We do absolutely no business in Iran," Serge Steiner, a spokesman for UBS, Europe’s biggest bank by market value, told Bloomberg News.

Deutsche Bank, Germany’s largest financial institution, said in July that it was retreating from Iran as well.

"We have sent a letter to private clients in Iran who have an account with Deutsche Bank in Germany, and told them that we have to terminate our business relationship with them," Deutsche Bank spokesman Ronald Weichert said last year.

Iran is indeed an oil rich nation. It ships about four million barrels of crude a day and accounts for 5% of global supply. But an unnamed German banking analyst told Forbes that Deutsche Bank’s interest in the Iranian oil business was inconsequential.

"I think leaving Iran improves the business opportunities [for Deutsche Bank]," he said. "Iran is a small country. It’s not worth it to deal with Iran and then lose business in the U.S."

Six months ago, the Organization for Economic Cooperation and Development cut Iran’s country-risk rating for export credits to the second worst level. It now shares a category with Albania, Bangladesh and Mozambique.

The number of banks doing business with Iran has dropped substantially in the past two years. According to Bankers’ Almanac, the number of institutions used by Bank Saderat Iran, one of the country’s largest banks, have fallen from 29 in 2006 to 8.

The result of such precautionary measures has been detrimental to Iranian business, which has been deprived of funds necessary to acquire equipment and services. European Union data agency Eurostat reported that machinery and transportation equipment exports to Iran dropped 20% in the first nine months of 2007 from the previous year.

Financial institutions are in the midst of a global credit crunch and most are shying away from riskier investments. That doesn’t bode well for Iran, which lacks the technology and equipment to develop its natural resources on its own. Without foreign investment, Iran is an island.

"Banks tend to be very, very conservative creatures," Peter Djinis a former member of the Treasury’s Financial Crimes Enforcement Network told Bloomberg. Until they hear directly from the U.S. government that Iran can be trusted, "there will not be any wavering." 

News and Related Story Links:

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