Repaying U.S. and Reaping Bounty in Fees - By Andrew Ross Sorkin

<blockquote>'In the case of Citigroup, its enormous size made it especially difficult. (Still, in an age of Wal-Mart and squeezed margins in just about every industry in the nation, it is surprising that Wall Street has been able to hold onto such large bounties.)'</blockquote>


Repaying U.S. and Reaping Bounty in Fees

By Andrew Ross Sorkin
December 22, 2009
Dealbook Column
Source

Repaying U.S. and Reaping Bounty in Fees

Here comes another payday on Wall Street, just in time for the holidays.

No, I’m not talking about the big bonuses you’ve been reading about already.

I mean a new one, courtesy of companies like Citigroup, Wells Fargo and Bank of America returning their federal bailout money and raising new capital to replace it.

And that means big fees for all the banks that will hawk these new shares for themselves and their rivals.

More than $50 billion of new capital was raised as part of the effort by the biggest banks to repay the money from the Troubled Asset Relief Program and get out from under the thumb — and pay caps — of Washington.

All told, December was the biggest month in history for offerings, according to Thomson Reuters.

Here’s what the post-bailout bonanza means for all the banks that helped find investors for the new shares: Bank of America’s $19.3 billion offering generated $482 million in fees; Citigroup’s $17 billion offering resulted in $425 million in fees; and Wells Fargo’s $12.2 billion offering led to $275.6 million in fees. (The banks paid themselves roughly 2.5 percent of the offering price.)

Other banks were beneficiaries as well. As part of the Citigroup offering, for example, Citi syndicated part of the sale to Morgan Stanley, BNP, Lloyds and ING. (Why can’t Citi do it alone? The answer is that to raise that kind of money, you need a little help from your friends, some of whom are better at raising money than others.)

Those fees are likely to factor into the bonuses for the investment bankers involved.

“Ironically, the mechanics of exiting TARP turned out to be lucrative business for equity underwriters this year,” said Matthew Toole, director of the Deals Intelligence unit of Thomson Reuters’ Investment Banking Division.

Mr. Toole ran some numbers and turned up a startling figure: fees over the last two years for follow-on share offerings among financial companies in the United States totaled $5.4 billion. That’s more than the $4.8 billion that was raised in the previous 20 years.

There’s one wrinkle in the case of Citigroup, and it is good news. When the Treasury Department begins to unload its shares in Citigroup — it originally said last week that it planned to sell $5 billion worth, but then said it would delay the sale — the taxpayers are not likely to be asked to pay the fees. Citigroup has privately signaled that it will pay the fees, though — wait for it — Citigroup will participate in the offering itself, so it will in effect pay fees to itself.

These outsize fees are even providing a bit of funhouse-mirror distortion to so-called league tables, which rank banks based on the size of the deals they handle each quarter.

Banks that were in such bad shape that they needed the government’s aid are now, perversely, getting extra bragging rights from raising money to replace the capital they have returned to the government.

Consider this: Citigroup, which has long been an also-ran when it comes to stock offerings, is ranked No. 4 by Dealogic, which tracks financial data, leapfrogging the likes of stalwarts like Morgan Stanley.

Why? Not because it worked for the largest number of clients on offerings this year, as the measurement usually implies, but because of the work it is doing on its own offering.

By the way, Thomson Reuters, which similarly tracks the data, doesn’t give credit to banks doing their own offerings, so Citigroup is further back in the pack. Which ranking do you think Citigroup will use in its brochures for clients next year?

(While we’re on the subject of rankings, here’s an interesting aside: this year Dealogic anointed Goldman Sachs the top mergers adviser, while Thomson Reuters said the top firm was Morgan Stanley. Goldman Sachs has historically used the Thomson Reuters numbers. But guess what? Now Goldman bankers are sending out the Dealogic numbers.)

On the fees from the post-bailout offerings, there is an element in all of this of just moving money from one pocket to another.

After all, paying yourself a fee just means the cost of the offering is lower than if you had used an outside bank to do the work. It’s not real revenue.

But when bonus time comes, and when employees tally up the work they did for the year, they will be compensated for their work on these offerings as if they had worked for an outside client.

That’s not to say that an offering like this, especially at this size, doesn’t require real work. Indeed, most banks typically take 1 to 5 percent of the total offering as a fee for rounding up money from investors. The harder the offering, the more money they usually seek.

In the case of Citigroup, its enormous size made it especially difficult. (Still, in an age of Wal-Mart and squeezed margins in just about every industry in the nation, it is surprising that Wall Street has been able to hold onto such large bounties.)

While many on Wall Street may hold a dim view of the Treasury, one banker I spoke with said he had a message for Timothy F. Geithner: “Thank you.”

The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.