As Citigroup Inc. was dealing with billions of dollars in subprime bad credit mortgage-related losses and the departure of Chief Executive Charles Prince, it got an unexpected call from a prominent investment banker suggesting a merger with Bank of America Corp.
Citigroup's board dismissed the informal approach "totally out of hand," and no discussions have taken place, says a person familiar with the matter. "When you're looking for a CEO, that's no time for a transaction," this person says.
Bank of America says it never authorized a formal overture to Citigroup.
Citigroup's board, meanwhile, gave a green light to a smaller transaction -- a $7.5 billion capital infusion from an investment arm of the Abu Dhabi government. In exchange, the Abu Dhabi Investment Authority will receive a 4.9% stake in the form of convertible stock.
More broadly, the Abu Dhabi deal shows that after years of doling out money to corporate clients and consumers, financial companies now need some fresh cash of their own.
Faced with massive losses linked to the subprime-mortgage crisis and accompanying credit crunch, several of the nation's financial institutions -- from Wall Street investment firms to bond insurers -- are assessing their need for new sources of capital. And they are likely to intensify their fledgling efforts in coming months amid signs that they could face billions of dollars in additional losses as the mortgage-market fallout persists.
"It's a bitter pill to swallow to admit that the problems in the market have reached the point that companies that traditionally could fund themselves now need external sources of capital," says David Honold, who invests in financial stocks at Turner Investment Partners in Berwyn, Pa.
Of course, one way to tap external capital is to merge operations. The merger boom that fizzled out this summer was driven by cheap and plentiful financing in the debt markets and a booming stock market. With credit increasingly tight and the stock market looking shakier, Wall Street may now see a round of opportunistic deal making.
Bank of America, based in Charlotte, N.C., has long been one of the most opportunistic acquirers in the banking industry. In the past couple of years, it has scooped up retail bank FleetBoston Financial Corp., credit-card issuer MBNA Corp., wealth-management firm U.S. Trust Co. and, most recently, LaSalle Bank.
This wasn't the first time Citigroup received an overture involving Bank of America; it got a feeler from the bank several months ago, according to a person familiar with the matter. The latest one, though, was quickly disavowed. "Bank of America did not authorize any investment banker to approach any company over the last six weeks," a Bank of America spokesman said.