Bonds were a good way to preserve value in an investment portfolio last year. They also helped


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investment banking operations rise above the carnage that afflicted the rest of Wall Street.

A string of rate cuts by the

Federal Reserve

led to a surge in new debt offerings last year. In fact, some 11,269 bonds were issued in the U.S. totaling a record $2.61 trillion, according to Thomson Financial/First Call. That was up 51% from the prior year as lower interest rates made the cost of debt more attractive. By comparison, just 559 new stock offerings came to market, including both secondary issues and IPOs. The total amount raised reached a paltry $125.5 billion, down 28% from the year before.

It's not surprising, then, that the companies that made money from investment banking last year were the ones that dedicated more resources to debt underwriting. In this regard, Citigroup emerged as a leader.

No Tears

"Investment banking results at Citi were strong primarily because they have very strong fixed income underwriting and were gaining market share," said Jonathan Balkind, an analyst at Fox-Pitt, Kelton.

Citigroup became Wall Street's largest underwriter of both stocks and bonds in 2001, usurping Merrill Lynch's lead after 11 years at the top. Investment banking revenue at its Salomon Smith Barney unit increased 21% in the fourth quarter from the prior year and 30% sequentially, while profits rose 17% from last year. At the firm's global corporate division, which includes its investment and corporate banking business, earnings increased 4% to $1.32 billion.

"They focused on being No. 1 in this area because it is a high-fee business," said John Barrett, an analyst at Gannett, Welsh & Kotler.

Investment banking fees jumped 30.3% sequentially as market share of global debt and equity underwriting rose to 14% from 10.6% in the third quarter. Citigroup said it raised global debt proceeds of $487 billion in 2001, a 37% increase over the prior year.

Blown Up

The firm's competitors didn't had the same good fortune, perhaps because many relied much more heavily on stock underwriting and M&A advisory.

Morgan Stanley


said last month that fourth-quarter profits fell 28% from the same quarter last year to $870 million, or 78 cents a share, as companies were reluctant to sell stock or initiate merger deals in the midst of a recession. In addition,

Lehman Brothers

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said its earnings per share fell 50%, and

Bear Stearns


posted a 20% decline in per-share profits.

Even companies that have large fixed income units struggled. J.P. Morgan reported a 67% drop in fourth-quarter earnings per share, due primarily to losses from Enron and Argentina. But the firm also said investment banking fees fell 10% from the fourth quarter of 2000 as "weak equity markets and lower M&A activity more than offset the record year for high-grade bond underwriting fees."

J.P. Morgan and Bear Stearns were both stung by the collapse of a merger agreement between

General Electric

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Honeywell International

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last year after the European Commission blocked it.


"The fact that Citigroup was able to outperform its peers in a difficult environment is a testament to the firm's management," Barrett said.

Both M&A and fixed income activity picked up in the fourth quarter, he added, but Citigroup was able to use its resources to take advantage of that better than anyone else.

"Citigroup leveraged the size of its balance sheet and its other relationships to its investment banking business," he said, adding that the company sold off units that showed only modest growth. Back in December, Citigroup said it planned to break up its Travelers insurance unit and sell part of it to the public.

To be sure, Citigroup benefited last year from its hugely diversified revenue streams and global reach. The firm's consumer business grew 20% in the fourth quarter, supporting overall profits of $3.86 billion, or 74 cents a share, an increase from income of $3.33 billion, or 65 cents a share, seen in the year-earlier period.

But increasing market share in the fixed income underwriting business is emerging as prescient. Meanwhile, gains in equity underwriting should put the company in a good position if and when the IPO market rebounds.