Bank of New York Mellon Corporation (BK)

BNY has been sued Russia's Federal Customs Service is seeking $22.5 billion in damages for alleged money laundering between 1996 and 1999. (See Bloomberg.com – 17 May 2007). Given the current deterioration of the relationship between the US and Russia and the centralization of power in Russia that is now underway, it isn’t clear that this suit has any merit. Forbes reported that some observers believe the suit was no more that a Russian mob-backed attempt at a shakedown a week before the shareholder vote to approve the BNY/Mellon merger. However, the suit is claiming three quarters of the BNY’s current $31 billion in capitalization.

One risk is that the merger with Mellon fails to gain regulator approval. This is unlikely, and the risk will be obviated by July 1, 2007.

Migration of financial services to Europe which, CEO Renyi described in the Financial Times on Friday, May 18, 2007 as a “… clear and unmistakable threat” to New York losing its preeminence as a global financial center. Monitoring the American Depositary (not ary, NOT ory) Receipt business, in which BNY is, by far, the leading provider, shows that foreign corporations have now much greater inclination to list elsewhere.

More important than these esoteric and systemic risks, is the effect of a decline in world-wide trading and asset valuations. Securities processing and financial services fees are based on assets. If a financial asset falls 25% in value, fees needed to pay for servicing this asset will fall 25%. A financial downturn or an economic downturn that would bring it on will depress the bank’s earnings, but perhaps not as much as earnings derived from lending, which is the principal source of income for traditional banks. Nevertheless, profits from securities processing businesses are tied to trading volume and asset values, thus a down earnings in securities services because of a downtown in asset values can only be overcome by acquiring more assets.

Despite a successful merger, the integration of BNY and Mellon may go less smoothly than expected resulting in cost savings lower than projected, perhaps no cost savings, or even increased costs to make the integration work.