Murder at Merrill (and Citigroup)?

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Rumours are starting to fly about the depth of cuts at Merrill and Citigroup. Are things about to get nasty?

Yes, if you believe the Observer and CNBC. The weekend paper favoured by UK liberals predicts Thain is preparing for a "sweeping reform" of Merrill's fixed income division, entailing a "swathe of job cuts".

Separately, CNBC reported yesterday that Citigroup is planning 45,000 job cuts in addition to the 17,000 it announced earlier this year. This news broke before the more recent revelations that Citi has received $7.5bn (€5.1bn) cash injection from the Abu Dhabi Investment Authority at the seeming penal rate of 11%.

How realistic are the Observer's observations? The paper quotes a Merrill risk professional, who may not be best placed to judge the strategic intentions of the new US-based CEO.

Ominously, however, banking analysts and senior headhunters are also starting to mutter about a lynching at Merrill once Thain gets to grips with the situation. "You need to make room for the write-downs, and staff cuts are simply the quickest way to do that," says Dave Hendler at Creditsights.

"It will be quick and it will be brutal and it will be done before bonuses are announced," says a fixed income-focused headhunter.

"Divisional heads have been asked to report to Thain by the 29th and the expectation is that he will then present a plan to the board in early December," he adds. "As many as 2,000 jobs could go in London."

The good news is that some banking analysts are prepared to disparage claims that Merrill will chop up to 30% of investment banking staff. "There is no doubt that there will be job cuts," says Dick Bove of Punk Ziegel & Co. "But Merrill won't repeat what it did in 2003. 10% of staff will go across the board, with a higher percentage leaving in areas like credit derivatives, prime brokerage and mortgages."

Meanwhile, Reuters reports that Merrill president Greg Fleming told employees yesterday that he has "tremendous confidence" in the company's long-term prospects and Merrill's strategy is fundamentally sound.

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