Since succeeding Kenneth D. Lewis on Jan. 1, 2010, Moynihan, 51, has struggled to stanch loan losses and a surge of litigation at the biggest U.S. lender while trying to mend relations with customers, regulators and investors. He paid $2.8 billion last week to government-owned companies Fannie Mae and Freddie Mac to settle claims the bank sold them defective mortgages, a major step toward resolving liabilities taken on with the 2008 purchase of Countrywide Financial Corp.
“Brian’s got his hands totally full dealing with the internal issues and the external focus on some of the problems of the company,” Stephen A. Schwarzman, CEO of Blackstone Group LP, the world’s biggest buyout firm, said in an interview. “He is in firefighter mode, dealing with fires that will be contained but need attention.”
A year ago, Moynihan pledged to improve customer service and assigned more than 26,000 employees to help delinquent homeowners. By last month, at least two states sued, claiming the bank foreclosed on people enrolled in loan-modification programs. Moynihan supported the Obama administration’s push to protect consumers, only to see new regulations blow an estimated $4 billion hole in annual revenue. When he told investors Dec. 7 the dividend may be restored in 2011, the shares, instead of jumping, slid by 7 cents.
“Moynihan needs to win the confidence of the markets, which he obviously doesn’t have now,” said Marty Mosby, a Nashville, Tennessee-based analyst at Guggenheim Securities LLC, which manages more than $100 billion, including 1.9 million Bank of America shares. “If he doesn’t do well in 2011, it will be hard to change that perception.”
One challenge may come from the website WikiLeaks, whose director, Julian Assange, said he intended to “take down” an American bank by releasing data from an executive’s hard drive early this year. While Assange hasn’t named the bank he’s targeting, Moynihan has set up an internal task force led by Chief Risk Officer Bruce Thompson to prepare for the possibility, said a person with knowledge of the plan who declined to be named because it is private.
There are other signs that the Charlotte, North Carolina- based bank, with $2.3 trillion in assets, 284,000 employees and 5,879 branches, is lagging behind rivals including Citigroup Inc., the third-largest U.S. bank by assets, in putting the financial crisis to rest.
The company’s shares dropped 11 percent last year, the second worst in the 24-company KBW Bank Index. Only Bridgeport, Connecticut-based People’s United Financial Inc. fared worse. Citigroup rose 43 percent. Bank of America, which repaid $45 billion in U.S. bailout funds in 2009, traded by year-end for about 60 percent of book value, reflecting investor doubts that assets are properly stated. The industry average is 94 percent.
“They’re the most troubled large bank -- it’s an unfortunate place to be,” said Christopher Whalen, a former Federal Reserve Bank of New York analyst and co-founder of Institutional Risk Analytics in Torrance, California.
The announcement yesterday of last week’s settlement, which Whalen said was “clearly a gift,” sent Bank of America up 6.4 percent to $14.19 in New York Stock Exchange composite trading, the biggest increase in almost eight months. The company rose 5 cents to $14.24 as of 4:15 p.m. today.
Improving the share performance of Bank of America, which reports fourth-quarter results Jan. 21, is a top priority for Moynihan, a graduate of Brown University and Notre Dame Law School who joined the bank after the 2004 acquisition of FleetBoston Financial Corp., where he worked for 11 years.
“The stock price doesn’t reflect, I think, the value of the franchise or the work we’ve done,” Moynihan said on Bloomberg Television’s “InBusiness with Margaret Brennan” on Dec. 10. “I can’t be successful unless the shareholders get paid and get paid well.”
Moynihan, who declined to comment for this story, is pursuing a strategy of integrating the businesses assembled by Lewis through more than $130 billion in acquisitions that made Bank of America the largest retail bank, debit-card issuer and mortgage servicer in the U.S.
Growth will come from marketing products to customers across divisions, Moynihan told 200 top executives in Charlotte in November, according to a slideshow used at the two-day meeting. Retail deposit customers will be encouraged to make transactions with the bank’s credit cards, and commercial- banking clients will have access to capital markets and financial advisers gained through the 2009 acquisition of Merrill Lynch & Co., the presentation said.
Moynihan also disposed of $16 billion in businesses and investments that weren’t considered essential, including most of its stake in money manager BlackRock Inc. and holdings in Brazilian and Mexican lenders.
“He’s methodically trying to make the place better, and I think he’s making the right moves,” said Sydney Finkelstein, a professor of management at Dartmouth College’s Tuck School of Business in Hanover, New Hampshire. “There’s just so much to fix, and they’re in the news all the time with the foreclosures, the toxic assets and all the rest.”
As its name suggests, Bank of America’s fortunes are more closely linked with the U.S. economy than those of New York- based rivals Citigroup and JPMorgan Chase & Co. Eighty percent of the bank’s 2009 revenue came from the U.S., compared with 55 percent at Citigroup and 75 percent at JPMorgan. That means it doesn’t stand to benefit as much from faster-growing economies.
Investor concerns focus on the bank’s retail units, whose deposit, credit-card and home-loan operations provide about half of the firm’s revenue and will bear the ultimate costs for soured mortgages and home-equity loans.
Retail-banking profit slipped 21 percent to $1.6 billion through the third quarter of 2010 as interest income declined and federal regulation limited fees. The firm’s credit-card unit posted an $8.1 billion loss, driven by a $10.4 billion writedown tied to debit-card regulation that may squeeze revenue by about $2 billion a year starting in the third quarter of 2011. Overdraft and credit-card fee limits are expected to decrease 2010 revenue by another $2 billion, Bank of America said.
In home lending, where Bank of America is the second- largest mortgage originator after San Francisco-based Wells Fargo & Co., according to industry newsletter Inside Mortgage Finance, the cost of loan buybacks drove a $4 billion loss in the first three quarters of 2010, widening from $2.9 billion in the year-earlier period.
The company had received $21.6 billion in demands to repurchase soured mortgages from Fannie Mae and Freddie Mac, Bank of America said yesterday. The firms were seeking to force the lender to buy back loans allegedly made with incorrect data, such as inflated incomes for borrowers and whether the property is a primary residence.
Bank of America said it paid $1.5 billion to Fannie Mae to end claims on $4 billion of Countrywide loans. It gave $1.3 billion to Freddie Mac to resolve or preclude claims on $127 billion in loans. The payments “largely addressed” liabilities tied to the two firms, the bank said.
The lender booked a $3 billion fourth-quarter provision related to the settlements and a $2 billion writedown on the value of Countrywide operations, wiping out the $2.7 billion in net income analysts had expected the company to post, according to the average estimate of 14 analysts surveyed by Bloomberg before yesterday’s announcement.
Nothing has been set aside for suits from insurers including MBIA Inc. and Ambac Financial Group Inc. alleging that Countrywide fraudulently induced the firms to guarantee bonds filled with faulty mortgages.
The bank lost a bid last month in New York State Supreme Court to prevent MBIA from using statistical sampling to determine if it improperly insured $21 billion in securities. The ruling is a setback for Bank of America, which had vowed to review claims loan by loan, because sampling reduces the time and expense of examining thousands of mortgages and could make it easier for others to pursue suits, said David Grais, a partner in New York law firm Grais & Ellsworth LLP.
The bank said in a November filing that it was “not possible at this time to reasonably estimate future repurchase obligations” tied to litigation brought by the insurers.
Moynihan also must fend off demands from Pacific Investment Management Co., BlackRock and the New York Fed for putbacks tied to about $47 billion of bonds, people familiar with the matter have said.
“He’s convinced investors that they’re focused on it, and they’re trying to allocate the right level of resources,” said Jonathan Finger, whose family-owned investment company, Finger Interests Ltd., holds 1.1 million Bank of America shares and led a 2009 proxy fight that helped drive Lewis into retirement. “The problem is he really can’t know the full extent of putback losses until they get cleared up through litigation or settlement. That’s the black cloud hanging over this stock.”
Another concern is $141.6 billion in home-equity lines of credit, said Whalen of Institutional Risk Analytics. Home-equity loans get wiped out in a foreclosure if the sale of a home doesn’t raise enough to pay off the first mortgage.
Many borrowers have remained current on home-equity loans to maintain their liquidity while defaulting on their primary mortgages, Whalen said. That’s obscuring inevitable losses for Bank of America, which may be forced to book writedowns approaching $70 billion, he said.
The “vast majority” of these loans are performing and charge-offs are declining, said spokesman Jerry Dubrowski.
The cost of resolving soured mortgages may force Moynihan to restructure Countrywide, housed in a separate legal entity, through bankruptcy, said Mike Mayo, a CLSA Ltd. analyst, in a Nov. 2 note. Moynihan said Nov. 4 that he didn’t see liabilities that would force the company to put Countrywide into bankruptcy.
A bright spot for Bank of America has been investment banking, boosted by the Merrill acquisition. The division, run by Thomas K. Montag, 53, posted $5.6 billion in net income in the first three quarters of last year, a 16 percent increase from the first nine months of 2009 after excluding a unit sale. While the unit accounted for 27 percent of the bank’s revenue, it made up more than half of the income from the firm’s profitable divisions through September 2010. Revenue from underwriting stocks and bonds and advising on mergers will rise this year, Goldman Sachs Group Inc. has said.
Bank of America’s brokerage unit, run by Sallie L. Krawcheck, 46, posted a profit of $1.1 billion, unchanged from the year earlier. It has about 15,300 financial advisers and is expanding overseas, as is the investment-banking unit.
The investment-banking and brokerage businesses will help make Bank of America “very formidable” in three to five years, said Blackstone’s Schwarzman, whose New York-based firm gets financing from the bank for buyouts.
Moynihan told executives in November that he planned to remake the firm into the “finest financial services company in the world,” according to his presentation. He talked about reinforcing company values, including cooperation and consumer focus, said two managers who attended the session in the new 32- story glass-and-steel Bank of America Center in Charlotte, across the street from the bank’s headquarters.
“Brian has made it very clear that he has no patience for the tribal warfare you see in some companies,” said Chief Financial Officer Charles H. Noski, 58, in an interview in December. “For us to succeed, all of our business leaders need to work together effectively. Our incentives are tied to the success of the overall enterprise.”
Moynihan’s emphasis on cross-selling products to clients across divisions has been the holy grail of banking since at least the 1980s. Previous efforts, including those that drove mergers at Citigroup, haven’t produced promised results.
“It’s been difficult to pull off in the past,” said Sophie Schmitt, a Boston-based senior analyst at research firm Aite Group LLC. “But they have all the ingredients. The fact that Bank of America has Merrill Lynch will help them from a brand perspective.”
To soothe concerns, Moynihan met investors more than 120 times last year, according to Scott Silvestri, a bank spokesman. The CEO is “much more aggressive” in reaching out to shareholders than his predecessor, said Finger.
In contrast to Lewis, who punctuated his appearances with anecdotes and humor, Moynihan has a rapid-fire speaking style that sometimes detracts from his message, said Nancy Bush, an independent banking analyst at NAB Research LLC in Annandale, New Jersey, who has a “buy” rating on Bank of America.
“He’s always thinking way faster than he can talk,” Bush said. “The thoughts tend to run together, and it’s been somewhat of an impediment to getting people to focus on what he’s saying, rather than the way he’s saying it.”
Moynihan, who grew up in Marietta, Ohio, is one of eight children. His father was a research chemist at DuPont Co. One of his younger brothers, Patrick, is a missionary and director of a Catholic school in Haiti, according to Brown Alumni Magazine.
After getting his law degree from Notre Dame in 1984, Moynihan worked at Edwards Angell Palmer & Dodge LLP, a firm in Providence, Rhode Island. He took a job as deputy general counsel at Fleet in 1993 and headed wealth management at the Boston-based bank when it was acquired by Bank of America.
Moynihan accepted four posts in the year before being named CEO, serving in rapid succession as head of consumer banking, general counsel and chief of investment banking twice.
Bank of America directors persuaded Lewis, 63, to allow Moynihan to remain after he refused in 2008 to move his family to Delaware to head a credit-card division, a person with knowledge of the situation said in 2009. Moynihan survived an 11-week search for Lewis’ successor, which involved directors interviewing more than a dozen candidates, including Bank of New York Mellon Corp. CEO Robert Kelly.
“Many of you know him because he’s been in so many different jobs,” Lewis quipped before introducing Moynihan to employees as CEO a year ago. “Another unique characteristic about him is that he wanted the job.”
Unlike Lewis, who bought Countrywide and Merrill Lynch, Moynihan has said he won’t be pursuing acquisitions. Instead, the firm is emphasizing internal growth and will start to return capital to investors “as fast as we can” through dividends and share buybacks, he said last month.
The CEO has the “absolute” confidence of the board, Chairman Charles Holliday said last month in an interview.
“We’re all disappointed in the stock, wish it would be higher,” Holliday said. “Brian’s putting the fundamentals in place, and the stock will follow.”
Some investors view Moynihan’s woes as an opportunity. Bruce Berkowitz, whose Miami-based Fairholme Capital Management LLC is the biggest private investor in bailed-out insurer American International Group Inc., bought 16.6 million Bank of America shares in the third quarter, according to regulatory filings. Berkowitz was named the domestic stock-fund manager of the decade last year by Morningstar Inc.
‘Has a Window’
Ania Aldrich, a principal of Cambiar Investors LLC, said the bank’s low valuation won’t last as Moynihan moves into his second year.
“The mess that he inherited, it will take time to sort this out,” said Aldrich, whose Denver-based firm manages $5.3 billion and holds more than 8 million warrants in the bank. “Once you see some clarity on their issues, the market will realize this is a good, cheap stock.”
How long it takes to get that visibility could determine Moynihan’s fate.
“He still has a window to take care of these issues,” Guggenheim’s Mosby said. “This is the year he proves himself.”
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