Bank of America Corp. (BAC)’s most richly compensated executive, Thomas K. Montag, may become a future candidate for the top job after a shakeup elevated him to co- chief operating officer at the money-losing lender.
Chief Executive Officer Brian T. Moynihan is counting on a new lineup to reverse the bank’s fortunes after he posted a record $8.8 billion quarterly loss, spent $30 billion to clean up faulty mortgages and sold $35 billion of assets and preferred shares to rebuild capital. The stock has lost more than half its value since Moynihan became CEO of the Charlotte, North Carolina-based company in January 2010.
“Moynihan knows he’s in the line of fire, he’ll do everything he can to save the bank,” said Greg Donaldson, chairman of Evansville, Indiana-based Donaldson Capital Management LLC, which oversees $500 million including Bank of America shares. “If for some reason he’s gunned down, he knows he has to have an heir apparent. Montag is a winner, a guy bringing dollars to the bottom line, and it would be hard for the board to throw him out, should the time come.”
The revamped team pairs Montag, 54, the head of global banking and markets, with David Darnell, 58, the co-COO who will supervise retail banking. It won’t include Sallie Krawcheck, who ran wealth management, and Joe Price, who led the retail unit. Both will leave the company, the bank said in a statement yesterday. Thousands of lower-level employees also may be fired in a cost-cutting plan that Moynihan has dubbed Project New BAC.
“Tuesday-afternoon massacre is what I’d call it,” said Nancy Bush, an analyst and contributing editor at SNL Financial, the bank-research firm in Charlottesville, Virginia. “Brian is under pressure, the company is under pressure, and when you’re transmitting your message to so many different people, I think it’s harder to get results. And clearly he was not getting results as quickly as he would have liked.”
Bank of America rose 49 cents, or 7 percent, to $7.48 at 4:15 p.m. in New York Stock Exchange composite trading.
Montag, a former trading head at Goldman Sachs Group Inc. (GS), gains responsibility for commercial banking previously handled by Darnell. Wealth-management operations overseen by Krawcheck, which included the Merrill Lynch brokerage, now will be run by Darnell, who also takes over Price’s former retail-banking units. Collectively, the two executives will preside over a company with $2.26 trillion in assets, $1.04 trillion in deposits and about 288,000 full-time employees.
Global banking and markets, led by Montag, posted net income of about $10 billion in the 18 months ended June 30, the six quarters since Moynihan became CEO. Darnell’s global commercial banking reported a profit of $5.5 billion in the period. That compares with about $2.4 billion at Krawcheck’s global wealth and investment management and $2.1 billion at the deposits segment overseen by Price. The card business, also run by Price, was unprofitable as the company booked writedowns last year after new regulations curbed fees.
The main businesses to be managed by Montag contributed $20.1 billion in first-half revenue this year, or about 50 percent of the company’s total.
“Before this, they clearly seemed to be operating without a succession plan for the CEO; at least now it looks like they’ve got one in place,” Moshe Orenbuch, an analyst at Credit Suisse Group AG, said today on Bloomberg Television’s “InsideTrack” with Deirdre Bolton and Erik Schatzker. Montag has broader experience than Darnell and is the top contender to be the next CEO, Orenbuch said.
Moynihan, Montag and Darnell “look forward to many years of work together,” Larry DiRita, a bank spokesman, said in an e-mail. “This decision brings forward a new generation of talent that includes many potential future leaders of our company.”
Montag received $15.2 million in bonuses for his performance last year, when his division was the company’s most profitable operation with $6.3 billion in earnings. Analysts have credited Montag’s business with bolstering results at Bank of America, which has posted deficits in six of its last 11 quarters as it struggled to recover from the 2008 financial crisis and losses tied to faulty home loans and mortgage bonds created by Countrywide Financial Corp.
Darnell joined a predecessor to Bank of America more than three decades ago as a credit analyst in Greensboro, North Carolina. He led the bank’s middle-market unit for four years before starting as president of commercial banking in July 2005. His new responsibilities include operations that provide deposit, card, home mortgage, wealth management, trust banking and related services, according to the bank.
Darnell, who will now oversee more than 16,000 financial advisers, said in a January interview that the Merrill Lynch brokerage was a “perfect match” for Bank of America because its members sent thousands of referrals to the commercial- banking unit.
Montag was at Goldman Sachs when the New York-based firm was selling mortgage-linked securities to investors. His role brought him notoriety later in April 2010 when U.S. Senator Carl Levin, a Michigan Democrat who led a panel investigating the financial crisis, cited a June 2007 e-mail from Montag that used an expletive to describe the low quality of the securities.
Bank of America gave Montag $29.3 million in stock awards in 2009, which included $20 million of stock as part of a package set in May 2008 when he was hired by then-Merrill Lynch CEO John Thain. Bank of America later agreed to acquire Merrill during the credit crisis as regulators were trying to stave off the collapse of the nation’s biggest financial firms.
The combined company eventually had to accept $45 billion in direct U.S. investments and draw on other federal programs to bolster its finances. While Moynihan vowed that Bank of America would never need such help again, the bank has been the biggest decliner this year in the 24-company KBW Bank Index (BKX), dragged down by expenses and writedowns tied to faulty mortgages that could reach $66 billion, according to FBR Capital Markets & Co.
After sliding 48 percent this year through yesterday, the stock was trading for about a third of its book value. Moynihan has had to contend with speculation he’d need to bolster capital by issuing more stock. He fended that off by selling assets and agreeing last month to let Berkshire Hathaway Inc. invest $5 billion in preferred shares and warrants. Berkshire Chairman Warren Buffett called the bank a “strong, well-led company.”
Until yesterday, those leaders included Krawcheck, 46. She ran New York-based Citigroup Inc.’s wealth-management unit before joining Bank of America in August 2009, supervising more than 15,000 financial advisers at Merrill Lynch and 2,200 at U.S. Trust and pushing client balances to $2.2 trillion by June 30. Second-quarter profit this year advanced 54 percent.
Krawcheck told investors in March that the bank’s style was different from other firms because “Brian is really driving a culture where we don’t care whose P&L these things go into. There are not debates about, ‘I want this percent of revenue, and you need that percent of revenue, and we need X, Y, Z.’ It really is about driving for the client.”
Her departure puts in question Krawcheck’s status as a new board member at the Financial Industry Regulatory Authority. Krawcheck was elected last month to the 22-member board of governors for the brokerage industry’s self-regulator, in the large-broker category. Unless she gets a job at a big firm, her regulatory position eventually will be vacated and filled by special election, said Howard Schloss, a Finra spokesman.
Top and Bottom
Price, 50, served as the bank’s chief financial officer until early last year, when Moynihan took over and named him to head consumer banking. That put Price in charge of more than 5,000 branches.
“It became evident that streamlining could be done at the top as well as throughout the organization,” Price said in Bank of America’s statement yesterday.
Darnell and Montag have decided which executives will report directly to them, joining an operating committee that will meet with Moynihan monthly, the CEO told employees in a memo yesterday.
The changes are “a big step forward in the transformation of our company, a journey that we began together in January of 2010,” according to excerpts from the memo obtained by Bloomberg News. “This change also is the first major, direct result of our New BAC initiative.”
Moynihan said in April that Bruce Thompson was replacing Charles Noski as chief financial officer, and Gary Lynch, formerly a U.S. Securities and Exchange Commission enforcement director, was hired to oversee legal and compliance operations. The CEO announced in July that Terry Laughlin would succeed Thompson as chief risk officer.
The management changes will give Moynihan more time and breathing room to improve results, said Richard Bove, an analyst with Rochdale Securities LLC in Lutz, Florida, in a Bloomberg Television interview today. Moynihan can focus on “policy decisions, policy implementation,” Bove said. “Back in the day, the CEO was never involved in the day-to-day operations.”
Bank of America was among 17 banks sued last week by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by government-run Fannie Mae and Freddie Mac. The Federal Housing Finance Agency said in filings that Fannie Mae and Freddie Mac bought $6 billion in mortgage-backed securities from Bank of America; $24.8 billion from Merrill Lynch, and $26.6 billion from Countrywide.
Bank of America has said losses on the bonds were due to the housing-market slump, while the FHFA accused financial firms of misleading Fannie Mae and Freddie Mac about the soundness of mortgages.
Moynihan struck deals to cut stakes in BlackRock Inc. and China Construction Bank Corp. and divest insurance units and non-U.S. credit-card businesses as he scales back the company left to him early last year by predecessor Kenneth D. Lewis.
“Only by streamlining and focusing our resources behind our customers will we truly deliver on the promise of what we have built,” Moynihan said.
While cost cuts help, they won’t allay investor concerns about the bank’s home lending, according to a research note by William Tanona, an analyst at UBS AG who has a neutral rating on Bank of America.
“Capital concerns and significant mortgage-related liabilities will continue to weigh on the stock until greater progress is made on resolving these challenges,” he wrote.
To contact the reporter on this story: Hugh Son in New York at email@example.com