Still Fighting Fires at Bank of America

Brian T. Moynihan spent his first year as Bank of America's (BOA) chief executive dealing with the aftermath of the financial crisis. In 2011 he'll do more of the same. Since succeeding Kenneth D. Lewis on Jan. 1, 2010, Moynihan, 51, has struggled to stanch loan losses and forestall a surge of litigation at the biggest U.S. lender while trying to mend relations with customers, regulators, and investors.

Last month he paid $2.8 billion to government-owned companies Fannie Mae (FNM) and Freddie Mac (FRE) to settle claims that the bank sold them defective mortgages. It was a major step toward resolving liabilities taken on with the 2008 purchase of Countrywide Financial. "Brian's got his hands totally full," says Stephen A. Schwarzman, CEO of Blackstone Group, the world's biggest buyout firm. "He is in firefighter mode, dealing with fires that will be contained but need attention."

One new challenge may come from the website WikiLeaks, whose director, Julian Assange, has said he will "take down" an American bank by releasing data from an executive's hard drive early this year. While Assange hasn't named the bank, Moynihan has set up a task force led by Chief Risk Officer Bruce Thompson to prepare for the possibility, says a person with knowledge of the plan who declined to be named.

Market Skepticism

The Charlotte-based bank, with $2.3 trillion in assets, 284,000 employees, and 5,879 branches, is lagging behind Citigroup and other rivals in recovering from the financial crisis. The company's shares fell 11 percent last year, the second-worst showing in the 24-company KBW Bank Index (KBX). Citigroup rose 43 percent. Bank of America, which repaid its $45 billion in U.S. bailout funds in 2009, traded at yearend for about 60 percent of book value. The industry average is 94 percent. The bank, which reports earnings on Jan. 21, lost $994 million in the first nine months of 2010 on revenue of $87.8 billion, compared with a $6.5 billion profit and revenue of $94.6 billion in the year-earlier period. "Moynihan needs to win the confidence of the markets, which he obviously doesn't have now," says Marty Mosby, an analyst at Guggenheim Securities, which owns 1.9 million Bank of America shares.

"The stock price doesn't reflect, I think, the value of the franchise or the work we've done," Moynihan said on Bloomberg Television 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 trying to integrate the businesses Lewis assembled through more than $130 billion in acquisitions that made Bank of America the nation's largest retail bank, debit-card issuer, and mortgage servicer. Growth will come from selling products to customers across divisions, Moynihan told 200 executives at a meeting in Charlotte in November, according to two managers who attended. Bankers will encourage retail deposit customers to use the bank's credit cards. Commercial banking clients will be steered to financial and capital markets advisers gained through the 2009 acquisition of Merrill Lynch.

Selling across divisions has been a goal of big banks since at least the 1980s. Previous efforts haven't produced promised results. "It's been difficult to pull off in the past," says Sophie Schmitt, a senior analyst in Boston at research firm Aite Group. "But they have all the ingredients."

Where Losses Have Come

Investor concerns focus on the bank's retail units, whose deposit, credit-card, and home-loan operations provide about half the company's revenue. Retail banking profit slipped 21 percent, to $1.6 billion, through the third quarter of 2010. The firm's credit-card unit posted an $8.1 billion loss, driven by a $10.4 billion writedown related to debit-card regulation that will squeeze revenue by about $2 billion a year starting in this year's third quarter.

In home lending, 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 demands to repurchase $21.6 billion in faulty mortgages from Fannie Mae and Freddie Mac, Bank of America said on Jan. 3. Fannie and Freddie were seeking to force the lender to buy back loans made with incorrect data, such as inflated incomes for borrowers. Bank of America said it paid $1.5 billion to Fannie Mae to end claims on $4 billion worth of loans. It gave $1.3 billion in cash to Freddie Mac to resolve or preclude claims on $127 billion in loans.

More losses may come from the bank's $141.6 billion in home-equity lines of credit, says Christopher Whalen, co-founder of Institutional Risk Analytics. Many borrowers who have defaulted on mortgages have stayed current on lines of credit so they can keep tapping them, he says. That's obscuring eventual losses for the bank, which may have to write down as much as $70 billion, he says. Bank of America spokesman Jerry Dubrowski says the "vast majority" of these loans are performing, and charge-offs are declining.

Merrill Bright Spot

A bright spot has been investment banking, boosted by the Merrill acquisition. Under Thomas K. Montag, the division posted $5.6 billion in net income in the first three quarters of last year, up 16 percent from the first nine months of 2009, after excluding a unit sale. Bank of America's brokerage unit, run by Sallie L. Krawcheck, earned $1.1 billion, unchanged from the year earlier.

Moynihan met with investors more than 120 times last year, according to Scott Silvestri, a bank spokesman. In contrast to Lewis, Moynihan has a rapid-fire speaking style that sometimes detracts from his message, says Nancy Bush, an analyst at NAB Research. "He's always thinking way faster than he can talk," Bush says.

Some investors view Moynihan's woes as an opportunity. Bruce Berkowitz of Fairholme Capital Management, who was named Morningstar's (MORN) domestic stock-fund manager of the decade last year, bought 16.6 million Bank of America shares in the third quarter, according to regulatory filings. Ania Aldrich, a principal of Cambiar Investors, which holds more than 8 million warrants to buy Bank of America stock, says the bank's low valuation won't last as Moynihan moves into his second year: "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," says Guggenheim's Mosby. "This is the year he proves himself."

The bottom line: Moynihan has to deal with loan losses and new government regulations as he steers Bank of America out of the financial crisis.

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