Photographer: Mark Kauzlarich/Bloomberg

BofA's Margin Lending Pullback Followed Broad Internal Probe

Updated on
  • Finger-pointing is said to erupt during internal investigation
  • Review seeks to ‘apply any lessons for the future,’ bank says

An intense internal review at Bank of America Corp. found that standard margin-lending practices failed to avoid about $300 million in losses tied to a South African furniture retailer, prompting the firm to pull back broadly from a bread-and-butter Wall Street business, according to people familiar with the matter.

The bank plans to change the structure of future lending arrangements, reducing risk by including terms that let it react faster to head off losses when stock used as collateral plunges, according to the people. Meanwhile, the firm is whittling its portfolio of existing loans, looking to sell some to rival banks, the people said, asking not to be identified discussing confidential talks.

A more conservative posture by one of the world’s biggest investment banks could ripple through the market. It may create an opening for more aggressive competitors. It might also pressure major U.S. peers to adopt similar precautions, lest they draw regulatory scrutiny.

The changes at Bank of America follow weeks of internal investigation into a roughly 300 million-euro ($367 million) loan backed by shares of Steinhoff International Holdings NV that soured in December. That probe unleashed finger-pointing between senior bankers, equity trading staff and risk officers, the people said. At one point, risk managers dug into old emails to show they were given assurances about the firm’s ability to adjust the deal’s terms in an emergency. Yet in the end, the bank concluded that blame for the loss mainly fell outside its walls.

‘Work Complete’

“Of course the responsible thing to do when losing a significant amount from fraud is to review it carefully, see if we missed something, and apply any lessons for the future,” bank spokeswoman Jessica Oppenheim said in a statement. “Our work is complete and we’ve concluded the core cause of the loss was fraud by another party, but we’ll always look to improve.”

Authorities haven’t accused Steinhoff or its former chairman Christo Wiese of wrongdoing.

Read more on Steinhoff’s vow to help regulators and ‘prosecute wrongdoing’

Bank of America aims to avoid loans that let it seize only a single type of collateral -- such as a company’s stock -- that could theoretically plunge in value or be hard to sell quickly, the people said. It also wants to stitch more protections into contracts. That may limit the bank from joining some lending syndicates that provide large margin loans to major investors, because firms in those deals usually agree to accept the same terms.

In a business where lenders occasionally eat sizable losses, Bank of America’s response was unusual.

The bank was among creditors providing a 1.25 billion-euro margin loan to Wiese backed by shares that cratered when the retailer announced Dec. 5 that irregularities would force it to restate financial results. Eight banks have said they lost more than $1 billion on loans linked to Steinhoff or the South African billionaire. Bank of America booked the largest hit from his margin loan, a $292 million charge in the fourth quarter.

The bank’s leaders soon hired an outside law firm, Davis Polk & Wardwell LLP, to investigate what happened. The move surprised executives at three other lenders -- Citigroup Inc., Goldman Sachs Group Inc. and JPMorgan Chase & Co. -- that also had big losses tied to Steinhoff. At least some of those firms performed preliminary reviews and decided a deeper look wasn’t warranted, according to people with knowledge of the matter. European lenders including HSBC Holdings Plc and UBS Group AG also posted losses last quarter related to Steinhoff loans.

Moynihan’s Mantra

Insiders at Bank of America say Chief Executive Officer Brian Moynihan and some board members were particularly irked because of the firm’s “responsible growth” mantra. Moynihan embraced the philosophy while spending years fielding legal claims over aggressive lending by the bank and firms it bought that contributed to the subprime crisis. The company paid more to resolve those woes than any other lender.

Frank Bramble Sr., who chairs the board’s enterprise risk committee, sought more information after Steinhoff’s stock plunged, people familiar with the matter said. A Davis Polk team led by partner Charles Duggan updated directors while questioning dozens of people, including executives in operations involved in the margin loan.

Managers assumed someone would catch the blame, setting off a race to protect themselves, the people said. Senior risk officers wrote a memo that some people interpreted to blame bankers, the people said. The banking team argued the loss was a failure from multiple units, with some placing much of the responsibility on equities operatives because it’s their business to finance and manage margin loans. Some equities executives, in turn, said the risk department should have raised alarms if the lending was problematic.

The risk managers suggested bankers should explain proposed transactions rather than advocate for their approval, the people said. They cited an email a banker wrote when the loan to Wiese was proposed. The banker said the firm could quickly readjust the loan if an emergency began to arise, thanks to strong contact with Wiese and his relationships with Alex Wilmot-Sitwell and Richard Gush, senior bankers then overseeing Europe and South Africa, respectively, according to an excerpt reviewed by Bloomberg.

Bank of America told staff last week that Wilmot-Sitwell, who helped run the bank’s Brexit planning, decided to leave to pursue other opportunities. Reached by Bloomberg, he said he wasn’t aware of the banker’s email and disputed the depth it implied of his relationship with Wiese. He said he didn’t have responsibility for covering Wiese’s or Steinhoff’s banking needs.

‘Wake-Up Call’

Risk officials were asked why they let the loan proceed if they had concerns about it, the people said. The officials have authority to stop transactions but, like their counterparts in equities and banking, let it proceed.

Atop the bank, some directors gradually seemed to be appeased with what they were hearing. The board’s risk committee invited equities head Fabrizio Gallo and corporate and investment banking chief Christian Meissner to at least two closed-door meetings to explain the loan, the people said. Some directors expressed dissatisfaction with their presentations in late January, but later warmed up when the duo returned to separately speak about broader topics in March, the people said. Fixed-income co-heads Bernard Mensah and James DeMare also answered questions about their unit’s financing operations.

CEO Moynihan acknowledged on a January conference call, without naming the client, that the incident in the fourth quarter was a “wake-up call.” He vowed the bank would figure out how to steer clear of similar events.

“What are the lessons learned, and what did we do right or wrong in that, and how do we avoid that in the future?” he said on the call. “The team has spent significant time doing that. We weren’t happy with it from the top of the house through to the actual people who were involved in it.”

(Adds other banks with losses in 10th paragraph.)
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