In return for giving Warren Buffett a sweetheart deal earlier this year, Brian Moynihan received a badly needed endorsement.
The chief executive officer of Bank of America, the nation’s largest financial services firm, took the fact that Buffett bought $5 billion worth of preferred shares and ran with it. But he didn’t get very far.
The positive impact of Buffett on the bank’s common stock price and market capitalization was short-lived. Part of the problem is that Moynihan announced last month that his restructuring included dumping one of the highest-profile women on Wall Street, Sallie Krawcheck, from the company. A source close to Krawcheck says she’s making a move “outside the Fortune 500.”
Merrill Lynch employees privately complain that they wish Moynihan’s restructuring efforts would include him severing his ties with them too. Merrill is the cash cow that’s largely keeping the troubled North Carolina financial supermarket afloat, and its financial advisers and investment bankers would love to release themselves from the BofA ball and chain.
Then came news of another sweetheart deal: Bank of America sold a portfolio of mortgages to Fannie Mae, prompting the chairman of the House Oversight and Government Reform Committee, Darrell Issa, to open an investigation. Issa blasted off a letter to the Federal Housing Finance Agency’s director, ordering him to explain Fannie Mae’s decision to buy the mortgages from BofA. “Some commentators have labeled this transaction as a backdoor bailout of Bank of America by permitting the bank to shift part of its risky portfolio to American taxpayers. Under these circumstances, I am unclear why the FHFA allowed Fannie to proceed with the transaction,” Issa wrote.
To be sure, the deal got a potentially toxic pool of 400,000 loans with an unpaid balance of some $73 billion off BofA’s back. But Moynihan came to the bank’s top job by not being Kenneth Lewis, who was a ready and willing recipient of taxpayer-funded bailouts.
Bank of America has spent the better part of two decades acquiring its way to profitability. Now it’s reversed course in an ambitious attempt at downsizing. Moynihan unveiled his Project New BAC at the Barclays Capital 2011 Global Financial Services Conference last month; it includes cutting down expenses by $5 billion annually. “We want to make the company leaner and more straightforward,” Moynihan told attendees. “We don’t have to be the biggest company out there. We just have to be the best.”
His first move was to elevate the bank’s Thomas Montag and David Darnell to co–chief operating officers, putting both in contention one day to succeed him as CEO. Project New BAC also calls for the elimination of 20 percent of current expenses and downsizing 30,000 employees. Gone, along with Krawcheck, is consumer banking head Joe Price.
Under Moynihan, Bank of America has sold 20 different noncore assets, generating $30 billion in cash. He divested investments in financial institutions including Santander Mexico, Itaú Unibanco, BlackRock and an equity holding in China Construction Bank. The company now has $402 billion in cash and short-term investments — the most it’s ever had.
Now Moynihan says he wants to create a flatter organization. He’s combining the retail bank and the wealth management business and placing the entity under the watch of BofA lifer Darnell. Then there’s Montag, who was recruited by John Thain to leave Goldman Sachs for Merrill Lynch in 2008 before it was purchased by BofA. Montag now oversees commercial banking in addition to global banking and markets.
Although a company insider tells Institutional Investor that some revenue-producing operations will remain intact, including the wealth management business, the bank does plan on cutting back on its retail banking operation by closing retail locations and eliminating staff at the branch level. What also isn’t helping Moynihan, a lawyer by training, is that some investors who aren’t Omaha billionaires don’t seem to think he’s up to the task of streamlining the company.
“Moynihan has to prove himself, and he hasn’t so far,” says Gary Townsend, president and chief executive of Chevy Chase, Maryland–based Hill Townsend Capital, an investment management firm that specializes in the financial sector and owns shares of BofA. “He can’t really sit down with an investor and expylain why investing in BofA is a good idea — even at 60 percent of tangible book value. He doesn’t know banking as well as he needs to in order to be the head of the largest bank in the country.”
