How Bank Of America Lost Its Balance

Sep 12, 2011
Originally published on September 13, 2011 7:17 am

The nation's largest bank said Monday that it will cut 30,000 jobs over the next few years. Bank of America has been plagued by losses after buying the home lender Countrywide, and many investors have lost faith in the bank, driving its stock down 50 percent this year.

Meanwhile, Bank of America has been selling off parts of its business to raise more capital.

Amid all the investor anxiety, Bank of America's current chief executive officer, Brian Moynihan, spoke to Wall Street analysts Monday and tried to calm their fears. But he also acknowledged that the bank has grown too large and has too many employees.

"During 2003 to 2008, our company acquired six major acquisitions — 200,000 employees to add to the 133,000 we started with," he said. "That added a lot of complexity."

So Moynihan said the company will be closing some of its 53 data centers, for example. It'll be selling off what he called non-core businesses, and the bank said it estimates a reduction of 30,000 jobs. Some of those jobs, it says, will be through attrition.

Still, Moynihan says 5 out of 6 of the bank's divisions are doing well.

"All the businesses we have make money, except for mortgages," he said.

In 2008, A Strong Position

But the mortgage business is a huge problem: The company is losing tens of billions of dollars on bad loans. With the economy showing more signs of trouble, investors still don't know how big the losses will be.

Critics say it didn't have to be this way. When the financial crisis struck in 2008, the bank was in good shape. In fact, it was the one big bank that steered clear of all those bad home loans.

"They did do everything right. They were the sort of the lone ranger out there, the lone bank that hadn't gotten into all these exotic instruments and committed hara-kiri," says Rebel Cole, a professor at DePaul University and a former Federal Reserve economist.

Cole watched Bank of America from its early beginnings in North Carolina, and says it always kept a distance from Wall Street.

"I grew up in North Carolina, so I remember that they didn't have that Wall Street mindset, and consequently they escaped a lot of the problems ... that [almost] took down all the investment banks," Cole says.

As a result, Bank of America was strong; it had money on hand. Most of its competitors were weakened. At this point, Bank of America's story could have been much different.

"Then, it became the story of the hubris of one man — Ken Lewis," Cole says.

Purchase Of Countrywide

Lewis was then the chief executive officer of the bank, and he decided to buy the giant mortgage company Countrywide. Countrywide was teetering on collapse because it made so many loans that were risky, predatory or reckless.

"Ken Lewis saw this as an opportunity to pounce," Cole says. He adds that Lewis and Bank of America should have known not to buy such a toxic company.

But, Cole says, "Ken Lewis wanted to show those guys on Wall Street that this North Carolina bank could be the biggest, the best and the baddest bank in the country."

Now, Bank of America faces not just loan losses but scores of lawsuits. Lewis has since stepped down, and some economists say that buying Countrywide was such a big mistake that it's still rippling through the U.S. economy.

"The developments at Bank of America are absolutely not helpful," says Simon Johnson, an economist at MIT. He says it would be a lot more helpful if Bank of America was still in strong shape to make more loans to consumers and businesses.

"If you'd had a couple of big banks that had really come through the crisis very strong, then [you'd say], 'OK, this part [of the credit system] is healthy, on which we could rely for the recovery,' " Johnson says. "But, of course, we don't have such banks. They're all in trouble to various degrees, and Bank of America is the most spectacular example of a bank that fell from being really quite well-run to a complete disaster."

But where some see disaster, others see opportunity. Warren Buffett recently invested $5 billion in the bank. Buffet said in a statement that he was impressed with the bank's profit-generating abilities. And, he said, Bank of America is a well-led company that is acting aggressively to put its challenges behind.

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MICHELE NORRIS, Host:

The nation's largest bank said today it will cut 30,000 jobs over the next few years. Bank of America has been plagued by losses after buying the home lender Countrywide. As NPR's Chris Arnold report, many investors have lost faith in the bank, driving its stock down 50 percent this year. And all this has forced B of A to start selling off parts its business to raise capital.

CHRIS ARNOLD: Amidst all the investor anxiety, Bank of America's current CEO Brian Moynihan spoke to Wall Street analysts today, and he tried to calm their fears, but he also acknowledged that the bank has grown too large and just has too many employees.

BRIAN MOYNIHAN: During 2003 to 2008, our company acquired six major acquisitions, 200,000 employees to add to 133,000 we started with. And that added a lot of complexity.

ARNOLD: So Moynihan says the company, for example, will be closing some of its 63 different data centers. It'll be selling off what he called non-core businesses. And a statement by the bank today estimates a reduction of 30,000 jobs, though some of those it said will be through attrition. Still, Moynihan says five out of the six of the bank's divisions are doing well.

MOYNIHAN: All the businesses we have make money except for mortgages.

ARNOLD: But the mortgage business is a huge problem. The company is losing tens of billions of dollars on bad loans. And with the economy showing more signs of trouble, investors still don't know how big the losses will be. And critics say it didn't have to be this way. Actually, when the financial crisis struck in 2008, the bank was in good shape. In fact, Bank of America was the one big bank that had managed to steer clear of all those bad home loans.

REBEL COLE: They did do everything right. They were sort of the lone ranger out there, the lone bank that hadn't, you know, gotten into all these, you know, exotic instruments and committed hara-kiri.

ARNOLD: Rebel Cole is a professor at DePaul University and a former Federal Reserve economist. He watched Bank of America from its early beginnings in North Carolina, and he says it always kept a distance from Wall Street.

COLE: I grew up in North Carolina, so I remember they didn't have that Wall Street mindset, and consequently they escaped a lot of the problems that we saw that took down all the investment banks - or almost took down all the investment banks.

ARNOLD: As a result, Bank of America was strong. It had money on hand. Most of its competitors were weakened. Bank of America's story, at this point, could have been much different. But...

COLE: Then it became the story of the hubris of one man - Ken Lewis.

ARNOLD: Lewis was then the CEO of the bank, and he decided to buy the giant mortgage company Countrywide. Countrywide was teetering on collapse because it had made so many loans that were - choose your adjective - risky, predatory, reckless, crazy.

COLE: Ken Lewis saw this as an opportunity to pounce.

ARNOLD: Cole says Lewis and Bank of America should have known not to buy such a toxic company. But Cole thinks...

COLE: Ken Lewis wanted to show those guys on Wall Street that this North Carolina bank could be the biggest, the best and the baddest bank in the country.

ARNOLD: But now Bank of America faces not just loan losses on all those Countrywide loans it had bought, but scores of lawsuits. Lewis has since stepped down, and some economists say that buying Countrywide was such a big mistake that it's still rippling through the U.S. economy.

SIMON JOHNSON: The developments at Bank of America are absolutely not helpful.

ARNOLD: Simon Johnson is an economist at MIT. He says it would be a lot more helpful if Bank of America was still in strong shape and could make more loans to consumers and businesses.

JOHNSON: If you had a couple of big banks that would really come through the crisis very strong, then you would have a part of the credit system where you'd say, OK, this part is healthy, on which we can rely for the recovery. But, of course, we don't have such banks. They're all in trouble to various degrees, and Bank of America is the most spectacular example of a bank that fell from being, you know, really quite well-run to a complete disaster.

ARNOLD: But where some see disaster, others see opportunity. Warren Buffett recently invested $5 billion in Bank of America. Buffett said in a statement that he was impressed with the bank's profit-generating abilities, and he said the bank is a well-led company that is acting to aggressively put its challenges behind it. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.