COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary
“The problem facing Bank of America is stunning, both on an economic and on a human scale. Among its 14 million mortgage customers, nearly 1 in 10 is past due. Another 190,000 have not been able to make a payment in at least two years, and one-third of the homes facing foreclosure are vacant, making them harder to maintain and sell. Dealing with customer service, many homeowners say, is frequently infuriating.”
“Nor has the company signaled its path out, experts say. “If this is truly the biggest bank, they should be a leader, out in front,” says Mark Williams, executive-in-residence at Boston University and a former bank examiner for the Federal Reserve. “But they’re still in defense mode.”
EDITOR’S NOTE: They can write all they want about “good intentions” and intractable problems, the fact remains that the assets on the books are an illusion, the business model is skewed by non-disclosure of a complete lack of planning on how to exit the mortgage mess, and the growing consensus of people in the court systems — Federal and State is that BofA has not emerged with a plan because it doesn’t have one.
THERE IS A PLAN THAT WILL WORK. But not one where BofA has it all their own way. There is an old expression that if you are being run out of town you might as well get in front of the crowd and make it look like a parade. If BofA wants to survive this and regain its some brightness to its image, it needs to adopt the obvious strategies that are necessary to bring down the increasingly deafening cries for heads to roll. If they take the lead, they can reload the investors, minimize losses, minimize the immediate risk and vastly improve the prospect of recovering the quality of their balance sheet. If they wait, then all will be lost. People on Wall Street are too devoted to believing that EVERYTHING IS AN ILLUSION. That is not and never has been true. Reality is affected by illusion — but in the end, if you promise someone 10 bucks, you have to give it to him or satisfy him in some other way — or you’re out of business.
Batting Cleanup at Bank of America
By NELSON D. SCHWARTZ
Charlotte, N.C.
BRIAN MOYNIHAN isn’t one to look back. And as the chief executive of Bank of America, he has plenty of reasons not to.
His company is staggering under the weight of his predecessors’ decisions, and each day seems to bring more bad news. More than 1.3 million of the bank’s customers are behind on their home loans, all 50 state attorneys general are investigating the industry’s foreclosure practices and Bank of America has become a leading symbol of the mortgage mess.
When the founder of WikiLeaks, Julian Assange, bragged late last month that his group was about to “take down” an American bank with a mother lode of damaging insider documents, the scuttlebutt on Wall Street quickly turned to Bank of America, sending its shares down more than 3 percent in a day.
But don’t bother feeling sorry for Mr. Moynihan. As far as he’s concerned, things are just fine.
“It’s been a great year and we’ve learned a lot,” he says during an interview in his office here, 58 floors above downtown Charlotte. “There’s not a better job in the world.”
However improbable that may sound, his damn-the-torpedoes stance has helped him stabilize a company that was in such desperate straits that it required two federal bailouts that totaled $45 billion. He’s even returned the bank to profitability — after a little help from that sizable taxpayer-supported cushion, of course.
But since he was named to the position a year ago this week, Mr. Moynihan’s strategy has failed to convince investors, analysts, and some customers that Bank of America is headed in the right direction. The bank’s shares have fallen 18 percent during his tenure.
“Many investors are trying to put their arms around Bank of America’s problems and have been left fluttering in the wind,” says Mike Mayo, a bank analyst with Crédit Agricole in New York. “The company hasn’t given investors much assurance or confidence. It’s like they’re in the twilight zone.”
As the chief executive of the largest bank in the country, Mr. Moynihan is under increasing pressure from Wall Street to raise his profile and rebuild his company’s battered image. “Given some of the problems the company has had, he’s got to show shareholders that he’s standing up for Bank of America,” said Moshe Orenbuch, an analyst with Credit Suisse.
Unfortunately, that doesn’t come easily to Mr. Moynihan. Unlike Jamie Dimon, who has become a media darling as the head of the nation’s second-largest bank, JPMorgan Chase, and has sidestepped some of the withering criticisms aimed at Bank of America, Mr. Moynihan isn’t fond of the spotlight.
“Jamie is visible, he’s a brand, and he gets much more of the benefit of the doubt than Brian,” says Christopher Whalen, managing director of Institutional Risk Analytics. “Brian still has to prove that he can ride the tiger at Bank of America.”
EVEN as his company was battered by one bad headline after another over the last 12 months, Mr. Moynihan rarely wavered from his script, sticking to his calls for better “execution” and a “customer focus.” The problem is that lengthy accounts of robo-signers, lost documents and other foreclosure imbroglios hardly sound like smart execution to furious customers.
“He’s got to get out there and become an equally large public figure as Jamie and articulate the bank’s position,” says D. Anthony Plath, an associate professor of finance at the University of North Carolina, Charlotte. “He’s a hard worker and he’s well liked inside the bank. But the way they are handling it now just won’t work.”
Within the company, Mr. Moynihan gets credit for prying open Bank of America’s rigid and top-down corporate culture and pressing the flesh with clients. Still, that side of Mr. Moynihan, a lawyer by training, doesn’t always come through in public settings. His detractors compare him to Charles O. Prince III, the general counsel at Citigroup who proved unable to adequately manage that sprawling juggernaut after he was promoted to chief executive in 2003.
That’s not a fair comparison, says Laurence D. Fink, chief executive of BlackRock, a money-management giant that was partially owned by Bank of America until last month, when Mr. Moynihan sold off most of that stake in an effort to raise capital and focus on the company’s core banking business.
“There’s always skepticism hiring a lawyer as C.E.O.,” Mr. Fink says. “He’s facing enormous headwinds, but in the first year Brian has surprised a lot of those skeptics.”
Mr. Moynihan has, indeed, put out a series of fires — settling a Securities and Exchange Commission suit against the company, mending ties with regulators and hinting last week that a dividend increase is coming soon.
He has also eliminated much-maligned overdraft fees on debit cards, strengthened the bank’s balance sheet and sold off $16 billion worth of businesses that didn’t serve core customers. On Wall Street, the combined Bank of America and Merrill Lynch has emerged as a global powerhouse, helping the company earn $9.4 billion so far this year.
But if Mr. Moynihan can’t get a handle on the foreclosure furor and restore the company’s reputation as a fair-minded lender, his wins will continue to be drowned out, according to interviews with analysts, industry experts and former Bank of America executives.
The problem facing Bank of America is stunning, both on an economic and on a human scale. Among its 14 million mortgage customers, nearly 1 in 10 is past due. Another 190,000 have not been able to make a payment in at least two years, and one-third of the homes facing foreclosure are vacant, making them harder to maintain and sell. Dealing with customer service, many homeowners say, is frequently infuriating.
A report that the Moody’s Corporation issued on Thursday found that, when it comes to resolving delinquent subprime loans, Bank of America had taken longer than the other six major servicers examined.
“Bank of America has a lot more to clean up than any other servicer or lender,” says Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. “And customers find themselves facing a bureaucracy where it’s hard to get answers, hard to understand what they’re telling you and certainly hard to get solutions.”
Nor has the company signaled its path out, experts say. “If this is truly the biggest bank, they should be a leader, out in front,” says Mark Williams, executive-in-residence at Boston University and a former bank examiner for the Federal Reserve. “But they’re still in defense mode.”
Mr. Moynihan’s predecessors, Hugh McColl and Ken Lewis, were classic empire builders who, during banking’s boom years, transformed a sleepy North Carolina financial institution, NCNB, into the nation’s largest bank through a never-ending series of deals. But in the end, Bank of America had swallowed much more than it could digest, leaving it stuffed with an unwieldy collection of assets and dangerously exposed to any economic downturns.
Mr. Lewis’s final acquisition, Merrill Lynch, fulfilled his longstanding dream of becoming a banker to Wall Street and Main Street, and promised to prove to the elite banks in New York that a bunch of bankers from Charlotte could be every bit as successful as they were. Yet all he ended up showing, most analysts concur, was that he was every bit as poor at risk management as most of the Manhattan bankers.
The Merrill deal proved to be Mr. Lewis’s undoing, saddling Bank of America with tens of billions in losses even as the red ink began to flow from another of his errant purchases: the mortgage lending giant Countrywide Financial. By the time Mr. Lewis resigned in 2009, several outside executives had made it clear they didn’t want his job, and it fell to Mr. Moynihan to impose some kind of strategy on the sprawling empire.
Today, Bank of America’s customers range from millions of subprime borrowers barely hanging on to their homes to the swells who bank with U.S. Trust, where the minimum deposit required to open an account is $3 million. Its 300,000-strong work force includes the “thundering herd” of some 15,000 brokers from Merrill, and 55,000 mortgage workers who help service one in five American home loans.
“This is a behemoth,” Mr. Williams says. “But I have no idea where Bank of America is going.”
MR. MOYNIHAN appears to be scarcely aware that his anniversary is upon him. “We are working that day, right?” he points out. “I don’t have any special things planned. My mother asked me what day it was, and I couldn’t remember whether it was the 16th or 17th.” (It’s the 16th.)
Then again, it might just be an uncomfortable reminder of the selection process that led to his appointment in the fall of 2009, when the bank was rudderless for two and a half months after Mr. Lewis resigned and the board mulled over different candidates. Initially, directors looked at an outside choice, Robert P. Kelly, chief executive of Bank of New York Mellon, but that foundered after it became clear that it would be expensive to lure him away.
Ken Lewis had poked fun at Mr. Prince, says one former executive who requested anonymity because he was not authorized to speak publicly, and joked that he would never turn the company over to a lawyer. But Mr. Lewis, who declined to comment for this article, had not groomed a successor.
Mr. Moynihan’s internal rivals had troubles of their own. One of them, Greg Curl, then the chief risk officer, was a strategist behind the acquisitions of Merrill Lynch and Countrywide, both of which had turned into money pits.
Mr. Moynihan, on the other hand, didn’t carry much baggage. An Ohio native and former rugby player who graduated from Brown University and Notre Dame Law School, he initially made his mark in New England in the 1990s, quickly working his way up from associate general counsel at Fleet bank to run corporate strategy.
At Fleet, Mr. Moynihan was a leading member of the so-called Nifty 50, a group of young executives who had been identified as up and comers, recalls Bill Mutterperl, who served as Fleet’s general counsel and was Mr. Moynihan’s first boss. “He’s indefatigable in terms of being a hard worker, putting in incredible hours, focusing and never losing attention,” Mr. Mutterperl says.
He also played a central role in Fleet’s own expansion. “On many deals he knew how to find the bodies that were buried and really do the due diligence,” Mr. Mutterperl says. “He is a real fixer.”
Mr. Moynihan was one of the few Fleet executives to survive when Bank of America acquired it in 2004, becoming president of the combined company’s global wealth and investment management business. He stabilized that unit, in which mutual fund managers had run afoul of regulators over trading practices, and then switched over to run Bank of America’s global corporate and investment bank in 2007.
Mr. Moynihan remained based in Boston, however, raising his three children in the suburbs and making it a point to be there for soccer games and birthday parties. His distance from Charlotte would actually turn out to be crucial when the top job opened up.
Amid the tumult caused by the merger with Merrill, Mr. Moynihan managed to hang on, cycling through four top jobs in 2008 and 2009, stepping in as other executives quit or were fired. He served for less than two months as general counsel, moving on to run corporate and investment banking and wealth management in January 2009, only to shift to running the consumer bank in August 2009. By December, he was chief executive.
“The good news was that he’d seen a lot of the businesses,” says Mr. Mayo, the analyst at Crédit Agricole. “The downside is that he wasn’t in any position for that long, making it much harder to evaluate his track record.”
Charles O. Holliday Jr., Bank of America’s chairman, admits that “nobody likes to move an executive after four months. But this guy was a proven quantity who could hit the ground running and produce results quickly.”
Others say Mr. Moynihan gets the job done without complaining or spending too much time analyzing the unforgiving messes he has frequently had to clean up.
“It’s really interesting how we got here, but it’s completely unimportant to where we go next,” Mr. Moynihan says. “You got to sit there and say, ‘Do I want to be part of the team? Yes.’ Then go do your job.”
IF Mr. Moynihan didn’t have time to settle into the myriad jobs he had before becoming chief executive, it also meant he avoided blame for the losses piling up at Merrill and for the controversial decision to hand out billions in bonuses to Merrill’s employees shortly before the deal closed in the beginning of 2009.
Unlike Countrywide, Merrill is now paying off for the company. In the first nine months of the year, Bank of America’s investment bank, wealth management and capital markets units earned $6.7 billion, or well over half the company’s overall profits. In businesses like leveraged finance, equity underwriting and investment banking, the combination of two middle-tier players has created a powerhouse.
“It took a long while for people to agree with us,” Mr. Moynihan says about Merrill. “You’re seeing the power of the franchise come through. It was a terrific transaction.”
David Darnell, the head of commercial banking, says his unit has received 10,000 leads from the former Merrill. “This is working,” he says. “Merrill is a game-changer in my business.”
But what about Countrywide?
“A decision was made; I wasn’t running the company,” Mr. Moynihan says, although he was obviously a top bank official at the time. “Our company bought it and we’ll stand up; we’ll clean it up.”
Countrywide has already cost Bank of America more than $5 billion in write-offs. But Mr. Moynihan might be the last man standing when it comes to defending the merits of the deal.
“When we get through the work on the management side, people will come to the same conclusion that this is a great thing for customers and a great thing for the bank,” he says. “Right now, we’re still absorbing the body blows.”
There’s no sign that those body blows will stop anytime soon. Nearly all of Bank of America’s subprime mortgage portfolio was inherited from Countrywide, whose risky lending typified the giddy years before the housing bubble burst.
Countrywide also saddled Bank of America with many more homeowners in default than its system could possibly handle. The overload contributed heavily to the consumer abuses and dubious legal practices that led it to halt foreclosures across the country in October, after the news media, courts and regulators began questioning the bank’s operations.
Mr. Moynihan remains reluctant to yield much ground on Bank of America’s foreclosure practices, however.
“At the end of the day, we could have done better. I’ll take constructive criticism,” he says, especially on delays as the caseload exploded. Still, with the number of workers focusing on defaults set to hit 30,000 by early next year — triple what the bank had two years ago — he says he’s “satisfied that we are doing everything we can and that we’ve caught up and are working through the backlog.”
“This is a very, very difficult process,” he adds. “People want to pay us their debt, but they’re sick, they’ve lost their job, they’ve lost their income. It’s a very tough scenario to have a good outcome for anybody.”
In-house mortgage modifications, the process in which the terms of a loan are eased so homeowners have a chance to catch up, have been a source of contention between the banking industry and its critics.
Mr. Moynihan points out that the scale of Bank of America’s modification efforts far exceeds those of his competitors — 725,000 modifications since January 2008 — and is expanding fast. He says the rate of monthly modifications jumped to 22,400 in November from 12,700 in September.
“I feel proud of what we’ve done,” he says. “You never want to have a customer feel something wasn’t done right.”
But with more than 1.3 million of its customers still behind on their mortgage payments, even tens of thousand of modifications a month still represents a small portion of the loans.
Other numbers also tell a less rosy story. For homeowners who failed to get a permanent modification under the federal government’s Home Affordable Modification Program, only 14 percent managed to get an alternative in-house modification at Bank of America, compared with 31 percent at JPMorgan Chase, 27 percent at Citibank and 40 percent at Wells Fargo.
And of the 425,000 homeowners serviced by Bank of America estimated to be eligible for the program at the end of September, only 0.7 percent began trial modifications in October, according to federal data. That compares with 2.4 percent at JPMorgan Chase, 1 percent at Citibank and 1.6 percent at Wells Fargo.
“Bank of America has just had a culture of being more reluctant to make concessions as part of the modification process,” said Alan White, associate professor of law at Valparaiso University in Indiana. “It’s improving slowly, but they continue to lag their peers.”
Bank of America says that the government’s modification program is a limited benchmark for measuring its progress, and its overall record on modifications is hampered by Countrywide’s subprime-heavy portfolio.
While the bank may be making progress, the overall picture Mr. Moynihan paints still doesn’t reflect reality, says Rachel Bloch, a foreclosure prevention advocate at Empowering and Strengthening Ohio’s People, a Cleveland community organization that helps borrowers with troubled mortgages stay in their homes.
“I’ve been working with Bank of America for three years now, and it’s been a really hard process,” she says. “I have homeowners waiting for a year just to get an update, let alone a resolution.” Over and over again, she said, the paperwork sent in by borrowers is lost, causing further delays, while fees and penalties accumulate.
It’s a problem cited by other consumer advocates and homeowners like Dorothy Robinson of San Jose, Calif. Ms. Robinson, 66, has been trying to get a modification from Bank of America on her $476,000 mortgage for the last two years, ever since her husband lost his job.
But dealing with customer service has been incredibly frustrating, she says, with one bank representative telling her she’d been denied, another saying the modification had been approved, and both of them repeatedly asking for documents she’d already sent in. And when Ms. Robinson withdrew money from her retirement account to try to get caught up, it took months for Bank of America to even record the payment, she says.
“I have to get this resolved. I need a roof over my head,” says Ms. Robinson. “I don’t know what’s happening.”
Bank of America says Ms. Robinson has been conditionally approved for a modification under the government program, including a principal reduction. More information is still needed from Ms. Robinson to confirm final eligibility for the modification, the bank says, while denying that there is any systematic problem causing documents to be lost.
BAD as the foreclosure mess has been for Bank of America’s reputation, Wall Street analysts say a bigger financial threat is looming: what if Bank of America and other giants are forced to buy back a portion of the hundreds of billions in mortgages gone bad?
A growing number of investors are arguing that because the mortgages may have been originated fraudulently, or sliced into mortgage-backed securities without adequate due diligence, the banks are obligated to buy them back under the original terms of the securities — a process known as a putback.
Legal barriers to putbacks are high, but the sheer amount of mortgages originated, securitized and sold to all investors by Bank of America and Countrywide is staggering — $2.1 trillion from 2004 to 2008.
So even if only a small portion are put back, some analysts argue, the losses for banks could run into the tens of billions. This is one issue on which Mr. Moynihan and Charles H. Noski, the chief financial officer, have made a more forceful case that the risk is “manageable,” promising “hand-to-hand combat” in the courts on a loan-by-loan basis if putbacks start cascading in.
But analysts like Mr. Mayo cite fear of putbacks as one reason Bank of America’s stock has lagged behind its main rivals. “People are worried about a $35 billion hit,” Mr. Mayo says. “That may be wrong, but they haven’t convinced people otherwise.”
Mr. Moynihan is unbowed. “We signed up for the task, and we’ll clean it up,” he says. “We’re working our tails off.”
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: Bank of America, BlackRock, BofA, Charles Holliday, Charles O. Prince, Citigroup, countrywide, David Darnell, Mayo, Merrill Lynch & Co., Moyhihan | 28 Comments »