Bank of America: Why "Project New BAC" Is Doomed
Bank of America (BAC) CEO Brian Moynihan hopes that "Project New BAC," the company's corporate restructuring plan, will convince investors that he knows how to revive the struggling financial giant. Don't bet on it.
According to the few details the executive laid out today, the new B of A will look a lot like like the old one. Slimmer, to be sure, as the bank looks to lay off as many as 30,000 workers over the next several years. More focused, too, as it continues divesting "non-core" assets under Moynihan's plan to get back to banking basics. The bank also will have fewer managerial layers, whatever that's worth.
These are sensible, if conventional, moves. Such streamlining is standard operating procedure for corporate behemoths under financial pressure. In banking, mass firings and asset sales have long been part of the usual playbook for corporate leaders eager to assuage restive investors. And despite B of A's sinking stock price and legal nightmares, the firm is in considerably better condition than it was two years ago. As banking analyst Chris Whalen of Institutional Risk Analytics puts it:
BAC is a good company with a bad parent company balance sheet.B of A's problem is this -- you can't "revamp" the past. Layoffs can't undo the toxic home loans at the center of federal, state and private litigation against the bank. Operationally, the company also faces a far more challenging domestic and global economy. Indeed, this is a lousy time for banks to try to shrink their way out of trouble.
Paying the price
Moynihan neatly summarized the company's problems last year when he told attendees at an investor conference that "at the end of the day, we'll pay for the things that Countrywide did."
Correct. B of A's $4 billion purchase of the subprime lender in 2008, well after mortgages around the country had started turning to dust, will go down as one of the most self-destructive acquisitions of all time. Project New BAC does nothing to dispel the mortgage-related cloud hovering over the company.
B of A faces a range of legal threats. On Countrywide, a host of financial firms, investors and state legal officials are trying to force the bank to repurchase mortgages the subprime lender issued during the housing bubble. B of A may even eventually have to contend with criminal charges in New York, where state attorney general Eric Schneiderman is looking into how the company sold mortgage-backed securities.
The Federal Housing Finance Authority, the government agency that oversees mortgage giants and , also sued the bank this month in alleging that B of A had deceived investors about the quality of mortgage securities. In addition, B of A faces numerous lawsuits by homeowners seeking to block the bank from settling an $8.5 billion settlement with large mortgage investors and a tide of litigation over its illegal foreclosure practices.
The potential tab for these suits? Who knows, although the estimated costs run into the tens of billions of dollars. However B of A remakes itself, uncertainty over these potential losses is likely to continue for years. And for shareholders assessing the risks around the company, it isn't enough for the company to have a strong quarter or two -- the company's results must consistently outperform its enormous potential legal liabilities.
Too big to succeed
Revamping B of A would be difficult in the best of times. Today, a global economic slowdown and stricter regulatory environment make growth even more challenging for big financial firms. Roughly two-thirds of B of A's lending in the U.S. is geared to consumers, for instance, so weak demand for home, credit card and other loans hits the company especially hard. And while Merrill Lynch, which B of A also bought in 2008 during the height of the banking crisis, is profitable, investment banking is far less lucrative than it was before the housing bust. Notes the FT: