If the saga of Bank of America, the country's largest and most
troubled bank, were to be made into a movie, its title would have to
be "The Dumbest Men in the Room," with a starring cast that features
its half-witted chief executive officer Brian Moynihan and his equally
half-witted board of directors.
All of which wouldn't be so bad if Moynihan and his brain-dead board
weren't running a bank with more than $2 trillion in assets and $1 trillion in
customer deposits that the federal government (meaning taxpayers)
might have to cover some day if Bank of America hits the skids just as
it did during the financial crisis of 2008, and as it almost did in
the last couple weeks.
Just to recap: BofA's share price was heading to zero as investors
came to believe that all the bailout money, the billions upon billions
of guarantees and zero-percent borrowing rates the government handed
the bank over the past two years wasn't working. That's because on top
of everything else, the big bank was facing a new potentially, more
devastating liability: untold billions of dollars in losses tied to
the sale of faulty mortgages by its Countrywide Financial unit, and
Moynihan's inability to come up with a plan to deal with the problem.
The run on the stock appears to have ended last Friday when Warren
Buffett pumped $5 billion into BofA in one of the most one-sided deals
the market has ever seen (I don't even need to say who got the short
end of this stick), and the company began unloading prime assets like
a piece of its stake in the China Construction Bank, raising billions
of dollars more. Investors seem to be getting comfortable that the
worse is over for BofA and that Moynihan is starting to get his act
together. The bank's stock price is no longer heading toward
penny-stock territory (shares are now trading at around $8 today), and
market talk about another round of government bailouts has ceased, at
least for the moment.
Will it last? Buffett says he thinks so and he's been saying a lot of
nice things about the bank and Moynihan since he announced his big
investment. But Buffett's show support should be seen for what it is:
a bribe. Under the terms of the deal, he has already made more than
$500 million, with many more hundreds of millions to come. His
investment isn't even a week old.
For that reason, investors should remain wary that the biggest bank in
the country won't at some point become the nation's biggest banking
catastrophe. While BofA may be in a better financial position than it
was before the 2008 financial crisis (it would be difficult to be any
worse), or before Buffett came to the rescue, it's far from a healthy
situation.
And one more thing: the bank is being led by possibly the most
unqualified CEO in all of corporate America.
I say this not because I dislike Moynihan; I've met him and he's seems
like a nice enough guy. Some smart people on Wall Street hold him in
high regard for basically the same thing; if there is a CEO in
financial business who wants to do the right thing, they say it's
probably Brian Moynihan.
But desire aside, Moynihan has been nothing short of a klutz as a
leader. Part of his problem is that he's a lawyer by training and
lawyers make lousy CEOs (remember Chuck Prince's messy tenure at
Citigroup). But at least Prince proved to be a decent lawyer who fought
his way up the corporate ladder to replace Sandy Weill as Citi's chief
executive.
The best you can say about Moynihan is that he got the job by default.
Before he became CEO, Moynihan was a regarded as B-player at best by
his colleagues. He held a variety of jobs inside Bank of America's
vast bureaucracy and failed to stand out at any of them. He was
mediocrity personified.
Moynihan he did have one thing going for him: he was part of a group
of executives who remained at BofA after it purchased Fleet Financial
in 2004 where he served as general counsel. And his Fleet lineage
helped him when it mattered most. Ken Lewis, under investigation for
his financial-crisis purchase of the troubled Merrill Lynch brokerage
firm, had resigned. A boardroom showdown over Lewis's successor ensued
with some members wanting an outside candidate and others looking to
promote one of Lewis's cronies.
At the time, Moynihan's name was barely on the long list of
candidates. But several former Fleet board members remained on the
BofA board, and capitalized on the general dysfunction to promote one
of their own. With that, a man least likely to succeed as a CEO became
the head of the nation's largest bank.
Moynihan took over in January 2010 and began screwing up from the
start. He assured investors that the feds gave BofA the green light to
raise its dividend when no green light had been given because the
bank's post-crisis finances weren't strong enough. Despite mounting
evidence that BofA faces a crisis of large magnitude stemming from
Countrywide, Moynihan has inexplicably downplayed the bank's exposure
right up to the moment the bank was about to announce its intention to
shell out its first multi-billion settlement to investors holding
soured mortgages.
In fact, Moynihan has had nearly two years to prepare for the
onslaught of Countrywide related claims -- one even came from his
business partner, Larry Fink, the CEO of Blackrock, the money management firm that BofA had held
a huge stake in. Yet when the trouble began earlier in the year,
Moynihan didn't have a clue about how to proceed.
"He seemed lost," one investor who met with Moynihan about the
liabilities told the Fox Business Network.
What's even worse, he seems to have learned almost nothing from recent
history of financial firms and their top executives assuring everything
of OK when it really isn't. Though people who know Moynihan swear he's
honest, he's been coming across as a CEO in the mold of Dick Fuld and
Alan Schwartz -- the guys who ran Lehman Brothers and Bear Stearns into
the ground but not before assuring the markets that their firms were
fine before they imploded.
Moynihan's BofA isn't quite the house of cards of either Bear or
Lehman, but he seems to be relying on the Fuld/Schwartz handbook of
dissembling when he should be telling the truth. During the recent run
on the stock, Moynihan and his PR staff were absurdly spinning that
BofA was in absolutely no need of additional capital, downplaying
reports, including an early one by the Fox Business Network on August
4, that the bank was looking to cash out of at least part of its stake
in the China Construction bank.
But between Buffett and the sale of the China Construction stake BofA
has raised close to $13 billion in additional capital. The BofA flacks
are saying that the moves won't "dilute" shareholders and place more
downward pressure of BofA shares since the bank isn't selling new
stock to come up with the money. But one of the reasons why the
Buffett deal is so one-sided is because BofA basically handed the
Oracle of Omaha the right to purchase some 700 million shares anytime
over the next 10 years -- or 7% of all outstanding BofA stock -- in what
will be the mother of all dilutions once that nice old man from Omaha
decides to cash in his chips.
Despite all of this, Moynihan's in-house defenders will tell you that
their man is working day and night to fix the bank and repair
something he had very little to do with, namely Countrywide. That's a
bit closer to reality since it was his predecessor Lewis on a pre-crisis buying spree to make BofA the world's largest bank, who snapped
up Countrywide in early 2008.
But Moynihan wasn't exactly an innocent bystander in terms of
Countrywide. In all those Countrywide-related meetings when he worked
as part of Lewis's management team, did Moynihan even once raise his
hand and object to the purchase?
The answer from what I understand is no.
For all of this experience, of course, Moynihan might be the best person to
run BofA for some of the more brain-dead members of the bank's board,
but investors should be demanding something better. So should
taxpayers, because if Moynihan fails to fix the problems at Bank of
America, they will be paying the ultimate price in the form of another
massive government bailout.
And all because Brian Moynihan used to work at Fleet.