Bank of America Corporation
Over the last decade, Bank of America transformed itself from a regional institution into the nation's largest brokerage house and consumer banking franchise. But during the financial crisis it was sapped by huge losses and a deal turned sour, and lost its position of pre-eminence to JPMorgan Chase and Goldman Sachs, the emerging titans of post-meltdown Wall Street.
While those institutions rebounded, Bank of America, along with Citigroup, came to symbolize the troubles plaguing the nation's banking industry. And while Bank of America reported a $3.2 billion quarterly profit on July 17, 2009, the result was driven by billions of dollars in one-time gains. Without the sale of its stake in a big Chinese bank, Bank of America would have lost billions.
On Dec. 2, 2009, Bank of America announced that it would repay the $45 billion in federal aid that it received at the height of the financial panic -- a step that, only months ago, would have been almost unimaginable.
Despite continuing problems with its loans to struggling homeowners and consumers, Bank of America is once again making money, in large part through Wall Street businesses like trading stocks and bonds, rather than by making loans.
Bank of America will repay part of its relief funds by selling $18.8 billion in stock that is expected to be converted into common stock, a move that will further dilute its existing shares even as it strengthens the bank's financial footing.
But most of the money will come from money that Bank of America has generated in recent months with its wagers in the financial markets. After its acquisition of Merrill - a takeover that was once panned but now appears to be paying off - Bank of America has taken greater risks to compete with Wall Street giants like Goldman Sachs and JPMorgan Chase.
The bank said it would put $26.2 billion of its cash toward repaying its bailout and would also sell off $4 billion in assets.
The board of directors at Bank of America struggled to find a replacement for its beleaguered leader, Kenneth D. Lewis, whose resignation is effective on Dec. 31. By paying back the federal money that it received, Bank of America will free itself from exceptional federal oversight of its executives' pay -- a thorny issue in recruiting a new chief executive.
On Dec. 17, Brian T. Moynihan, formerly head of Bank of America's consumer unit, was named to succeed Mr. Lewis. Mr. Moynihan, 49, joined Bank of America after it acquired FleetBoston in 2004, becoming president of global wealth and investment management. Before he was named head of consumer banking, Mr. Moynihan served as president of investment banking and as general counsel.
Bank of America grew through an aggressive series of acquisitions. But the September 2008 purchase of Merrill Lynch, when that famed brokerage house was at death's door -- may have been a deal too far. On Jan. 14, 2009, the Treasury announced that it was injecting $20 billion into Bank of America (on top of $25 billion it received in the financial system bailout) and pledging to absorb as much as $98 billion in losses on toxic mortgage assets that Merrill brought with it.
The Merrill Lynch deal drew heavy criticism, and in April 2009 shareholders voted to strip Mr. Lewis of his title as chairman of the board -- a stinging blow that left his legacy in doubt. The board said that it still unanimously supported Mr. Lewis in his role as chief executive. But on Sept. 30, 2009, the bank announced that Mr. Lewis had resigned, effective at year's end.
The Merrill deal was a headache for Mr. Lewis throughout 2009. Congress held a series of hearings on the deal, in which Mr. Lewis was alternately defended as the victim of government bullying and derided as little more than a shakedown artist. On Aug. 3 of that year, Bank of America agreed to pay $33 million to settle claims by the Securities and Exchange Commission, without admitting or denying the accusations, that it had misled its shareholders about $3.6 billion in bonuses paid by Merrill before Bank of America bought it.
On Aug. 10, the judge in the case, Jed S. Rakoff, refused to approve the deal, questioning whether the $33 million agreement was adequate. He said too many questions remained unanswered, including who knew what and when about the controversial payouts. On Sept. 14, Judge Rakoff overturned the settlement. His ruling directed both the agency and the bank to prepare for a possible trial that would begin no later than Feb. 1, 2010. He wrote that the settlement "does not comport with the most elementary notions of justice and morality."
GROWTH BY PURCHASE
Bank of America's recent difficulties are a startling change from what had been a successful run of growth by purchase. In 2003, it paid $48 billion for FleetBoston Financial, which gave it the most branches, customers and checking accounts of any United States bank. In 2005, Bank of America became the biggest credit card issuer when it bought MBNA for $35 billion. And when the mortgage meltdown came along the bank showed itself ready to move rapidly to take advantage of the instability, acquiring two troubled giants: Countrywide Financial and Merrill Lynch.
The deal for Merrill cost more than $50 billion -- and appeared to have been a coup, transforming Bank of America overnight into the nation's largest player in wealth management.
The $4 billion deal for Countrywide, which had become a symbol of the excesses that led to the subprime mortgage crisis, had already significantly bolstered Bank of America's position in the mortgage market while rescuing Countrywide from the jaws of possible bankruptcy. At the time, both deals appeared to burnish the reputation of Mr. Lewis, and his strategy of bold acquisitions that had turned what was once a regional institution into a national player. A decade ago, it was known as NationsBank when it bought a much larger institution, the Bank of America, and took its name.
The purchase of Merrill represented something of a change of heart for Mr. Lewis -- or an underscoring of his willingness to move quickly when he saw an opportunity.
Only a year before, Bank of America appeared to have given up on investment banking after enduring a string of large losses. Mr. Lewis had spent more than $625 million to expand it, only to see all of its trading businesses swamped by red ink.
In retrospect, the Countrywide and Merrill Lynch acquisitions turned Bank of America into the type of financial supermarket model that Citigroup had championed -- just at the time that deep mortgage losses are forcing Citigroup to dismantle it.
TURNING TO WASHINGTON FOR HELP
Like the nation's other big banks, the Bank of America received $25 billion from the federal government in October 2008 as part of the Treasury Department's bailout of the financial system. Then in December 2008 it quietly turned to the government for help after learning that Merrill would be taking a fourth-quarter write-down of $15 billion to $20 billion, which came on top of the bank's rising consumer loan losses. Mr. Lewis threatened to talk away from the Merrill deal, which had not been finalized. Henry M. Paulson Jr., then the Treasury secretary, warned that leaving Merrill to collapse on its own could put the entire banking system in peril. He told Mr. Lewis that if he did, the Federal Reserve would use its authority as the bank's regulator to force him out. Both sides were later heavily criticized for not disclosing the Merill losses until January 2009, after the deal had closed.
After the loss was disclosed, the government announced that it was injecting $20 billion more into Bank of America. The second lifeline brought the government's total stake in Bank of America to $45 billion and made it the bank's largest shareholder, with a stake of about 6 percent.
On April 20, 2009, the bank reported a $4.2 billion quarterly profit, but investors sent its shares and that of many of its peers down on fears that much of the new profits being reported by banks stemmed from recently approved changes in accounting rules and one-time accounting gains.
In May 2009, the government told Bank of America that its so-called stress test indicated that the bank would need to raise $33.9 billion in new capital to withstand any worsening of the economic downturn. In July, the bank reported that it increased its capital buffers by nearly $40 billion by issuing stock and selling assets in a sign that it is preparing to absorb losses in its commercial and consumer loan businesses. Its quarterly earnings were put in the black by the $5.3 billion pretax gain from the sale of shares in the China Construction Bank.
UPROAR OVER BONUSES
In the months following the various government bailouts of financial institutions in the fall of 2008 and into the spring of 2009, the American public made clear its displeasure over big bonuses paid to executives of financial firms, who in the minds of many, were the very people responsible for the financial crisis.
Bank of America approved a round of such bonuses in late 2008 to some of its Merrill Lynch executives just before the bank took control of Merrill. Neither company provided details of the bonuses to their shareholders, who voted on Dec. 5 to approve the merger. When the bonus payments were revealed, however, shareholders were outraged, as was the S.E.C., which filed suit, and Judge Rakoff, in whose court the proposed settlement was heard.
Judge Rakoff overturned the settlement in September 2009. The judge focused much of his criticism on the fact that the fine in the case would be paid by the bank's shareholders, who were the ones that were supposed to have been injured by the lack of disclosure.
"It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims' money should be used to make the case against the management go away," the judge wrote.
The proposed settlement, the judge continued, "suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."
