Moynihan's Next Act: Fixing B of A's Business

Brian Moynihan has led Bank of America through its darkest period, punctuated Thursday by its nearly $17 billion settlement with the Justice Department.

His job since taking over as chief executive from the controversial Ken Lewis in 2010 has primarily been one of negotiator-in-chief. He has overseen $48 billion in settlements of mortgage bond, overdraft, fair lending and other problems, most of which stemmed from Lewis' ill-fated acquisitions of Countrywide Financial and Merrill Lynch.

Moynihan, a lawyer, was well suited for the job. Now he faces perhaps an equally daunting challenge: nudging the nation's second-largest bank back to growth while wrapping up the last of its legacy mortgage problems. Though B of A still has some litigation pending, the settlement will free Moynihan to focus on the core banking franchise.

"You don't necessarily call it a win when you're looking at a number this big, but it's an important step toward putting the litigation behind them and moving on," said Benjamin Diehl, a special counsel at Stroock & Stroock & Lavan LLP, and a former supervising deputy attorney general in California, where he helped negotiate the national mortgage settlement.

Many had questioned whether Moynihan, a plain-spoken executive from Ohio who rose from the ranks as outside legal counsel for Fleet Bank to become the successor of the much-criticized Lewis, was up to the task. He was chosen to replace Lewis by former B of A director Charles Gifford, the CEO who sold FleetBoston Financial to B of A in 2004.

Allen Jones, a managing director at RiskSpan, a Washington mortgage-data consulting firm, and a former B of A executive, said Moynihan, 54, can now return to the bread-and-butter business of serving customers.

"He's done the hard work and now he can focus on rebuilding the core businesses of the bank," Jones said. "That's been a huge part of his job, rebuilding a brand that was so tarnished after the acquisition of Countrywide. They weathered the storm."

Shareholders had grown impatient as Bank of America's legal problems lingered while other banks such as JPMorgan Chase were putting most of their problems behind them. Theyapplauded the settlement Thursday, sending B of A's shares up 4.45% to $16.21 a share in late-day trading Thursday, a 13% jump from a year ago.

Moynihan overall seems to have maintained the faith of shareholders, analysts say, so he is expected to stay with the Charlotte, N.C., bank for the foreseeable future.

In the short term, B of A will take a hit to third-quarter earnings; the anticipated charge roughly equals one quarter's worth of earnings. The settlement is expected to reduce B of A's third-quarter pre-tax earnings by $5.3 billion or 43 cents a share after tax, B of A said. By comparison, in the second quarter B of A earned $7 billion in pre-tax, pre-litigation earnings, so the company can easily absorb the overall cost of the $17 billion settlement.

Bartlett Naylor, a financial policy advocate at Public Citizen, a nonprofit watchdog group, denounced the agreement, saying the profits that B of A made from the securitization of nearly $1 trillion of loans sold to investors far exceeded the penalties.

"They had a machinery that was full of fraud, and this is a settlement made of out of the courts with little transparency," Naylor said. "We don't know how much they gained, but the figure is not in the same order of magnitude."

Dick Kovacevich, a former Wells Fargo chairman and CEO, criticized the settlement, saying no B of A employee or stockholder engaged in criminal conduct. "This is just simply a political stance and theater," Kovacevich told CNBC. "This has nothing to do with justice or restitution to innocent victims."

Moynihan said in a press release that the settlement "resolves significant mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future."

B of A said the settled claims relate primarily to conduct that occurred at Countrywide Financial, the once high-flying Calabasas, Calif., subprime lender and at Merrill Lynch, two firms B of A acquired in 2008.

Former Countrywide Chairman and CEO Angelo Mozilo is now the target of a separate civil lawsuit by prosecutors in Los Angeles. In 2009, a year before Countrywide was acquired by B of A, Mozilo fatefully told shareholders that B of A "will reap the benefits of what we have sowed."

Moynihan has made huge strides reducing B of A's remaining legacy mortgage assets, which would position the company to deliver a reasonable rate of return. B of A also will get a bump from higher interest rates in the short run, analysts say.

Moynihan has sought to return B of A to its roots of delivering products to core customers. To that end, he blundered early on by scaling back the bank's mortgage business during the refinancing boom. The overcorrection was unsurprising in light of the Countrywide debacle, but in the last year B of A has begun to reemphasize mortgages.

Working down the default servicing costs of legacy loans is critical to reestablishing the core economics of the retail consumer business. B of A's pre-tax, pre-provision profit margin of roughly 30% still trails those of peers JPMorgan and Wells Fargo, which are running at about 40%, analysts say.

Moynihan this summer acknowledged the major expense of servicing soured loans.

B of A serviced 263,000 loans that were delinquent by at least 60 days in the second quarter, a 47% drop from a year earlier. Expenses for those loans fell to $1.4 billion in the second quarter, but Moynihan has vowed to cut those expenses to $500 million a quarter.

"The No. 1 thing about costs is continuing to work down the legacy costs, down to a more normalized level on a per-loan basis and also keep reducing the number of delinquent loans," Moynihan said during a second-quarter conference call.

The nearly $17 billion settlement could prove to be a turning point for B of A and Moynihan.

"It represents a significant sanction for alleged misconduct, and B of A clearly determined that it felt it needed to do this to be judged based on its services and products offered today versus those offered in 2008," Diehl said. "It's of a magnitude that has the potential to be considered a watershed moment."

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Comments (3)
The problem was tremendous. Markets were failing. People had lost confidence and were pulling their remaining funds from the banks. Companies were closing doors, laying people off in great numbers. The economy was faltering. And as much as I hated TARP, it was a necessity to stop the bleeding.

How we got there and why is an amazing story, but stopping the pain, regardless of where the funds came from, was a necessity and a success story.
Posted by ROBERT R | Tuesday, August 26 2014 at 12:57PM ET
Bank of America's behavior, just as that of the other banksters is criminal. They should all be in jail. Instead they are partying on the taxpayers money given to them through TARP. Every politician who voted for TARP should be voted out of office.
Posted by marilynn e | Friday, August 22 2014 at 4:56PM ET
Moynihan was the perfect guy for the job. He has done an amazing job here. Although the settlement numbers seem high, they could have been considerably higher. His negotiating skills paid off for Bank of America, no doubt. They are lucky to have Moynihan because they are now about to see just how smart this guy is. He is the right captain for this ship, I just hope he decides to stay and show the world what, I know, he is capable of accomplishing!!!!
Posted by ROBERT R | Friday, August 22 2014 at 1:07PM ET
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