A collection of businesses fraught with risk. A seedbed of cultural dissonance. A company that did too much to increase in size, and not enough to contain the rot beneath the foundation of its supersized balance sheet.
This has long been the rap on Citigroup Inc., but increasingly the description is being applied to Bank of America Corp., which seems to have taken over for Citi as the poster child for what can go wrong at a big, complicated bank.
Certainly Citi still has its problems, but the company has been keeping a relatively low profile of late as it works on selling assets, repairing relationships with regulators and slowly renewing investor confidence. In contrast, B of A, whether it is dealing with the fallout of the foreclosure mess or the threat of an informational assault by WikiLeaks, keeps finding itself in the public glare.
"For the longest time, people were criticizing Citi, saying Citi can't get out of its own way," said David Havens, a Nomura Securities debt analyst who follows U.S. financial institutions. "The general view [now] is that Citi is getting its act together, and B of A is still looking back and grappling with some of the problems that are left over from the financial crisis, specifically the mortgages."
Though both banks needed extra assistance from the government in 2008, it was Citi that became the lightning rod for an angry citizenry early in the financial crisis, while the rescue of Merrill Lynch & Co. gave B of A some cover in its request for help. But as the credit cycle churned and the mortgage mess moved front and center, the negative attention migrated to B of A.
Of course recent revelations about robo-signers and the intensified concerns over put-back risks in the securitization market have not been helpful to any of the big banks. But as the steward of the giant Countrywide franchise, the backlash has been particularly punishing for B of A, which has been responsible for a third of the country's home loan modifications.
"Cleaning up the distressed Countrywide portfolio colors everything we're doing right now, but it's manageable and we are meeting it head on," said Lawrence Di Rita, a spokesman for B of A. "At the same time, our new home loans business has originated more than $200 billion in high-quality home loans this year, showing the potential of this important product in our customer-centered strategy."
But investors remain worried. When the debate over the need for a national foreclosure moratorium reached a crescendo in mid-October, it started to cost more in the credit derivatives market to protect against a bond default by B of A than by Citi, implying that investors had begun to assign a greater default risk to B of A. The difference has widened since. On Friday, protection against a default on $10 million of B of A debt cost about $183,000 based on the price of a five-year swap, compared with $142,000 for protection on Citi debt.
Of course the idea of an actual default remains remote. But enough clouds have been gathering over the put-back risk in B of A's mortgage business that Damon Silvers, a member of the Congressional Oversight Panel monitoring the Troubled Asset Relief Program, believes the government ought to be examining the situation as a systemic risk.
A group including the Federal Reserve Bank of New York, BlackRock Inc. and Pacific Investment Management Co. already has sent B of A a letter requesting that the company repurchase soured mortgages that had been sliced and diced into $47 billion of bonds. Silvers, who is the policy director at the AFL-CIO, pointed out at the oversight panel's Oct. 27 hearing that if B of A were to receive a few more requests of similar size, the repurchase demands would eclipse the company's total stock market capitalization. When a Treasury Department official testified that there "didn't appear to be evidence of a major systemic risk" from the put-back issue, Silvers shot back, "I hope … if the Treasury comes back to us and is discussing whether or not we need to deploy further public funds to rescue Bank of America, or any such institutions as might be affected by these events, that we get a similar kind of indifference to their fate after it's too late."
In an interview, Silvers said that his comments were not meant to foreshadow another bailout of B of A but rather to get at whether the government feels it has a systemic risk in its midst when it comes to the question of put-backs. Either way, B of A — like all big banks with significant mortgage exposure — has a tough problem to attend to.
"We know that the securities that are involved in the New York Fed letter to B of A are worth 50 cents on the dollar, and if you start putting loans back piecemeal, you're not putting back the good ones, so you can begin to measure the scale of the potential downside here and you can see your way very quickly to a problem," Silvers told American Banker.
Even before the mortgage woes came to a head, there were signs that B of A was potentially inviting the kind of criticism that Citi had courted for years.
The messy search process that led to Brian Moynihan's promotion a year ago to chief executive, replacing Kenneth Lewis, put B of A in the same governance camp as Citi, which twice since 2003 raised eyebrows with CEO picks seemingly made in lieu of any real succession planning.
Meanwhile, B of A was trying to digest the gargantuan acquisitions of Countrywide Financial Corp. and Merrill Lynch. Though both companies fit into B of A's strategy of serving three major constituents of customers — consumers, companies and institutional investors — they also diluted B of A's historic strength of maintaining a strong core of simple business lines in retail and commercial banking.
The acquisitions also presented the classic problem of integration, not just of systems but of radically different cultures, a challenge that Citigroup architect Sanford Weill never addressed successfully as he cobbled together diverse businesses.
B of A has been making much clearer strides on this front. In August and September, 1.2 million B of A brokerage accounts were transferred on to Merrill Lynch's brokerage platform, a feat that took 2 million hours of coding and hundreds of thousands of testing scenarios. After an initial wave of defections, the rate of attrition among financial advisers has calmed to historic lows.
With $31.3 billion of revenue in the first nine months of the year, the company's investment bank has dominated the top ranks in the league tables for a variety of asset classes. The melding of B of A's strengths in debt financing with Merrill's leadership on the equity side and in merger advisory have helped the company bounce back from 2009, when the initial growing pains from the integration coincided with a destabilization in the markets.
"Those two factors made it challenging," said Jeffrey Kaplan, the veteran Merrill banker who runs mergers and acquisitions globally for Bank of America Merrill Lynch. "But the fact that the strategy was logical, that the compatibility was good — that made the execution feasible, and that's why we stand where we do today. We got through the combination and the integration, and we got through it at the point in time where the markets began to rally."
But it is less clear how the culture of the investment banking and wealth management businesses will mesh with the cultures of Countrywide and of B of A's commercial bank. And until B of A CEO Brian Moynihan can show that he has unified the employee base, the lessons of Citi — where cultural dissonance reached debilitating levels as the company expanded and expanded — cast a long shadow.
"It sounds like a great whitewash to say it's the culture, but this gets to elements of brand and of consistency within an organization," said Rob Sloan, head of the U.S. financial services practice at the executive search firm Egon Zehnder International Inc., which has done recent work for Citi. "Which institutions have momentum in some direction? Is the brand on the rise, does it have cultural alignment to reinforce that brand? These things are important."
But right now it's the financial picture that is taking precedence, and with good reason. Though B of A's capital ratios are passing muster — the Tier 1 capital ratio is at 11.16%, compared with Citi's 12.5% — it's the valuations underlying the balance sheet data, for home equity lines of credit and other assets, that keeps the skeptics concerned.
"If you were going to buy this thing tomorrow at fair value, you would cut the HELOC book in half," said Christopher Whalen, managing director of Institutional Risk Analytics. And though he said B of A's executives are "throwing assets out of the gondola as fast as they can," Whalen is among those who suspect the company eventually will be in need of a more radical restructuring.
William K. Black, a University of Missouri-Kansas City professor who has written critically of B of A on The Huffington Post and other websites, said the foreclosure mess has made B of A's problems more salient, but that the company ought to be dismantled anyway.
"The recent mergers were pure ego plays," said Black, who teaches law and economics and was litigation director at the old Federal Home Loan Bank Board. "The markets don't like it, and some day there's going to be a new B of A head who is going to sell these entities and will be treated as a genius for doing it."
That sounds similar to the position in which Citi CEO Vikram Pandit finds himself, though it took him two years and hundreds of billions of dollars of asset sales to get there.
Citi's progress may not feel so comforting now at B of A, where the road to rehabilitation is not so clear. But on the bright side, it shows that a troubled bank has a hope of escaping whipping-boy status.