Brian Moynihan has led Bank of America through its darkest period, punctuated by its nearly $17 billion settlement recently 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 nations second-largest bank back to growth while wrapping up the last of its legacy mortgage problems. Though Bank of America still has some litigation pending, the settlement will free Moynihan to focus on the core banking franchise.
You dont necessarily call it a win when youre looking at a number this big, but its 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 was up to the task. He was a plainspoken executive from Ohio who had been the outside legal counsel at Fleet Bank and ultimately rose to become Lewis successor. He was chosen to replace the much-criticized Lewis by former Bank of America director Charles Gifford, the CEO who sold FleetBoston Financial to Bank of America in 2004.
Allen Jones, a managing director at Risk Span, a Washington mortgage-data consulting firm, and a former Bank of America executive, said Moynihan, 54, can now return to the bread-and-butter business of serving customers.
Hes done the hard work and now he can focus on rebuilding the core businesses of the bank, Jones said. Thats 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 Americas legal problems lingered while other banks such as JPMorgan Chase were putting most of their issues behind them. They applauded the settlement, initially sending Bank of America shares up 4.12% to $16.16, a nearly 13% jump from a year ago. In the few weeks since the settlement, shares have increased slightly to about $16.57 at press time for Bank Investment Consultant.
Overall, Moynihan 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, Bank of America will take a hit to third-quarter earnings; the anticipated charge roughly equals one quarters worth of earnings. The settlement is expected to reduce its third-quarter pre-tax earnings by $5.3 billion or 43 cents a share after tax, the bank said.
By comparison, in the second quarter Bank of America, 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 Bank of America 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 outside of the courts with little transparency, Naylor said. We dont 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 Bank of America 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.
Bank of America 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 Bank of America 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, Mozilo fatefully told shareholders that Bank of America will reap the benefits of what we have sowed.
Moynihan has made huge strides reducing Bank of America remaining legacy mortgage assets, which would position the company to deliver a reasonable rate of return. The bank also will get a bump from higher interest rates in the short run, analysts say.
Moynihan has sought to return Bank of America to its roots of delivering products to core customers. To that end, he blundered early on by scaling back the banks mortgage business during the refinancing boom.
The overcorrection was unsurprising in light of the Countrywide debacle. But in the last year, Bank of America 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 for Bank of America. Its 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.
Bank of America 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 the bank and for Moynihan.
It represents a significant sanction for alleged misconduct, and Bank of America 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. Its of a magnitude that has the potential to be considered a watershed moment.