commercial banking

Can Brian Moynihan fix America's biggest bank?

July 7, 2011: 5:00 AM ET

With its damaged reputation and huge mortgage losses, Bank of America is still reeling from the financial crisis. But CEO Brian Moynihan may be the right guy to turn things around.

In late June, Moynihan rocked Wall Street by announcing an $8.5 billion landmark settlement that should help BofA finally begin moving past the home loan mess.

FORTUNE -- It's hard to think of a company that emerged from the financial crisis more despised than Bank of America. Sure, Goldman Sachs gets pilloried as a symbol of Wall Street greed and excess. But when you count up the various constituencies that have a beef with BofA -- homeowners, consumers, investors, regulators -- it's really no contest. The infamous 2008 acquisition of mortgage giant Countrywide saddled America's biggest bank with the largest, most toxic portfolio of home loans in the business, as well as an ongoing public relations nightmare. Due in large part to its mortgage woes, Bank of America's (BAC) stock remains some 80% off its pre-crisis high of $55. In the minds of many, BofA epitomizes the sorry state of the whole damaged U.S. economy.

In his first 17 months on the job, Bank of America CEO Brian Moynihan did little to dispel that image -- or to win the confidence of Wall Street. Since Moynihan replaced the much-criticized Ken Lewis at the beginning of 2010, BofA's mortgage losses have ballooned, and nervous shareholders have bailed en masse. A few embarrassing public gaffes only made things worse. The 51-year-old Moynihan was widely seen as a charisma-challenged plodder, fumbling the biggest salvage operation in financial services.

Then, in late June, Moynihan rocked Wall Street by unveiling a landmark settlement that takes a giant step toward finally putting the home loan mess behind Bank of America. Moynihan announced that BofA will pay $8.5 billion to 22 big investors -- from BlackRock (BLK) (to the Federal Reserve Bank of New York -- which claimed that Countrywide had misrepresented the quality of loans it sold them. In a single stroke, he effectively removed the biggest cloud over the company's future. The deal is so comprehensive, covering all of Countrywide's disputed mortgages sold to private investors, that it should serve as a model for the rest of the industry and a bullish sign for the broader economy. It may be the single best headline in financial services since the credit crisis began. "It's a win on the board that Brian Moynihan needed," says Credit Agricole analyst Mike Mayo, a famously tough critic of the big banks. "The challenge is to ensure that the momentum continues."

The victory shows that Moynihan has been vastly underrated. In part, that's because of his rough-around-the-edges personality. The workaholic Providence lawyer turned hard-core banking brainiac won't win any awards for public speaking, and he isn't inclined toward public relations. But a close look at his career reveals that he's proven his mettle for two decades as a dealmaker, team builder, and crisis manager. And he is perhaps uniquely suited for the job of chief executive in today's banking world. The business is now so complicated and so fraught with hidden dangers lodged in such esoteric products, that the best leaders are those who are totally immersed in the data and details -- the ones who serve as their own risk managers. That's Moynihan.

Best of all, Moynihan is the architect of a radical blueprint his rivals would be wise to follow. In effect, he wants to turn back the clock, to run Bank of America the way banks were managed before the industry -- led by BofA -- embraced a strategy of growth at all costs. His goal is to avoid the chronic cycle of making lots of money in good times, then handing it all back in a downturn. It's something few banks have ever accomplished. "He's dead right," says Gene Lockhart, former chief of retail banking at BofA and now a senior adviser at Berenson & Co. "His strategy is the polar opposite of the way BofA was run for many years."

Moynihan is pledging that this approach will make Bank of America into one of the most profitable companies on the planet. In March, at a presentation to investors in the baroque ballroom of New York's Plaza Hotel, Moynihan unveiled his audacious goal of earning as much as $40 billion before taxes by the middle of the decade. That translates into $25 billion in net income, far more than any non-oil company in America made in 2010. One of America's best value investors is betting big that Moynihan will deliver. Bruce Berkowitz, whose $15 billion Fairholme Fund (FAIRX) has returned more than 11% annually over the past 10 years, owns a $1.2 billion stake in BofA. That position has hurt his recent performance, but he believes the stock will be a long-term winner. "Moynihan has the right strategy of staying away from consumer loans that blow up in a bad market," Berkowitz tells Fortune. "Bank of America will show tremendous earnings power."

There's a lot to like about BofA. It ranks as the largest U.S. bank, with nearly $2.3 trillion in assets. And it boasts more market-leading franchises than any player in financial services. BofA has the biggest retail business, with $410 billion in deposits and 5,800 branches from California to Maine; it owns the premier wealth management platform in Merrill Lynch and U.S. Trust; and it stands just behind J.P. Morgan Chase (JPM) as the world's second-largest investment bank.

Those healthy businesses show so much muscle that they should be able to propel Bank of America past the mortgage crisis, especially since we now know the approximate size of it. The losses so far have been staggering: From the beginning of 2008 through the first quarter of 2011, Bank of America's home loan business lost a stupendous $46 billion. It will lose another $20.6 billion in the second quarter of this year, chiefly because of the settlement. That gargantuan hit will leave the bank with an overall loss of around $2 billion for 2011. But analysts now predict it could earn as much as $15 billion next year. (It booked $20 billion in profits at its peak in 2007.)

The mortgage settlement has two huge effects for BofA. The first is that it allays fears that BofA will need to raise fresh capital in the future by selling new stock at very low share prices and dilute its shareholders -- just the problem that soured investors on the stock during the crisis. Second, putting a firm number on the losses makes it far more likely that Moynihan can deliver on his promise to deliver truly epic earnings. If he can pull it off, it will go down as one of the great turnarounds in banking history.

"His mind is always outracing his mouth"

At a height of 1,200 feet, the Bank of America Tower on 42nd Street in Midtown Manhattan is the second-tallest skyscraper in New York, after the Empire State Building. Completed in 2009 at a cost of around $1 billion, it has been widely recognized as one of the world's most environmentally friendly buildings, with state-of-the-art features that include a system to capture rainwater, purify it, and reuse it. Moynihan typically spends a day or two each week working in the building, splitting the rest of his time between BofA's heaquarters in Charlotte and its office in Boston, where he lives.

During a wide-ranging interview recently in his 50th-floor office, which has slanted, floor-to-ceiling windows with breathtaking views of lower Manhattan, Moynihan explained his plan to remake the bank. He detailed his two-part strategy for first building a bulwark of capital, then delivering all earnings to shareholders. He also addressed the most embarrassing incident of his tenure so far.

Last December, Moynihan began telling Wall Street that his company would apply to the Federal Reserve -- which is still closely monitoring the capital levels of the big banks -- for permission to increase its dividend in the second half of 2011. On March 23, however, BofA disclosed that the Fed had rejected the proposal. Analysts speculated that the Fed said no because BofA's mortgage losses could leave it short of capital. Chuck Noski, who'd been CFO for less than a year, announced he would step down in June. Moynihan explained that Noski was reassigned because of a relative's ill health, not because of the dividend mix-up. Still, the incident made Moynihan look bad. Moynihan calls the episode a temporary setback and says the Fed's rejection had nothing to do with mortgages. "It happened because we hadn't fully integrated the risk systems of Merrill Lynch and BofA," he told Fortune. "Once that work is finished, we will apply again for the dividend increase."

Conversing with Moynihan is no easy task. He tends to fire off sentences in machine-gun-like bursts, without anything resembling a pause for punctuation. Words like "litigation" and "putback risk" run together into a verbal blur. For an executive with such clear ideas, he can be almost impossible to understand at times. "His mind is always outracing his mouth," says Jay Sarles, a former top executive at Fleet and BofA.

In appearance, the redheaded Moynihan recalls a shorter, stockier, and less mirthful version of Conan O'Brien. At work, he practically radiates intensity. "He's not the cuddliest guy in the world," says BofA director and former Fleet CEO Chad Gifford. On trips, the perpetually disheveled executive carries two canvas shoulder bags packed with papers. In meetings, if an underling starts to defend an investment that Moynihan has decided to exit, he'll snap dismissively, "I've heard enough stories." About the only time he engages in small talk is if the topic is the Boston Red Sox or the virtues of Irish executives. "In their own minds, the Irish always think they're in charge," he quips, before resuming his just-the-facts demeanor.

Moynihan landed the CEO job during a secret interview at the Four Seasons hotel in New York City in November 2009 by promising the board's search committee that he would follow a rigid set of principles: Sell virtually every asset unrelated to bedrock banking. Forget all acquisitions, now and forever. Don't grow total loans, but do change the mix so BofA won't be overexposed to risky consumer credit in a bad cycle.

In effect, Moynihan was repudiating the go-for-growth culture that reigned under Lewis. "We got in trouble trying to grow far faster than GDP," he warned the directors. "Our goal should be to grow with the economy and the customers we have now, not take a lot of risk chasing new ones." Never again, he swore, would BofA need to sell stock in a downturn to survive. To the board, Moynihan's plan was far more than a knee-jerk reaction to the crisis. It struck them as a better way to run a bank, period. "Brian wants to level out the peaks and valleys, so that we won't get hit in a downturn as in the past," says director Thomas Ryan, the retired chairman of CVS Caremark (CVS).

In explaining his current strategy, Moynihan divides the future into two main periods. Over the next two years, he says, Bank of America will retain virtually all its earnings to build the funds necessary to comply with the new Basel III international standards of capital requirements for financial institutions, which are anticipated to be stringent. He adamantly insists that during this period, BofA's earnings power makes the crunch scenarios that critics fear impossible. "To say we have to raise capital is wrong," he says. "We'll generate all we need from our own earnings."

When BofA has built up a sufficient capital cushion, probably two to three years from now, Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets. "We need to get back most of the shares we issued in the crisis, that caused all the dilution," says Moynihan. It's a classic value strategy of growing modestly without plowing profits back into the business.

A rugby player in college, Moynihan made his reputation as a hard-nosed dealmaker at Fleet. He plans to grow BofA by being more customer-friendly.

Moynihan's goal is to expand revenues just one percentage point faster than GDP. The total lending book will remain at around $1 trillion, but the CEO is radically reducing exposure to risky areas, especially credit cards. "In the boom we pushed cards through the branches and in mass mailings," he says. "To drive growth we gave cards to people who couldn't afford them." Moynihan has already shrunk the card loan portfolio from $250 billion to $170 billion, and it's going still lower.

The new mantra is to grow by providing more services to today's customers. Indeed, BofA hasn't stopped lending. It's using the money freed from lowering the credit card portfolio, and selling billions of dollars in auto loans bought from GMAC as an investment, to make carefully underwritten mortgages to loyal customers and provide more safe, lucrative lines of credit to corporate clients.

Moynihan also aims to make the retail experience more customer-friendly, free of hidden "gotcha" fees that make people hate their banks. A crucial move is his decision on debit card fees. For years the big banks have been reaping billions of dollars by charging overdraft fees to customers who buy a cup of coffee or a dress with their debit card without a sufficient balance to cover the charge. Last year Congress enacted legislation requiring banks to ask customers if they'd accept or decline being allowed to overdraw their accounts. If customers chose to "opt in," banks could keep charging the fat fees.

Virtually all of the big banks, including J.P. Morgan Chase and Wells Fargo (WFC), gave customers the choice to opt in, and are still charging overdraft fees for folks who said yes. BofA is the rebel. Moynihan eliminated debit card overdrafts on purchases. That gambit erased $1 billion a year in revenues and astounded the competition. It's all part of a campaign to nurture long-lasting relationships with customers. "We can't be the biggest bank in America and have people thinking we're taking advantage of them," he says.

From busboy to banker

Moynihan grew up in Marietta, Ohio, a town of 14,000 in the southeastern part of the state, the sixth of eight children in a middle-class Irish Catholic clan. His father was a chemist for DuPont (DD) and his mother sold insurance. Brian wore all the Christmas sweaters passed down from his three older brothers. As a teenager he worked as a busboy at a Ponderosa steakhouse, dug ditches for sewer projects, and manned the afternoon shift at a plant that made industrial magnets.

At Brown University, Moynihan majored in history and met his future wife, Susan; the couple have three children. He also played rugby, a sport that allows for no helmets or padding. As the fly-half, the player who directs the attack, Moynihan proved skilled at picking in a nanosecond just the play to flummox the defense. "He was a fiery, physical player, a real guy's guy," his coach, Jay Fluck, remembers. At Notre Dame Law School, Moynihan ran the snack bar, stirring the spaghetti pot and serving coffee.

Returning to Providence, Moynihan joined the law firm Edwards & Angell in 1984. He soon began working on mergers for a Providence bank called Fleet Financial, a midget that harbored gigantic ambitions. Its CEO, Terry Murray, would eventually create FleetBoston by buying most of the major banks in the region, with Moynihan as his chief dealmaker. Moynihan, still a lawyer, first impressed Murray during the purchase of the failed Bank of New England from the FDIC in 1991. It was the deal that made Fleet a major force. Moynihan's creativity, and work ethic, astounded Murray. "At 11 p.m., I'd tell the investment bankers to model the effect on earnings if we paid different prices, with Brian in the room," says Murray. "The next morning at 8 a.m., he'd have the entire model ready showing the dilution or accretion, depending on the price, before the bankers even arrived."

In 1993, Murray hired Moynihan, and the pair formed a mentor-student relationship, reminiscent of the rapport between the creators of Citigroup (C), Sandy Weill and Jamie Dimon. Murray reveled in his rugged upbringing in a "triple decker" -- a three story, working-class apartment house. He prided himself on playing the underdog from a tiny bank in a tiny state, with the guts to steal the mantle of banking from the aristocrats in Boston. A consummate storyteller, the flamboyant Murray couldn't have been more different from his slogging protégé.

But Murray and Moynihan shared the same philosophy on making deals. They concentrated on extremely complex transactions, and they liked to pay cash. The reason was simple: The tangled deals scared off other potential bidders, allowing Fleet to buy on the cheap. Mike Lyons, who now heads strategy at BofA, worked on Moynihan's team for two years in the mid-1990s. "Brian would use a strategy we called 'hanging around the hoop,' " says Lyons. He'd make a low-ball offer on a complex deal and wait while all the other bidders dropped out, then low-ball again. That strategy worked brilliantly with the purchase of NatWest's U.S. business in late 1995. The ailing British bank's investment bankers, Goldman Sachs (GS), handed Moynihan a letter with the asking price. Moynihan whipped out a pen, crossed it out, and wrote in a drastically lower number. He got his price.

After completing an acquisition, Moynihan and his team would swoop down on the credit card unit or broker, analyze the business, then decide which parts of it to sell, grow, and fix. Recalls Lyons: "Brian would examine every asset, including securities, land, buildings. He'd do an assessment of what it's worth and what we should do with it."

The crowning deal for Murray and Moynihan was Fleet's $16 billion acquisition of BankBoston in 1999. It was a landmark moment in New England. BankBoston, founded in 1784, had dominated banking in the region for decades. Once again, it was Moynihan who turned a complex twist to Fleet's advantage. The Justice Department required that Fleet sell 280 branches in New England. Strong buyers lined up, including Chase and RBS Citizens. But Murray and Moynihan wanted to keep powerful rivals out of their territory. "The point was to find absolutely the worst operator possible," says an investment banker whose client wanted to buy the Fleet branches. Moynihan arranged to sell them to a weakling, Sovereign Bank. FleetBoston quickly won back old customers from Sovereign.

Surviving shakeups

Fleet's run came to an abrupt end in 2004 when it was acquired by Ken Lewis and Bank of America. Moynihan was one of the few top executives to make the transition to BofA. But Lewis was slow to give him major responsibility. Moynihan's break came in late 2007, when the investment bank suffered big trading losses, and Lewis picked him as the fixer. He restored profits by cutting 18% of the workforce and selling an underperforming unit. But any chance that Moynihan might succeed Lewis -- clearly his ambition -- seemed to disappear when BofA signed the Merrill Lynch deal in mid-September of 2008. Lewis announced that Merrill CEO John Thain would head both investment banking and brokerage.

Lewis offered Moynihan a job running the credit card division in Wilmington. Moynihan refused. For Lewis -- who declined to be interviewed for this story -- shunning an assignment at BofA was a fatal breach. When his old boss Hugh McColl would order Lewis to Texas or Florida, Lewis would famously hop on a plane that day. On Dec. 8, 2008, Lewis informed the board that Moynihan was departing. The headline on the prewritten press release stated, "Brian Moynihan Leaving the Company."

But the three directors from FleetBoston demanded that Lewis reverse his decision and keep Moynihan. Lewis, already weakened by big losses at Merrill, relented. Lewis named Moynihan, who hadn't practiced law in 15 years, as general counsel, a job he held for less than a month.

On Jan. 4, 2009, with Merrill Lynch in serious trouble, Lewis abruptly fired Thain and once again installed Moynihan to lead investment banking and brokerage. "We were getting horrible press, and lot of key people were leaving," recalls Michael Rubinoff, a top executive in BofA's investment bank. The stock had collapsed to $3 a share. Merrill bankers were scared that BofA wouldn't pay large bonuses, the lifeblood of Wall Street. Moynihan assured the troops that BofA was determined to build a great investment bank and would pay competitive bonuses for 2009. He also ordered generous payments to retain Merrill brokers. The exodus slowed, and by the second quarter the investment bank was solidly profitable.

On Sept. 28, 2009, Lewis announced he would resign by year-end. As a successor, Lewis initially backed not Moynihan but his own chief dealmaker, Greg Curl. "He found Brian useful but not CEO material," says a former top executive. But the former FleetBoston directors threw their support behind Moynihan. They got an assist from his mentor, Terry Murray, who called big institutional investors to champion Moynihan. "I called as a large shareholder," says Murray, now 72. "I said he was by far the best choice. He understood this large and complicated company where it would have taken an outsider a year to get a grip on the problems."

The Countrywide hangover

Moynihan will ultimately be judged on his success at quickly and decisively resolving the gigantic burden in mortgages. Though the settlement in June was expensive, it demonstrated that future home loan losses should prove far lower than many on Wall Street feared. Most of all, it clears a dense fog of uncertainty. "This is the first time investors have been able to fully grasp the extent of the future losses since the issue surfaced last year," says analyst John McDonald of Sanford C. Bernstein.

Here's why fraudulently underwritten loans posed such a towering, and until now unpredictable, problem. From 2004 to 2008, Countrywide originated $424 billion in mortgages that it sold to private investors, usually after packaging the loans into securities. Those mortgages ranked among the riskiest exotic products sold in the housing bubble. Countrywide clearly figured that it would never see those loans again. But Countrywide's contracts with its investors made it clear that if Countrywide misrepresented facts about properties or the owners, the investors could force the lender to take the loans back at full value. When BofA bought Countrywide, it took on that liability.

The issue of these boomeranging mortgages, or "put-backs," arose last October when a Texas law firm wrote to BofA on behalf of a dozen large investors, alleging that loans they had bought from Countrywide were in breach of contract. Moynihan recognized that the group accounted for just a fraction of the loans that Countrywide had sold to private funds. He didn't want to negotiate settlement agreements one at a time that would leave shareholders uncertain of the total cost. Instead he sought a comprehensive deal that would resolve all of the Countrywide private-label put-back liability in one agreement.

To reach that universal deal, Moynihan needed the approval of both the investors and the trustees responsible for ensuring that the bondholders received their payments. Fortunately for BofA, a single trustee, Bank of New York Mellon, represented virtually all of the Countrywide investors. That presented an opportunity for the seasoned dealmaker. Moynihan recognized that the sole trustee made a broad settlement reachable. After months of pressing, he got Bank of New York Mellon to recommend the terms of a settlement for all the investors in those securities.

BofA still faces two problem areas in home loans. First, BofA holds $408 billion in mortgages on its balance sheet. That's 19% of all home loans owned by America's banks. Fortunately, the rate of defaults has been declining since it peaked in late 2008. McDonald of Sanford C. Bernstein projects that if that figure keeps falling, as he expects, BofA is about three-fourths of the way through its total losses. The second issue is that Bank of America is the largest mortgage servicer in the country, with 14 million loans outstanding. Today, 1.5 million of those mortgages are over 60 days past due. To deal with this avalanche of defaults, BofA has hired an additional 20,000 employees to arrange short sales, file legal documents, or sell houses the bank owns through foreclosure. Moynihan pledges to dispatch half the delinquent loans within two years. It's another big goal Wall Street will be watching. If he succeeds, BofA will substantially lower its operating costs, a crucial part of Moynihan's recovery plan.

For those who despise it, Bank of America is a symbol of unfulfilled promise and promises. No one is promising bigger than Moynihan. But don't underestimate his chances of delivering.

This article is from the July 25, 2011 issue of Fortune.

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