Wednesday, September 14, 2011

Bryan Moynihan and Dodd-Frank Layoffs At Bank of America

Bank of America announced that the it would be laying off 30,000 employees over the coming three years.  BofA, one of the world's largest banks serving 59 million customers is the result of several mergers: between San Francisco's Bank of America, Charlotte's North Carolina National Bank, or NCNB (headquarters), Boston's Fleet Financial and NY Investment Bank Merrill Lynch, among others.  It produced losses of $2.23 billion on revenues of $110.2 billion in 2010.

The WSJ rightly links the announcement to over-regulation generally, and Dodd-Frank specifically, which somehow managed to impose comprehensive control upon the entire financial system without addressing the actual easy money and housing policy causes of the fianancial crisis.  Naturally, every political boondoggle has its consequences-- 30,000 jobs at BofA in the extant case--which Olympian legislators failed to consider while smiting the impious, legislating morality, covering their derri√®res and, generally, saving the planet.
Take the amendment that Illinois Democrat and Senator Dick Durbin (with the help of 17 Senate Republicans) attached to last year's Dodd-Frank financial law. Mr. Durbin's amendment instructed the Federal Reserve to limit the amount of "swipe fees" that banks can charge merchants when customers use debit cards. 
How exactly does forcing banks to charge Wal-Mart less money for operating an electronic payment system prevent the next financial crisis? Readers may wait a long time for a satisfactory answer, but the cost of this Dodd-Frank directive is straightforward...
Restricting bank profits on a particular product may have obvious populist appeal, but politicians shouldn't be surprised if banks decide that such consumer credit operations aren't good businesses and can function with fewer employees. Add in the various federal programs aimed at extracting penalties for this or that mortgage-foreclosure error and it's understandable that a bank would have trouble forecasting growth to justify its current work force...
[G]iven the real-world results for bank employees, politicians should not be allowed to pretend that there are no consequences when they deliberately reduce the profitability of employers. Mr. Obama proposed last week to spend some $450 billion more in outlays or tax credits to create more jobs, but it would have cost a lot less to save these 30,000.
Maybe Senator Durbin owed Walmart a favor.  That's generally how these things get done.  Regardless, the die is now cast for 30,000 people to lose what used to be good jobs.  Your government at work for you.

The foregoing notwithstanding, special attention must be paid to the man at the top crafting BofA's strategy and executing its directive, Brian Moynihan, a member of Fleet's Boston Mafia.  Greg Farrell reports in "Crash of the Titans" (2010) that Moynihan was one of the few Fleet executives to become company men and team players at the clubby Charlotte bank.  The rest were squeezed out by a hostile culture.
He had taken over broken businesses and fixed them at [predecessor CEO] Lewis's request, followed orders from headquarters without question, and slashed costs mercilessly when Alphin [Lewis's top advisor] told him it was necessary.  He even tore up his contract in his first year, a contract that guaranteed him a big payout following the change in control from Fleet to BofA, to demonstrate his loyalty to the cause.
Elsewhere, Farrell writes of him:
At Bank of America, Brian Moynihan embodied all the attributes of the old NCNB (North Carolina Nation's Bank) culture: He was completely dedicated to the Charlotte bank, a tireless worker, and he executed every order he received from on high.  He had never served in the armed forces, but when it came to his career at BofA, Moynihan was as loyal and dedicated as a Marine.
It is the way that Moynihan went about executing his every order that Noman wishes to draw attention to.

Farrell recounts a telling anecdote about Moynihan, who ran BofA's New York operations as the president of its global wealth and investment management business prior to the Merrill Lynch merger.  Losses in 2007 apparently disgusted Ken Lewis and confirmed his prejudices against investment bankers as "self-important cowboys who took wild risks with the banks' hard-earned money."  Moynihan was ordered to conduct a strategic review of the investment bank with an eye to paring costs.

Losses at BofA, as at every investment bank, had been caused by CDO's (collateralized debt obligations) on tanking sub-prime related assets.  Ignoring the cause of the problem--and, more importantly, permitting it to remain in place festering on the Bank's balance sheet--Moynihan rather identified the easy, quick fix.  He opted to fire people and sell off profitable parts of the business.

Following the strategic review, in January 2008 he announced 650 layoffs which included a number of research stars.  Research doesn't produce revenues directly at banks.  Thus, it is an easily identifiable target for cost cutters, just as R&D is at industrial firms.  Researchers do indirectly produce revenues, however, by providing customer service, reputation, cache and business for other producing units, which is apparent to anyone not fixated on brute figures.  Moynihan targeted fifteen researchers for dismissal (out of seventy-two analysts) including top analysts for important sectors: energy, banking, and media.  In order to maximize savings, he targeted the highest paid analysts.  They were given two weeks notice and terminated one day before earning bonus payments totaling $20 million.

Equities trading executives implored Moynihan to relent because many BofA clients did business with the bank precisely for its research stars.  Moynihan dismissed their concerns and stuck to his plan for reducing costs.

Moynihan also decided to offload BofA's prime brokerage business for hedge funds--a business which Farrell likens to running a luxury hotel for business travelers.  Once a prime broker establishes this luxury service in return for exorbitant fees with a sufficient number of hedge fund clients, the business throws off a regular stream of low risk revenues.  It was a stable and lucrative business at BofA which until Bear Stearns' collapse in March 2008 was worth roughly $1 billion.  It employed 300-plus people and generated annual revenues of $400 million.

Farrell recounts what happened:
Following the sale of Bear Stearns to JPMorgan Chase, Moynihan's attempts to sell BofA's prime brokerage business floundered.  Moynihan himself got distracted by the blowback from his earlier decision to fire the best-paid research analysts.  Several clients complained and by May, Moynihan had to go out and hire new researchers to replace the senior people he'd let go.  Because of concerns over whether BofA was committed to its research group, Moynihan had to pay out even more to rebuild the unit than the savings generated by the firings early in the year.
Embarrassed by the retreat with the research group, Moynihan doubled his efforts to get rid of the prime brokerage unit, at any cost.  Given the collapse of Bear Stearns, BofA's prime brokerage business could have benefited from a 'flight to quality,' the perception among hedge funds that it would be better to do business through a large commercial bank than a riskier investment bank.  But Moynihan remained adamant about executing the plan to sell the business or, if a buyer couldn't be found, to shut it down and lay everyone off. 
Eventually, Moynihan decided to proceed with the mass layoffs and shutdown of the $400 million dollar unit, and crafted an announcement with BofA's legal, PR and corporate planning teams to justify it.  At the last minute, BNP Paribas reemerged as a buyer.  Under their agreement, BofA would net several hundred million dollars if the unit hit performance targets under BNP's stewardship.

At the very least, none of this is good management.  The foregoing doesn't inspire Noman with confidence in Moynihan's leadership, or indicate that the layoffs announced at BofA are entirely the fault of a bumbling government.  Such actions are also the standard operating procedure of a seemingly artless manager who mistakes his task for something that any machine or first-year business student could do, at a fraction of his $1 million base salary.  (The company would also save on his $9 million bonus.)

It is notable that as shrewd a bank chieftain as Jamie Dimon at JPMorgan Chase (who Noman wrote about Monday; See "Last Man Standing Won't Take it Sitting Down," 9/12/11) is chaffing against the same external environment while running a profitable bank and seeking an international acquisition.  Just as he was looking to acquire a prime brokerage business for pennies on the dollar in March 2008 while Moynihan was digging in to offload his at any cost, Dimon sees the same problems Moynihan does but identifies opportunities inhering in the risks rather than the mere chance to wield a cleaver.

Noman doesn't know that Moynihan's won't prove to be the more profitable strategy, or that Dimon won't be forced to announce mass layoffs.  He simply doubts the former, and would assume of the latter that Dimon had acted as a last resort, not first; that his actions were the result of a decision, not reflex.

Noman has seen, and taught, many managers like Moynihan over the years, and can't help thinking that somehow, despite their apparent "success," they're more suited to another profession.

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