What exactly is going on at Bank of America and what does this mean for your company?
Brian Moynihan, CEO of Bank of America, has one of the most stressful jobs in the country today. With the entire world watching and waiting for disaster to strike, he is attempting to transform (in record time) an organization with 280,000 employees, over 55 million customers and revenues in excess of $134 billion.
There are varying opinions regarding the decisions he is making, but few people argue that Bank of America isn’t broken. However, it must be fixed. What exactly is going on at Bank of America and what does this mean for your company?
Bank of America: An immigrant success story
Bank of America began in 1904 as the “Bank of Italy.” Founded by Amadeo Pietro Giannini, the bank differentiated itself from established banks at the time by offering loans to working-class immigrants who were generally refused service at other banks. Giannini was the son of Italian immigrants and he recognized that hard-working people with good character are in fact a good credit risk. This willingness to work with immigrants was a breakthrough strategy for growth, positioning the company as one of the largest financial institutions in the world only a couple of decades later.
Expansion and growth under CEO Ken Lewis
Fast forward to the 21st century. From 2001 through 2009 Ken Lewis served as CEO of Bank of America. Under his leadership, Bank of America expanded aggressively, spending over $130 billion to invest in and acquire companies. The company grew to well over $2 trillion in assets and became the largest lender in the country. But this growth came at a great price.
Brian Moynihan’s challenge
Much of Bank of America’s growth under CEO Ken Lewis took place in riskier lines of business: subprime mortgages, unsecured lines of credit like credit cards and trading operations. Bank of America did enjoy short-term boosts to profits as a result of these investments, but there is no such thing as a free lunch. Those risky investments are now haunting Bank of America with a vengeance.
Bank of America’s stock price has fallen 40 percent this year due to concerns regarding the true extent of mortgage losses—the stock price is down about 90 percent from its peak value. American International Group (AIG) is suing Bank of America for $10 billion due to losses they incurred from investments in mortgages facilitated by Bank of America. A consortium of institutional investors that collectively lost billions of dollars on mortgage-backed securities offered by Bank of America my cost the bank a similar amount as part of a settlement agreement.
