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Market Oracle FREE Newsletter


Bank of America's Mortgage Headaches

Companies / Banking Stocks Oct 29, 2014 - 07:25 PM GMT

By: Bloomberg


Bank of America Chairman Brian Moynihan spoke with Bloomberg Television anchor Erik Schatzker today, where he said that legal costs stemming from defective mortgages are largely behind it. Moynihan said, "If you look at the different components of liability and the amount of settlements, whether it's the RMBS cases, yes, it's behind us...Embedded in that is often the question, OK, that's over, now you can go concentrate on running the company. The answer is, we were running the company" all along.

Moynihan also said, "I always tell people I could do this for a long time. What else would I want to do? This is a great job."

Full transcript below.

ERIK SCHATZKER, BLOOMBERG NEWS: I am delighted to be here with Brian Moynihan. Brian, congratulations. You just became president, and excuse me, chairman of this bank. You were already the CEO of course. We have a lot to cover in this conversation. I hope you don't mind if I begin with the present. It has been an awfully challenging month, I don't need to tell you, in financial markets. What do you expect in the months to come?

BRIAN MOYNIHAN, CHAIRMAN, BANK OF AMERICA: Well I think if you think about financial markets they're going to reflect the economy. And what we see in the economy this month when you see the statistics on a customer basis it's as strong as it was last month, or even a little bit stronger, and stronger than it was a couple months ago. So you're hoping that that comes through and America continues to make progress because if you look around the world there's other places that aren't growing as fast as we'd want them to and their issues, but you've seen our America.

You've seen our customer base. You see it strong, which then I think would ought to play forward because you have consumer confidence, people spending, gas prices coming down. Those things are all good for the American economy. And I think as you go forward you'll see that reflect in the markets and stuff.

SCHATZKER: What about the volatility, because that's what really scared people?

MOYNIHAN: Well you had - you just had a lot of - a convergence of events, a concern about a lot of things. And when people get concerned they start moving and stuff starts moving, prices start moving around.

SCHATZKER: If you actually see more of it?

MOYNIHAN: Well you always will see more of it based on the news and the information, but we also have to remember we were so unprecedentedly low in volatility, and the thing was so stable that activity is causing it to move off a very low basis. And so but there are adjustments in equity prices, there are adjustments in bond prices, but a lot of that is retraced. You actually sort of look at the ten-year. It went way down and came way back up. And I think as people step back and look at the fundamentals it sort of stabilized.

SCHATZKER: Tell me what effect did Dodd-Frank have on BofA's ability to trade during that market volatility?

MOYNIHAN: Well I think and if anything else the question is how much liquidity support you can give in the market making?


MOYNIHAN: And I'd say is anything else and the very liquid stuff, less and the less liquid stuff a little bit more. And so our research team has put out notes on this about issues about the high-yield bonds and how to fix it.


MOYNIHAN: And so I wouldn't attribute it to Dodd-Frank. I'd just say the market structure has changed, the amount of leverage has changed. And I think that's something we got to keep working on and to improve the markets going forward is to continue to create good liquidity. Our job is to provide liquidity in markets as an agent between all the principals. And everybody knows that's the job of our industry. And so getting that pendulum swinging back and forth and getting it more right is something we'll all be working on for a long time I think.

SCHATZKER: Can you say yet whether the capital restrictions are exacerbating volatility because you can't provide liquidity in certain markets the way you once were able to?

MOYNIHAN: I wouldn't say it's that - you can't linearly trace those much from when you actually look at our activity the more we play, but -

SCHATZKER: So these fears about Dodd-Frank, and liquidity and what's happening in corporate credit sound to me perhaps a bit overblown.

MOYNIHAN: Well I think we've got to, like anything, as a person who studied history a long time you got to wait until you get through a period. You can't take the present, the last two days which have been different from two days before that, been different and say this is an extrapolation. So I think that overall the amount leveraged in the system is down, which is good. But that's going to have another effect, which is going to be it's going to create less activity and less liquidity.

And so figuring all this out will take time, but it's the responsibility for people like ourselves and my colleagues, and more importantly the experts we have in this to figure out to get this right with our regulatory brethren to avoid the excess of before, but provide the liquidity that we had. And that's still a work in progress.

SCHATZKER: Brian, the selloff was triggered in part by concerns over European growth. The data are terrible. How much do you worry about Europe?

MOYNIHAN: Well I think the data is there and you can see it. And it's real and people are feeling it. And you listen to customers and clients and they see it. So it wasn't growing very fast, but slowing down just seems like we're working our way backwards. So the good news is as the adjustments were made by the IMF and others of the growth rates outside the United States the United States came up. The issue with that is the linkage between the United States, and a couple other key economies and what's going to happen in the world now is pretty linked. In other words, as Europe becoming less of a contributor if the U.S. becomes more of a contributor and if we don't grow then you could have more risk to the worldwide growth. Everything we see in the U.S. is pretty solid right now.

SCHATZER: So that being the case, what's your strategy in Europe?

MOYNIHAN: Our strategy in Europe outside the United States has always been the same, global corporate investment banking in companies and global investors. And so we've actually had a pretty good year in Europe, frankly, compared to the prior years because the activity had picked up around helping some of our clients restructure their portfolios. And so -

SCHATZKER: So now is the time to be committing more capital to Europe?

MOYNIHAN: Yes. It's in activity and people. And we have several thousand people in London who work those markets, and then people in the various countries. So it's not taking long lending risk if it's - if there's risk around the economy and the companies, but it's more providing markets and capabilities, but it doesn't change.

SCHATZKER: Tell me what you worry about the most.

MOYNIHAN: If you do what we do as a financial institution we transmit the economy from consumers. You're borrowing to consumers to give us deposits from companies, giving us deposits in the companies borrowing from markets. And so -

SCHATZKER: Lending, right, the riskiest thing that any bank could ever do.

MOYNIHAN: Borrowing in capital markets activities. So we are always going to reflect the economy. So my worry is if the economy doesn't grow how do you manage a company in a sustained low-growth environment? And that's what we've been in for the last five or six years. That's what we're prepared for.

And so people say when rates rise, well the problem with rates rise is is not that rates are - or not the discussion of rates rise is not that rates are rising. It's why are they rising, and so rising because the economy is growing faster? That is a great thing for financial institutions.


MOYNIHAN: If they're not rising it means the economy is not growing faster, which means the focus on expenses, the focus on simplifying our institution, the focus on taking out the excess cost has to just be relentless to get underneath the revenue base.

SCHATZKER: So what do you make of the current expectations for Fed policy? The Fed is meeting right now. We're going to hear what the Fed has to say in its policy announcement in about four hours' time. Are the markets too complacent about the trajectory for interest rates and bond yields?

MOYNIHAN: Well they move it around a little bit, but and well first of all us guessing what the Fed is going to do in four hours is probably not good (inaudible).

SCHATZKER: Oh no, no, no. That's not what I'm suggesting.

MOYNIHAN: (Inaudible)

SCHATZKER: I'm a little further out.

MOYNIHAN: And we'll know. We'll know. But they've exited the buying and they've made that clear. They've been very transparent. Their concern is the health in the U.S. The Fed's concern is the health of the labor markets, and think of that as more people earning more money, you can spend more money and driving the economy. And you don't see that changing measurably in any data or any statistics. What you see is incrementally improving. And that's going to be - that's why the market has rates about mid - that then they move between next year to end of next year, and back and forth. And that is all just people guessing about when it happens. But in the scheme of five years from now it's going to be a low rate environment long term because it's a low growth environment.

SCHATZKER: Still. I see. These questions matter because you have to decide how to position the bank vis-a-vis interest rates. If you're positioned for a rising rate environment or a very positively sloped yield curve environment that says something, but if you're not positioning yourself that way that says something else.

MOYNIHAN: We inherently at this rate structure are positioned for rates to rise because if you think about one of our major liabilities is no-cost deposits that don't go below zero.


MOYNIHAN: And so you're sort of stuck in this mode that that floor has been there. You've been crunched by the floor. And that's when people look at it's not that we position ourselves. It's that when rates rise the non-interesting bearing accounts do not bear interest at a high-rate structure. And they start to produce more revenue. That is very important to our company.

It has been six years of this situation. And this is a tough interest environment for banks to make money because its core value, have we paid six basis points for a trillion, six, seven basis points for all deposits? It doesn't go any lower because there isn't a lot left there, but the reality is $400 million, $500 million are interest free that our equity you start thinking about how much we have. And that doesn't in rates and that's why we have a big upside. It's not that we position ourselves. It's that you're positioned by the reality.

SCHATZKER: So is it going to be easier to make money next year?

MOYNIHAN: Is it - we'll make more money in a rising rate environment. We disclose that and tell people.


MOYNIHAN: The question is when does that happen.

SCHATZKER: That's why I'm asking.

MOYNIHAN: When does the Fed rise? You've got the markets expectation or expectations is mid next year to - somewhere mid next year to later next year, but you don't run this company for the six month difference in that estimate. You run this company for the 230 years we've been in business.

SCHATZKER: Let's talk about risks. Are auto loans or student debt the next subprime?

MOYNIHAN: Well where we've been in our company is coming out of the crisis we stopped engaging in institutional loans.

SCHATZKER: You stopped doing a lot of stuff.

MOYNIHAN: A long time ago. That was one of the ones we got on early. But I think the sheer amounts of student loans is not that big. It'll be tough for the individual borrowers in getting that all restructured and getting through that. And there's probably policy discussions about how you handle student lending, but that's really not much.

On auto lending we stayed at a high prime, very super prime space. We (inaudible).

SCHATZKER: But you have - you also see what's happening elsewhere, what other people are doing.

MOYNIHAN: There's - and that - there's been - it's overheated and you're seeing the regulators reflect on that. And you'll probably see the pendulum swing back and forth.

SCHATZKER: What about corporate credit? Janet Yellen talks about corporate credit. Other regulators talk about corporate credit. I hear from the people I talk to in private equity for example that banks are becoming very, very permissive with the terms of the loans and financing they're extending. And they talk about BofA. Are things getting too easy?

MOYNIHAN: I don't - if you were one of our - if you were up on the floors of one of our lenders they would not say that. And we have good (inaudible).

SCHATZKER: Well because they're in a competitive environment.

MOYNIHAN: And so but the issue is less about what the banks are doing. And just think about leveraged finance. There's been a lot of discussion about that. We've all stuck to the guidance that was given. And now the regulators realize they had to get everybody to stick to their guidance. So one of the great stories I have is there was - somebody was talking about this phenomenon. And it was a private equity player. And the actual loans they were talking about they actually made the loans. So we've kept our -

SCHATZKER: You're not worried about corporate credit.

MOYNIHAN: I'm not worried about what we do. I'm worried about if (inaudible).

SCHATZKER: Well are you worried about (inaudible)?

MOYNIHAN: Leverage is always the issue. And you're seeing that being - you saw that move out and now it's got to settle back down. And that's what the market is kind of bringing back the discipline.

SCHATZKER: The discipline is returning.

MOYNIHAN: It's returning in the sense that you're seeing - if leverage is high it's in very selective deals for very selective industries across the board if people are trying to maintain their discipline. It is very competitive on yields. The spreads in the middle market are as tight as they've ever been. In other words the conditions are fine, but the price you're getting paid is low.

SCHATZKER: So how does that evolve? People say we're in the late innings of a credit cycle. What does that mean from the perspective of the CEO of one of the biggest banks in the country?

MOYNIHAN: The competition is given - you're fighting about what rate you get paid, not about the structure of credit. The discipline has been holding on the middle market and stuff. And so I think and corporate credit won't be the problem it was in say the early '99s, 2000. There will be significant cases, but we're at all-time lows in terms of credit risk. And so it's going to come back up and people are going to make great fanfare about that. But the reality is in the context of what we call sustainable levels it's still - we're very, very low credit costs in our industry. And they'll have to come back up. The question is that will reflect when the economy comes back.

SCHATZKER: Let's hold it there, Brian. We have so much more to talk about, Brian Moynihan from Bank of America back after this break.




SCHATZKER: I'm Erik Schatzker in Midtown Manhattan at the New York City headquarters of Bank of America. I'm here with the chairman and CEO, Brian Moynihan. Brian, you have shrunk this bank a lot since you became the CEO in January of 2010 in terms of assets, expenses, jobs of course. Is the shrinking done, or is there more to come?

MOYNIHAN: Well it's largely done in a sense of what you from the outside would say paring back lines of business we got rid of and stuff. But we constantly work on our effectiveness. And that's a constant effort because in a low-growth environment we're going to have to continue to be able to invest in a business with $3 billion, plus we invest in technology, more salespeople, the talent, pay our people more.

And at the same time we've got always do work and take out expenses to make that affordable. And when you're a big company like ours and the amount of revenue growth you can get and you have three percent economic growth environment is a fight. And so we shrunk a lot, but the question is why did we shrink it. This is the thing I think that we have to (inaudible).

SCHATZKER: (Inaudible) presumably.

MOYNIHAN: Well it also was that you had from 2003 fall to 2009 January 1 six or seven large deals that our company did. 300,000 people came in. We have 230,000 people today. So we had 150,000 or so people. We added 300,000. We ended up at 230.

So we basically had to reposition all these companies. So each company came with parts that didn't fit the whole. And so we have our eight lines of business, the (inaudible) customer groups inside the United States we do all our businesses. Outside the United States we do our global corporate investment banking markets. And so we've just simplified that around being customer driven.

So what does that mean? We had a $2.7 trillion balance sheet. It's 2.1. We had $70 billion of (inaudible) account equity. We have 140 now. And we had $100 billion of liquidity. We have $400 billion. But what it really means is you've been able to bring the scope in. So everything we do is really for those core customer bases. And everything that was not directly for them we basically pared away.

SCHATZKER: But you know that the litigation overhang has clouded all of that for many people, customers and investors alike. Are you out from underneath that overhang now?

MOYNIHAN: Well the math says yes, and you do it. But the thing that -

SCHATZKER: What do you mean by that?

MOYNIHAN: If you look at the different components of liability and the amount of settlements, and whether it's the RMBS cases or -

SCHATZKER: Most of that is behind you.

MOYNIHAN: - you put it backwards. Yes it's behind us. Now the question though is what - and embedded in that is often the question is, okay that's over, now you can go concentrate on running the company. The answer is we were running the company while that was going on. So in the time frame of that, just to give you a simple mark, and we went from probably $5 million on mobile banking customers to 16.5, 16 and change now at that same time.

We went from probably $50 billion in assets in our preferred segment with Merrill Lynch to $100 billion. We went from earnings in our wealth management business are up now to industry-leading margins on earnings. So all that was going on.

SCHATZKER: Well that's why you are where you are now.

MOYNIHAN: And so what we have to do is as we pull that out, and this comes through, and that's why when you look at our numbers you see these four lines of business make money and have growth year-over-year, have growth year-over-year, and pretax have growth year-over-year and PP&R.


MOYNIHAN: And then you have this one business holding us back. That is largely behind us.

SCHATZKER: What's your top priority then, trading at book value?

MOYNIHAN: Well we've traded at multiple tangible book, again because we've had all the -

SCHATZKER: Well I'm just wondering is it book value? It's a $20 stock. Is it -

MOYNIHAN: My top priority is to run this company well for the benefit of the customers and shareholders, just drive at that. And so it's very simple. We have a lot of customers and we have a lot of capabilities, and every day do we bring those capabilities to every customer we can? And I can just see that going on. So 600,000 credit cards a quarter to 1.1 million plus for the last several quarters, all going to our core customers, all using them more, all - and that's better economics for us, and better customer base, better customer experience and you're driving it. That goes to the commercial business. That goes to the investment banking business and that goes to the trading business. It's all about bringing the company in to do what we do best. So everything we touch we're in the top market position.

SCHATZKER: Let's talk about cybersecurity. Are you prepared for the next hack attack?

MOYNIHAN: I hope so. We work on it every day. We spend hundreds of millions of dollars. We've been successful, but we keep working on it. It's something -

SCHATZKER: Hundreds of millions of dollars. How many hundreds of millions do you spend a year do you figure?

MOYNIHAN: Let's just say hundreds. We don't put a figure out, but we spend -

SCHATZKER: Are you spending, having to spend more, and more and more as a result of what we've seen?

MOYNIHAN: It's probably doubled or tripled over the last five years. And we just -

SCHATZKER: And will that happen again? Five years from now will it be double again?

MOYNIHAN: I don't know, in the sense that we'll spend whatever it takes, and because this is the number one issue to protect yourself against. So if it doubles or triples that's because the need was there. If it doesn't it's because the need wasn't there, but there's a lot of - there's just a lot of good work that our teams do on this every day. And they do a great job, doesn't mean there's not a lot of good work ahead of us. And but it goes to the heart of what we do, which is to move money for people, and protect their information and drive at it.

And it's a very complex issue because it requires lots of people to coordinate and drive together. And I think our industry, our think our regulatory fraternity and our industry, I think the government. And I think everybody is really understanding that this is the issue of the moment because in the old days when we worried about robbery people walked into our branches. And so they're now doing it through electronic means and we have to stop it. And we've been very successful and we - but we got to keep our guard up and work very hard at it.

SCHATZKER: Brian, there's an enormous opportunity for banks like Bank of America in mobile banking and payment processing. And Bank of America has been among the leaders in mobile banking. What happened with Apple Pay?

MOYNIHAN: Well it's out there working and (inaudible).

SCHATZKER: There was a hiccup though there.

MOYNIHAN: Oh there was a technical glitch that and that's like 1,000 transactions went through twice or something. We had 150,000 people signed up in the first 24 hours and the number has been building from there. And so the numbers are staggering. It will be staggering.

Now but what are we doing? What is the industry doing? Well you're trying to sit there and say effectively what you're doing with that capability is you're taking with, you carry around your wallet that's too thick to sit on and drives you crazy, you're taking those things and putting them someplace that the convenience now comes, more secure and tap and pay. What better for a customer?

The information about the customer stays with the customer. The information about what they bought, I bought $72 at x, goes to transaction. And you just keep those things separate. That's called tokenization you hear about.


MOYNIHAN: That is much more secure, lets the customer own themselves, which is arguably - which we believe is the key, their own data, their own information, and lets the merchants through the loyalty programs they can have customer loyalty incentives.

SCHATZKER: But who ultimately is going to be the net beneficiary of this move to mobile banking? Is it going to be the banks? Is it going to be the merchants? Is it going to be the backend processers? Or is it - or is the value all going to accrue to Apple?

MOYNIHAN: The customers.

SCHATZKER: You believe that.

MOYNIHAN: Yes. Because in the day the question isn't what mobile payments looks like. It's how people are going to shop. It's how people are going to behave. So you put it in the context of what goes on.

SCHATZKER: But the point of being involved from the perspective of a financial institution is to make money, surely.

MOYNIHAN: It - our choice is the payment is going to be made some way. We spend a lot of money to move cash around for our cash management customers and for our consumers. Our ATMs the number is a couple hundred million dollars a day go out of the ATMs in greenbacks. If you can make it more electronic it's more efficient, more secure and more safe. So we're driving that electronification, but the customer benefits because at the end of the day they're getting a convenience that they don't get. But it's if you think about depositing checks and what's gone on, so two years ago in August you couldn't deposit a check by through your mobile phone. Now you can.

Eleven percent of all the deposit transactions go through a mobile device now. Now that probably took 25 years for the ATMs to get that to that level. The ATMs are over half now of the deposits that go through. It was only about 25 percent in five, six, seven years ago when we started putting the image because people would say that that worked. So you're driving that for the company, but the customer it's convenient. They don't have to go and really take a picture.

SCHATZKER: So the customers see this.


SCHATZKER: And they listen to you talk, the conversation we're having right now. And they think to themselves, hey Bank of America is doing things for me that I like. Brian Moynihan sounds like a pretty customer-oriented person. Why then do we keep hearing bashing of big banks from people like Bill Dudley, president of the New York Fed? I'm sure you know that just last week he was, so to speak, at it again saying that the corporate culture on Wall Street is still broken. And he threatened to downsize big banks if it's not fixed. What is he talking about? Is the culture still broken?

MOYNIHAN: That's - going to the customer side, our customer scores are as strong as they go back before the crisis now. And so now the issue is there's this side of the debate about what happened with the banks, and what happened with government support, and whether we're too big and all that stuff. That's going to go on and that is an issue that will be a dialogue until everybody feels that what happened in 2007, '06, '07 and '08, people get that it really started in the latter part of '06, can't happen again. That's the key and that's where capital liquidity, living will, simplifying the companies all that's -

SCHATZKER: So we've been talking about this for five years already.

MOYNIHAN: And a lot of activity has taken place. But the other issue is do we - can we continue to improve our culture so that you won't have actions that you - the culture that says people behave properly, behave for the interest of a customer, a shareholder, and can you give and make sure that their compensation practice, don't (inaudible) and things, we've worked a lot on that.

SCHATZKER: Yes. Where are you on that?

MOYNIHAN: We've adopted all the different things. And we continue to work to improve it. And so I feel very good about the culture in this company. I feel that we made great improvements. And I think tomorrow is always another day. There's 230,000 people out there and we have to make sure every one of them delivers our brand every day. Think about that. It's every day 230,000 people get up.

And my management team, and their management team and their management team has to make sure every one of them would be - everything they do would make our company proud every day. And that's a lot of work. And that's what we're continuing to strive for. It's gone to the point where we have to be striving for perfection and excellence comes along.

SCHATZKER: The European banks have started to pay people with these so-called performance bonds, effectively compensation that can be clawed back in the event that they don't meet capital requirements or there's some kind of a regulatory penalty that the bank faces. Do you think that would work here at Bank of America?

MOYNIHAN: We already have claw backs. We've had them for (inaudible).

SCHATZKER: Sure, sure, sure, but this specifically this bond.

MOYNIHAN: I think, look, if you think about being CEO I get all my compensation paid in stock. Some of it that's short term. The rest of it is long term. I have to hold every share I have to two years after I retire. So my alignment of interest is absolutely -

SCHATZKER: 100 percent?

MOYNIHAN: - 100 percent with the shareholders. My net worth is in the company. And by the way, our employees in the 401(k) alone own six or seven percent of our company. They're the biggest shareholder, more than Warren Buffett does, and on the top of that all the shares they have outside that. So our employees own a lot of this company. And so they're interested in making sure it really does a great job for its customers, and shareholders and the (inaudible).

And so I think that (inaudible). I think the practices in the United States have been going back to the pay czar. We forget all these things that we went through. And all those practices were put in. Now there's constant debate about what the next practice might be, but the real what you're trying to get is to establish duration of compensation with the duration of risk taken. And we've been matching that for a long time with deferrals, and so anybody that's paid a significant amount of money has significant deferrals, and the claw backs and things like that.

SCHATZKER: Brian, you have been through a lot already, perhaps twice as much as your almost five years in this job would suggest. How much longer would you like to do it?

MOYNIHAN: I would - it's the best job in the world. When I get up in the morning to think what we can do for customers, and whether it's a consumer, or whether it's a company or whether - and just to see the people and the talent we have that do that, there's no energy loss here. This is fabulous stuff. And -

SCHATZKER: You could do it for another five years.

MOYNIHAN: I could do it for another - I always tell people I could do this for a long time. And I'm 55. What else would I want to do? This is a great job. And I think as long as I do a good job that I could do it. When I don't think it's fresh, and I don't think it's good and I don't - and somebody - and by the way, I work at the discretion of the board. I could be gone tomorrow if they -

SCHATZKER: Well you're now the chairman. That helps.

MOYNIHAN: It doesn't make a difference.



SCHATZKER: A lot of people, as you know, predicted that you wouldn't last. Do you ever find yourself surprised that you did?

MOYNIHAN: No, because I never would have believed when they said that. And I also don't - also when they say I'm doing a good job I have a deep enough self-inspection I know I can improve every day. And I know the company can improve every day.

SCHATZKER: You're like the baseball player who doesn't read the sports pages.

MOYNIHAN: But I don't read it because at the end of the day the question is you've got to talk to the people who are the most important, our constituencies, our shareholders, our customers, our teammates, and make sure they know what we're doing. And people have different interpretations, as they always will. But the key is just to keep driving the company along its basic foundation of the values and principles, the purpose. And if we do that it will take care of itself. And my obligation is to improve the place, and my management team's obligation.

It's not me. It's the team. And it's 230,000 people. It's a 230-year-old company. We were doing this when the Adams family was John and John Quincy, not Morticia and Gomez. We've been doing this a long, long time. And our job is for this period of time, 5, 10, 15, 20, whatever management team has together is just to move this ball and make this company even greater. And we'd love to do that. And that's the goal. So it will go on after us and it will be terrific. And so you can never get too wound up about you because you're here for a moment. This is here for centuries, centuries.

SCHATZKER: Brian, I thank you very much, great talking to you.

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