Econ_May_05_2018

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The Economist May 5th 2018 65
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1
I N THE skyscraper that is Bank of Ameri-
ca’s NewYorkheadquarters, the chief ex-
ecutive, Brian Moynihan, looks relaxed.
The bank has just announced record first-
quarter earnings. Its return on equity is
comfortably indouble digits. Its share price
has been on a roll. The revival ofAmerica’s
second-largest bank, he avers, was inevita-
ble. Any darkmoments? None, except per-
haps when America’s sovereign debt was
downgraded in 2011 and all the country’s
banks suffered. Early hints at the current
prosperity? On his first day in the job, in
2010, he says. Vast losses from bad debt
and litigation merely obscured billions of
dollars in operating profits. “We just had to
get rid ofwhat was dragging us down.”
In fact, this renaissance was anything
but predictable. Over littlemore thanhalfa
centuryMr Moynihan’s two predecessors,
Hugh McColl and Ken Lewis, had trans-
formed the tiny North Carolina National
Bank into an institution that could claim a
business relationship with half of all
American households. Any disruption
along the way was dwarfed by the conse-
quences of the final two acquisitions,
Countrywide Financial, a subprime lend-
er, and Merrill Lynch, an investment bank
with underwriting, brokerage and trading
arms. Both imploded during the financial
crisis. Askedwhat madeMrMoynihan the
right person to take over in themidst of the
chaos, the acerbicMr Lewiswas reputed to
have quipped: “Hewanted the job.”
liever. The bank’s shares now trade at130%
of accounting value. The threat of regula-
tory sanctions continues to hangover all fi-
nancial institutions, but Bank of America
has been replaced by Wells Fargo as a fa-
voured target. And it has benefited from
government policies in other ways. The re-
cent cut in corporate taxes lowered its ef-
fective tax rate from 27% to 18%, accounting
for a third of its increased profits. The wide
variety of capital standards to which big
banks must adhere gives a relative advan-
tage to those that have lots of businesses,
and can thus arrange their affairs most effi-
ciently. The crisis-era bail-outs sent the
message that the government regarded the
largest banks as too big to fail. Deposits
have since flooded in (see chart), even
though interest rates have been nugatory,
keeping funding costs down. And the rules
intended to avert future bank failures have
helped big banks see off competition from
smaller ones, since they can spread com-
pliance costs over a larger base.
Mr Moynihan is now hacking away at
anything not directly related to servicing
Bank of America clients. He has got rid of
stakes in Santander, BlackRock, China
Construction Bank and Banco Itaú; credit-
card businesses in Britain, Canada, Ireland
and Spain; and a slew of private-equity in-
vestments. He has kept hubs in London
and Hong Kong for trading and investment
banking, which act as a conduit between
foreign clients andAmerica, andAmerican
clients and the world. But wealth manage-
ment, once offered in 35 countries, is now
offered in just one—America.
Internal restructuring has been un-
relenting. The bank claims to have moved
away from lucrative but risky activities
such as subprime lending for cars, cards
andhomes.WhenMrMoynihan tookover
the top job, 23 kinds of current accounts
were offered. That has been cut to three.
Over the next five years Bank of Ameri-
ca lost $134bn on loans that were repaid
late or not at all and related expenses, and
spent a further $64bn on litigation. Head-
count had peaked at 302,000 in 2009 after
the Merrill purchase; it fell by 100,000 in a
brutal series of redundancies. The number
of branches was slashed from 6,100 in late
2008 to 4,500. For years, the pain seemed
fruitless. As recently as February 2016, its
shares traded at half their accounting val-
ue. Regulations that in effect outlawed ac-
quisitions constrained its opportunities for
growth. Investors had little faith in the
worth of its assets, or indeed in its strategy.
The stockmarket has since become a be-
Bank of America
Dollars and sense
NEW YORK
Asprawling financial empire has found awinning strategy
Finance and economics
Also in this section
66 Reshaping Deutsche Bank
66 China’s effect on innovation
67 The pay premium for education
68 Blackstone’s credit-default swaps
68 Cleaning up tax havens
70 Japan’s overstaffed banks
71 Buttonwood: The next crisis
72 Free exchange: The worth of nations
Banking on scale
Source: FDIC
United States, bank domestic deposits
By asset-size group, Q4 2007=100
50
0
100
150
200
250
2008 10 12 14 17 16
Less than
$100m
$100m-1bn
$1bn-10bn
$10bn-250bn
Greater than
$250bn
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