After Brian Moynihan became CEO at the start of 2010, B of A's stock lost more than half its value. Meanwhile, the leading bank stock index, KBW, scarcely went down at all. And B of A was recently selling for about 1/3 of book, a remarkably low valuation. Evidently enormous further losses are expected. Why?
The most obvious reason is Countrywide. B of A's stock was worth $75 billion recently. Under Moynihan’s leadership, it has agreed to pay out at least $25 billion for Countrywide liabilities — plus incurring many billions in continuing losses on Countrywide mortgages. There could be an additional $25 billion, or much more, to come.
The obvious solution when Moynihan took over at the start of 2010 was to put Countrywide into bankruptcy. Bankruptcy still can reduce future losses but won't recover what Moynihan paid out. It will be legally and practically harder to excise Countrywide from B of A than it would have been in 2010, but no one says it's impossible.
Moynihan rejected bankruptcy from the outset. In fact, he testified shortly after getting the job: "At the end of the day we will pay for the things that Countrywide did."
Why did he say that? Fatalism? Thoughtlessness? Twisted moral sensitivity? No.
When Moynihan, who was considered the only viable inside candidate, was chosen by B of A's Board, the story was that he — unlike outsiders that were interviewed — assured directors he would aim to keep B of A nearly intact. That included Countrywide. According to Ken Lewis, Moynihan "offered the advantage of a smooth transition."
B of A, like GM and Chrysler, didn't need a smooth transition. It required radical surgery. If Steve Rattner could have operated on B of A the way he operated on the auto companies for the Treasury, then the bank would have recovered by now.
Why did the board prefer continuity? Maybe director compensation is more strongly correlated with size than with equity value. Maybe those who assented to Ken Lewis' idiotic Countrywide stock purchase and then acquisition felt it would make them look bad to write it off less than two years afterwards.
Are these the real reasons why Countrywide's bankruptcy hasn’t been formalized?
Then there is the fig-leaf reason: "If it were simple, we would already have done it." That's what Moynihan was recently quoted as saying.
Well, if it's not simple, two years still seems too long to meditate, apparently without even beginning to execute. Now we have a marathon between Countrywide and Greece to see which of these two obviously insolvent entities will be the first to go — after delaying the inevitable for years while their "sources of strength" (B of A and the E.U. respectively) bled themselves dry.
And Moynihan's statement is self-evidently false. Filing bankruptcy for Countrywide is incredibly simple. The consequences may not be simple. But, so what? Is it simple to take $25 billion in losses — with far more to come — and face suits over endless numbers of securities issues? Besides, simplicity isn't the applicable criterion. Do what is best for shareholders, even belatedly.
Yes, a bankruptcy filing would lead to new litigation. But let's look at MBIA, also bogged down in the mortgage disaster. With support from its regulator, MBIA acted promptly to segregate its mortgage business from its other activities. Lots of counterparties sued over this. Still, MBIA's stock has doubled, while B of A's has halved. Face up to problems, divide and conquer.
Who will lose unjustly in bankruptcy? No one. Those who bought securities from Countrywide have no claim to B of A support. Anyone who bought the securities in the secondary market, relying on B of A's deeper pockets, simply made a bet — just like hedge funds that bought Greek debt at 40 cents on the dollar. There's no immorality or injustice in letting these losers take their losses.
It's ironic that conspicuous among Moynihan's modest qualifications is that he’s a corporate lawyer. So he should know better. His biography on the B of A website has 400 words, 200 of them devoted to his support of appealing causes. Zero words describe any accomplishments before he became CEO. I won't say they missed anything.
Since then he's announced an intention to pay impermissible dividends. He's announced and then rescinded a new fee on debit cards that lost many customers — without bothering to put the fee to a market test first, as competitors did.
Ken Lewis destroyed value as CEO. Brian Moynihan provided continuity: he continues to destroy value as CEO. Discontinuity is overdue. Recognize the obvious fact that Countrywide is bankrupt and find new leadership for this bank.
Anrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at email@example.com.
Related BankThink: B of A Should Put Countrywide into Bankruptcy