Regulators have pushed Bank of America Corp. to show what measures it could take if conditions worsen for the Charlotte, N.C., lender, according to people familiar with the situation.
Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank's most profitable division.
Chief Executive Brian Moynihan isn't expected to pull the trigger soon, if ever, on the creation of a so-called Merrill Lynch tracking stock. Such a move would raise money from investors but could be viewed as counter to Mr. Moynihan's strategy of knitting together the disparate parts of the franchise into a cohesive whole. Its inclusion on the list as a theoretical option shows the bank is considering all possibilities as it wrestles with an array of problems weighing down its shares.
Bank of America and the Fed declined to comment.
The heightened scrutiny from the Fed is another pressure point for the 51-year-old Mr. Moynihan, who faces mounting investor concerns about the bank's legal costs and its ability to withstand another economic downturn.
The bank's stock-market value fell $16 billion in a single day in early August. Shares rallied following a deal announced on Aug. 25 for Warren Buffett's Berkshire Hathaway Inc. to buy $5 billion of Bank of America's stock. The bank also recently reached an agreement to sell half its shares in China Construction Bank Corp., realizing a $3.3 billion gain on the sale, and has decided to sell a sizable piece of its mortgage business.
Still, the stock is down 41% for the year after falling 26 cents to $7.91 Thursday in New York Stock Exchange trading.
Bank of America has posted losses in three of the six quarters since Mr. Moynihan took over as chief executive Jan. 1, 2010. The bank has battled for profits following the financial crash of 2008. It reported a loss of $8.8 billion for the second quarter, as it took a $14.5 billion loss in the consumer real-estate services unit that is dominated by its Countrywide unit.
Bank of America has been operating under strict regulatory oversight since 2008. In May 2009, regulators surprised executives by slapping the bank with a nonpublic memorandum of understanding that required it to improve governance, risk and liquidity-management policies. The action followed a downgrading of the bank's ratings by the Fed and Office of the Comptroller of the Currency and repeated tussles with regulators over the bank's risk controls, capital levels and purchase of Merrill.
Earlier this year, regulators surprised executives again by rejecting the bank's request for a small dividend increase in the second half of 2011. It was an embarrassing turn of events for Mr. Moynihan, who had hinted publicly that a second-half increase was likely. Many of Bank of America's rivals were allowed to raise their payouts for the first time since the crisis.
Regulators have pushed Mr. Moynihan this year to put management-team changes in place quickly to deal with the bank's mounting legal and regulatory problems, according to a person familiar with the situation.
Mr. Moynihan recently accelerated the start of Gary Lynch as the bank's top legal officer. A former Morgan Stanley chief legal officer and ex-director of enforcement with the Securities and Exchange Commission, Mr. Lynch was hired in April but couldn't start right away because he had signed a noncompete agreement with Morgan Stanley that locked him up until September.
In early July, Mr. Moynihan placed a call to Morgan Stanley Chief Executive James Gorman and asked if Mr. Lynch could start his new job two months early, according to people familiar with the call. The Morgan Stanley CEO agreed to free Mr. Lynch without any money changing hands.
A week later, on July 11, Mr. Lynch started as Bank of America's chief of legal, compliance and regulatory relations.
The Fed's call for more documentation about what the bank might do in more-extreme circumstances was a response to uncertainty about an economic recovery and a downward swing in Bank of America's share price earlier this year, one of these people said. It was a one-time request, although the Fed has done the same with other firms in the past.
Bank of America did the analysis at the Fed's request in late July and early August and then provided the Fed with its menu of options, said people familiar with the situation. Some items, such as the tracking stock, were more theoretical than others.
Mr. Moynihan isn't giving the tracking stock serious consideration at this point, said a person familiar with the situation, but he included it on the list to show the company has multiple levers to pull.
Tracking stocks sometimes pay a dividend tied to the performance of a specific portion of the company-in this case, the operations Bank of America inherited with the 2009 purchase of Merrill Lynch.
Holders of the new shares typically don't have the voting rights or protections that owners of the larger parent company have, and they don't own the assets of the division.
Tracking stocks have a mixed record since their introduction in 1984 by General Motors, which developed new shares to follow the performance of its Electronic Data Systems division. The so-called GM class E shares performed well, but that hasn't always been the case. Tracking shares issued by Walt Disney Co. and AT&T during the Internet boom fell sharply and were retired a year or so later.
