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Waiting for a New Blueprint From Bank of America

Nelson D. Schwartz|The New York Times
Thursday, 8 Sep 2011 | 5:23 AM ET

Brian T. Moynihan takes the stage at a Midtown Manhattan hotel on Monday to tell investors what is in store for Bank of America, but already the chief executive’s plans are generating the kind of buzz reserved for the opening of a Broadway show down the street.

Brian Moynihan
Fabrice Coffrini | AFP | Getty Images
Brian Moynihan

Will he break up the company and spin off Merrill Lynch? Cut tens of thousands of jobs? Put its subprime mortgage albatross, Countrywide, into bankruptcy? If not such a bold move, how does Mr.Moynihan plan to reverse the company’s painful slide?

The earliest clues could come Thursday, when the top executives of the country’s largest bank gather at its Charlotte, N.C., headquarters to review recommendations of a 44-member internal team that has been preparing restructuring plans since March.

Company officials say a split-up is out of the question for now, as is imminent bankruptcy for Countrywide.

But 30,000 jobs, roughly 10 percent of the company’s work force, could be eliminated over the next three years as a result of the restructuring initiative known as Project New BAC.

There has been plenty of drama already this week, with the abrupt exit Tuesday of two top executives, Sallie Krawcheck and Joe Price, and the splitting of the bank into two basic units, one dealing with individual customers, the other focusing on businesses and institutions.

While company officials say the reorganization would actually make it harder to break up the company, it has not stilled the speculation.

“At some point, it gets too big to manage,” said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management firm.

“Smaller works better, and the less complicated it is, the better it can work.” Bank of America shares rallied sharply Wednesday on a broader market jump, rising 7 percent to close at $7.48.

They are still off 50 percent since January, weighed down largely by fears that the company could have to pay out tens of billions of dollars more to settle claims stemming from the subprime mortgage meltdown.

Those losses set off worries the company might need to raise fresh capital, but the $8.3 billion sale of its stake in China Construction Bank and a $5 billion investment by Warren Buffett last month have eased those fears for now.

Despite the cold water from executives, some big investors would like to see the Merrill brokerage and investment banking unit spun off.

“As a stockholder in Bank of America, I feel like Merrill Lynch would be worth $7 a share on its own, at least,” said Buzzy Geduld, who sold his brokerage firm — Herzog, Heine, Geduld — to Merrill in 2000, and now owns more than 2.5 million shares in Bank of America. “I think the upside is terrific.”

No one disputes the idea that Bank of America has become too complex. In some ways, the company resembles a crazy quilt assembled through acquisitions pursued by Mr.Moynihan’s predecessor, Kenneth D.Lewis, whose deal-making culminated in 2008 with the purchase of both Merrill Lynch and Countrywide Financial, the subprime mortgage giant at the root of many of Bank of America’s problems today.

Bank of America flag
Getty Images
Bank of America flag

Mr. Moynihan has spent much of his 18 months at the helm undoing Mr.Lewis’s legacy.

In fact, company officials say the need to turn what was a sprawling empire into a leaner, more focused enterprise is what is driving both Project New BAC, which takes its name from the company’s ticker symbol, and Tuesday’s reshuffling.

“We’ve simplified the company in the aftermath of the financial crisis and regulatory reform,” said Anne M.

Finucane, Bank of America’s top global strategy and marketing officer.

“And we’re reducing risk to both the company and the financial system by evaluating businesses that are not core to the strategy or were bolted on.” She added that the new structure follows the blueprint Mr.

Moynihan presented to the board shortly before he was tapped to become chief executive in December 2009.

Looking ahead, executives say the reorganization actually makes it harder to split off Merrill Lynch, because it will be more integrated into the overall company and will not remain under one main leader.

Its famous “thundering herd” of 16,000 financial advisers will be under David Darnell, who will also head up Bank of America’s more traditional consumer businesses.

The institutional business will still be under Tom Montag, a Goldman Sachs veteran who joined Merrill shortly before Bank of America acquired it in 2008.

The first of what will be many more job cuts began Tuesday morning in Charlotte, when Mr. Moynihan met with Mr. Price and told him of the reorganization in person.

Mr.Price, a 19-year veteran of the company, oversaw the consumer banking division. Then he flew to New York to deliver the news personally to Ms.Krawcheck on Tuesday afternoon.

In both cases, Mr.Moynihan told them they would not be offered positions in the new management team.

The cuts that will be laid out Thursday and Friday in Charlotte will be the deepest announced by any major bank in the United States since the industry began to recover from the financial crisis in 2009.

The job reductions will fall mostly on the consumer banking, home loan, and technology and support operations of the company, which account for more than 70 percent of its 288,000 employees.

Some additional reductions could hit the former Merrill Lynch unit, despite strong profits in recent quarters. More than anything else, say shareholders like Mr.Geduld, Mr.Moynihan needs to convince investors that the losses the company is facing on mortgage claims are manageable.

Along with write-downs on bad loans, mortgage-related losses have caused Bank of America to lose $9 billion over the last 18 months.

On Friday, the federal agency overseeing the mortgage giants Fannie Mae and Freddie Mac filed suit against 17 institutions, including Bank of America, to recover losses on mortgage-backed securities that collapsed after the housing bubble burst in 2007.

The issue is almost certain to come up at Monday’s conference, and Mr.Moynihan will likely reiterate the company’s contention that losses in mortgage-backed securities were not caused by how the loans were originated or packaged, but by the broader economic downturn and the housing bubble’s collapse.

Bankruptcy for Countrywide is not being contemplated for now, with executives preferring to fight the suits in court, rather than risk alarming investors and creditors with news that one of the bank’s units had filed for Chapter 11.

Moreover, Mr.Moynihan will contend that Fannie and Freddie were sophisticated investors who knew the securities were not without risk.

“We have very strong defenses,” said Gary Lynch, the company’s chief legal officer. “These cases are eminently defensible. We’re confident at the end of the day we are going to prevail.”

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