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Net Net: Promoting innovation and managing change

Sallie Krawcheck: The Euro Is “Fundamentally Flawed”

Sallie Krawcheck

Although the deal reached to supply Greece with rescue funds may make Europe a less acute problem for the near term, it is likely to remain a chronic, long-term problem, former Bank of America executive Sallie Krawcheck said on Squawk Box Monday.

The problem was that Europe had a currency union without a full monetary union, Krawcheck said.

“You still have this issue that the construct, at its base, is fundamentally flawed,” Krawcheck said.

In an hour-long guest hosting stint on Squawk Box, Krawcheck addressed her sudden departure from Bank of America , how the Federal Reserve’s interest rate policy hurts the bank lines of banks, and how individual investors should approach today’s market conditions.

Krawcheck admitted she was “surprised” when she was let go from Bank of America last year after running Merrill Lynch’s global wealth management business for nearly two years.

Krawcheck had been hired by former Bank of America chief executive Ken Lewis after the bank acquired Merrill Lynch during the financial crisis in 2008. Several Merrill executives left soon after the merger, and many of the brokerage’s financial advisers were being scooped up by competitors.

“If you roll back a couple of years, I was brought in by the prior CEO with a mandate to turn around Merrill Lynch. It’s all eons ago now. But if you were to look at the headlines then, Merrill Lynch was viewed as being a pretty tough acquisition to make work. Not just financially but strategically — the financial advisers were leaving, the numbers were declining. I had a very clear mandate to turn the business around,” she said.

According to Krawcheck, the turnaround was a massive success. Indeed, under Krawcheck’s leadership the Merrill wealth management unit was responsible for over $5 billion of Bank of America’s profits. Krawcheck had also stemmed the departures, in part by managing to successfully fend off some of the demands of the bank, such as cross-selling Bank of America financial products, that many financial advisers believed created conflicts of interest.

So why was she let go?

After Lewis left, Brian Moynihan became chief executive. He wanted to change the way the brokerage business was managed, Krawcheck said.

“Two years further forward, the business really I think had been turned around. I think we would all agree, the adviser count had grown by about 1,800, we were beating our budget, we were gaining share versus the competition. And the current CEO at that point had determined that he wanted to manage the business under one COO with the consumer businesses, the deposits, the credit cards and so on,” Krawcheck explained.

Interestingly, Krawcheck never uttered the name “Brian Moynihan” once during the interview.

Krawcheck said that the success of her turnaround efforts had effectively ended her job. A turnaround executive, she said, should only expect to hold a job for a matter of years, rather than decades.

“I feel very good about the turnaround that we put into place. I feel very good about the management team we put into place. And, you know, at the end of day he wanted to manage it differently and I think really with the turnaround was able to do so,” Krawcheck said.

Krawcheck said that the Federal Reserve’s zero-interest rate policy is hurting bank earnings more than most on Wall Street expected. Net interest income is far more important than many analysts and executives realized.

“The other thing that is happening — which I think almost everybody underestimated — what’s happened with interest rates as they’ve gone close to zero as the yield curve has been relatively flat as there’s been no loan demand, the net interest income has declined dramatically,” she said. “I think one thing analysts and commentators — and in fact some bank execs perhaps — didn’t fully recognize is that net interest income is a very powerful driver of the bottom line.”

Krawcheck said the most important thing for investors looking at the current market environment to do was to understand their risk profile — which she said few investors do accurately — and allocate assets appropriately.

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