Welcome to the machine. One of the largest banks in the US by assets (along with JPMorgan Chase and Citigroup), Bank of America also boasts one of the country's most extensive branch networks with some 5,700 locations and more than 17,000 ATMs throughout the US. The bank's core services include consumer and small business banking, corporate banking, credit cards, mortgage lending, and asset management. Thanks largely to its 2009 acquisition of Merrill Lynch, Bank of America is also one of the world's leading wealth managers with more than $2 trillion under management. The addition of the once-mighty investment bank known as "The Bull" also beefed up Bank of America's trading and international businesses.
Bank of America settled a lawsuit in 2012 for $2.43 billion over accusations that it misled investors about the acquisition of Merrill Lynch. It is so far the largest securities class-action settlement to arise from the financial crisis. Bank of America had paid some $50 billion in stock to buy Merrill Lynch, but the deal came with a fair share of headaches. For one, then-CEO Ken Lewis came under fire for not disclosing how bleak Merrill Lynch's financial condition was prior to the purchase; he was ultimately pushed out of his position. Shareholders and lawmakers also cried foul over Merrill Lynch's giving early bonuses worth billions to its executives. In 2011 Bank of America agreed to another settlement, this time for $315 million over claims that Merrill Lynch made false statements about its mortgage-backed securities sold to investors.
The Merrill Lynch acquisition was somewhat reminiscent of the company's 2008 acquisition of Countrywide Financial, which made Bank of America the US' largest residential mortgage lender and servicer. Both deals involved buying a well-known firm that had fallen on hard times. Bank of America paid $8.5 billion to settle a lawsuit contending that Countrywide had engaged in deceptive lending practices. That did not end controversy surrounding the unit, however. In early 2011 Bank of America announced that it would pay nearly $3 billion combined to Fannie Mae and Freddie Mac to repurchase bad loans originated by Countrywide (since renamed Bank of America Home Loans to avoid the stigma of the subprime loan crisis) and purchased by the government-sponsored entities. The bank set aside an additional $5.5 billion to cover potential losses from exposure to Fannie Mae and Freddie Mac, as well as private investors. To that end, in 2013 the bank announced roughly $11.6 billion of settlements with Fannie Mae and a $1.8 billion sale of collection rights on home loans to Nationstar Mortgage and Walter Investment Management Corp. The deals are meant to help the bank put its disastrous Countrywide purchase behind it.
In early 2012 Bank of America, along with Wells Fargo, JPMorgan Chase, Ally Financial, and Citigroup, reached another settlement related to the companies' foreclosure practices. The $25 billion settlement with the US Department of Justice and 49 state attorneys general was related to their so-called robo-signing process, through which the companies were able to foreclose on homes at lightning speed without due diligence. (Bank of America temporarily halted its foreclosure activities while it assessed its processes. It resumed all foreclosure activities in 2011.) The deal didn't preclude any further related legal actions against the companies, including litigation from individuals or states.
All of the legal battles compound the troubles Bank of America has had with its image: Considered too big to fail, it has been targeted by critics as an institution that should be broken up, minimizing risk should another financial crisis hit. Its purchases of Merrill Lynch and Countrywide were questionable and, as a recipient of bailout funds, the company has garnered further criticisms.
Bank of America is also subject to the Basel III accord, which calls for stronger bank capital requirements by 2014. The company has been busy shoring up capital levels through asset sales and securities offerings, and as a result the company lost its slot as the bank with the most assets in 2011. (It was surpassed by JPMorgan Chase.) In 2010 it sold private bank First Republic, which it had gained with the Merrill Lynch acquisition, to an investor group for around $1 billion. Also that year it sold the long-term asset management business of its mutual fund manager Columbia Management to Ameriprise for some $1.2 billion. It reduced its stake in China Construction Bank (to some 1%) in 2011, reporting a gain of some $6.5 billion. Bank of America also issued new securities to raise funds. In 2012 Bank of America sold its remaining 26.5% stake in Archstone to Lehman Brothers Holdings for $1.6 billion. The bank then announced plans to sell its international wealth management business to Julius Bär.
Through the Merrill Lynch deal, the bank also gained a 49% stake in asset management giant BlackRock. That stake was later diluted to 34% when BlackRock acquired Barclays Global Investors, and again to 12% in 2010. Bank of America exited the remainder of its stake in 2011 for a gain of around $377 million.
Additional sales in 2011 included the sale of Balboa Insurance (acquired as part of its Countrywide purchase) in separate deals to Securian and QBE Insurance. Bank of America spun off its last remaining large private equity fund. The bank has no plans to make new private equity investments. Bank of America also announced that it would shut down its correspondent mortgage operations, another Countrywide-related line of business, after failing to find a buyer. (The unit was a relatively low earner.)
Bank of America has also been exiting some international markets. Until late 2010, the company owned a quarter of one of Mexico's largest banks, Santander Serfin, through its ownership stake in Grupo Financiero Santander. However, as a part of its cash-raising efforts, the company sold the stake back to Spain's Grupo Santander for $2.5 billion. It also sold its Latin American asset management business to the Spanish group. In another deal, Bank of America sold its stake in Itaú Unibanco for some $4.5 billion. (It had gained its stake in the Brazilian bank in a swap for the operations of BankBoston in Brazil, Chile, and Uruguay).
The company is focusing its consumer card operations on the US. In 2011 it sold its Spanish card operations to Apollo Capital Management and sold the card assets of MBNA Canada, including an $8.6 billion account portfolio, to TD Bank. Bank of America plans to exit its Ireland card business as well. Previously, it divested its UK small business card business in a sale to Barclays. The company continues to assess the rest of its international card operations.
The divestitures began as the bank also announced plans to shrink its branch network by about 10% over the next few years, halting a two-decade expansion by the mega-bank. The closures reflect an industrywide trend away from brick-and-mortar banking towards electronic banking. Shortly after acquiring Merrill Lynch, the company began implementing a restructuring plan to cut the combined group's total workforce by some 30,000 (approximately 10% of employees). The company also closed its corresponding mortgage and reverse mortgage origination businesses to better focus on its retail channels.
Although the bank continues to work on strengthening its capital levels and reducing its risk-weighted assets, it plans to focus less on asset sales but rather will implement other capital-raising initiatives. Its strategy to regain fiscal health and reinvent itself includes streamlining its operations and better connecting its businesses while cutting costs (the above-mentioned workforce reduction) and growing revenues. The first phase of the restructuring plan narrowed in on consumer operations; the second phase, which the bank entered in late 2011, focuses on commercial banking, global banking, and wealth management.
Bank of America, which reported a $2.2 billion loss in 2010, returned to profitability the following year to the still relatively quiet tune of $1.5 billion. Gains on sales of assets (especially related to its stakes in China Construction Bank and BlackRock), as well as a reduction made in the company's allowance for loan losses, contributed to the rise in net income. However, a decline in consumer loan balances has impacted the company's top source of income -- interest earnings. Recenly signed regulations have also cut into the company's fee revenues, one of its top non-interest revenue sources: The Durbin Amendment limits interchange fees and the FDIC's Regulation E limits the way banks provide overdraft protection to its customers.
The company, which was losing investor confidence amid all of its financial and legal troubles (not to mention a poorly received attempt to charge a debit card fee, which caused a customer uproar), received a stroke of luck when Warren Buffet's Berkshire Hathaway bought some $5 billion of preferred stock in 2011. – less
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