MH0007 0 0 7 7645065 Ca s ey B u rt Fra nk T. R o tha e rm e l Bank of America (in 2010) and the New Financial Landscape Stephanie Milner spent the fall and winter of 2008-2009 like many Americans, watching and reading the dire financial news as it was streamed, blogged, and reported directly from Wall Street. Milner, however, had an even more personal interest. As a manager in the Global Corporate and Investment Banking (GCIB) division of Bank of America, she worked every day in the middle of the financial storm. Now, as the dark clouds are beginning to part and the recovery gathers steam, she has been asked to join a committee of managers from throughout the organization who will analyze the strategic direction of the bank and locate opportunities for growth. Historically, Bank of America has pursued a strategy of growth through acquisition. (See Exhibits 1, 2, and 3 for Bank of America's historical financial information.) This strategy was evident even at the height of the financial crisis, when the bank purchased mortgage lending powerhouse Countrywide Financial in the summer of 2008 and brokerage Merrill Lynch in early 2009. (See Exhibit 4 for a list of important company dates.) These latest acquisitions made Bank of America the largest bank holding company in the United States by asset value (Exhibits 5 and 6).1 They also led to the absorption of nearly $100 billion dollars in toxic assets from Merrill and increased the bank's exposure to potentially massive losses in the mortgage industry.2 Like its competitors, Bank of America had significant problems in late 2008 and was on the verge of collapse. The U.S. federal government came to its rescue, providing $25 billion and then an additional $20 billion in TARP funds. The U.S. Treasury and the Federal Deposit Insurance Corporation (FDIC) also guaranteed $118 billion to \"provide protection against the possibility of unusually large losses\"3 (Exhibit 7). Without this cash injection, Bank of America could possibly have received the dubious distinction of being the largest bankruptcy in U.S. history. Instead, that \"honor\" went to another victim of the 2008 financial crisis, Lehman Brothers, which destroyed more than $40 billion in shareholder value when it filed for bankruptcy in September 2008. With economists agreeing that the recession ended in mid-2009, Bank of America has some important work to do.4 As Milner enters the conference room, she surveys the scene. The group looks weary, but optimistic. After greeting several colleagues, she takes a seat and begins to scrawl a few notes on the questions she feels the committee should address: Where is the bank heading? What can Bank of America do in the future to prevent such exposure to economic meltdowns? What will the financial landscape look like as the U.S. economy continues to recover? Where will the bank's opportunities lie in the new economy? And most importantly, how should the bank position itself strategically to compete successfully and grow in the future? These questions swirl in Stephanie Milner's head as the room quiets and the team gets to work. Consultant Casey Burt (GT MBA '11) of Capgemini and Professor Frank T. Rothaermel prepared this case from public sources. It is developed for the purpose of class discussion. It is not intended to be used for any kind of endorsement, source of data or depiction of efficient or inefficient management. All opinions expressed, all errors and omissions are entirely the authors'. Burt and Rothaermel, 2013. This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Commercial National Bank and Bank of Italy Bank of America's history is really the history of two banks on opposite coasts of the United States one in North Carolina and the other in San Francisco.5 COMMERCIAL NATIONAL BANK The foundations of the first bank were laid in 1874 in Charlotte, North Carolina, with the formation of Commercial National Bank. It grew steadily in the Charlotte area for nearly 85 years. Then, in 1958, it purchased Charlotte banking competitor American Trust Company and took on the new name American Commercial Bank. Regional expansion continued in 1960 when American Commercial Bank purchased another local competitor, Securities National Bank, and again renamed itself, this time as North Carolina National Bank (NCNB). In 1982, NCNB expanded beyond the borders of North Carolina through the acquisition of First National Bank of Lake City in Lake City, Florida. The next year began an era of rapid growth for the company with the appointment of Hugh McColl as chief executive officer. Assets swelled to $118 billion after the purchases of failed Dallas bank, First Republic Bank Corporation, from the FDIC in 1988, and Atlanta-based C&S/Sovran Corporation in 1991. Upon completion of the latter acquisition, NCNB became NationsBank. Under McColl's leadership, the asset base of NationsBank more than doubled throughout the mid-1990s. To further strengthen its presence in the Atlanta banking market, NationsBank purchased BankSouth in an all-stock deal valued at $1.6 billion in 1995. Next came the acquisitions of St. Louis's Boatmen's Bankshares for $9.6 billion in 1996, and Florida-based Barnett Bank for $15.5 billion in 1997. These purchases made NationsBank the largest bank in the South, with $284 billion in assets and more than 2,600 branches stretching as far west as New Mexico. BANK OF ITALY Thirty years after the founding of Commercial National Bank in Charlotte, Italian-American Amadeo Giannini founded Bank of Italy in San Francisco. Although Giannini first established the bank to cater to immigrants, he had much larger dreams. Like Commercial National Bank, Bank of Italy achieved much of its early growth through acquisitions. In 1922, Giannini purchased Banca dell'Italia Meridonale and renamed the combined entity the Bank of America and Italy. Five years later, he increased his holdings again in a merger with the newly formed Liberty Bank of America. The new entity, the Bank of Italy National Trust & Savings Association, served customers through a network of 276 branches in California. After the completion of yet another merger, this time with the Bank of America Los Angeles, in 1930 the Bank of Italy was renamed Bank of America. Giannini continued throughout the 1930s and 1940s to pursue his vision of creating a national bank. Bank of America expanded into most of the states surrounding California. It also expanded its service offerings to include insurance through the formation of a holding company, Transamerica Corporation. However, the 1956 passage of the Bank Holding Company Act prohibited banks from owning nonbank subsidiaries, forcing Giannini to spin off Transamerica Corp. Bank of America continued its traditional 2 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape banking activities and retained the Transamerica name for the insurance arm. Additionally, due to new federal interstate banking regulations, Bank of America's domestic non-California banks were formed into a new corporation that would eventually become First Interstate Bancorp (which was acquired by Wells Fargo & Company in 1996). The 1950s did not represent all bad news for Bank of America's aspirations. New technology that allowed credit cards to be directly linked to bank accounts led to the introduction of the BankAmericard in 1958. The credit card ushered in a new era for the bank as well as for American consumer spending in general. BankAmericard became Visa in 1975. In response, a consortium of other California banks joined together to form Master Charge, the forerunner of MasterCard. During the late 1960s, the regulatory environment changed again. The Bank Holding Company Act of 1967 allowed for the establishment of BankAmerica Corporation, to serve as parent company to Bank of America, its subsidiaries, and any future acquisitions. Growth continued slowly in the ensuing years until the bank began a new wave of expansion outside of California by acquiring the insolvent Seattle-based Seafirst Corporation and its subsidiary, Seattle-First National Bank, in 1983. Bank of America faced a crisis in the mid-1980s due to massive losses on loans made to third-world nations, particularly those in Latin America. As a result, the company replaced then-CEO Sam Armacost with former CEO A. W. Clausen, but the damage was already done. Stock price depreciation made the bank vulnerable to hostile takeover. Ironically, one of the attempts was made by First Interstate Bancorp, its former spin-off. Bank of America rebuffed this and other takeover efforts by liquidating several subsidiaries such as FinanceAmerica (sold to Chrysler), Charles Schwab and Co. (sold back to Schwab), and Bank of America and Italy (sold to Deutsche Bank). After the 1987 stock market crash, BankAmerica's stock rallied strongly. Major acquisitions resumed in 1992 with the purchase of Security Pacific Corporation and the banks owned by its subsidiaries in California, Arizona, Idaho, Oregon, and Washington. Despite having to liquidate Rainier Bank due to concerns of federal regulators about competition in Washington state, the Security Pacific deal was the largest bank acquisition in history at that time. In 1994, BankAmerica acquired Continental Illinois National Bank & Trust Co. Continental had been run by the federal government for more than 10 years due to insolvency issues stemming from the same oil-industry exposure suffered by Seafirst in 1983. This transaction allowed BankAmerica to regain its position as the largest bank in America by total deposits, a title that the company had lost to NationsBank Corporation in 1997. That was also the year that BankAmerica embarked on a path that would change the face of the bank forever. In exchange for running various business units at the bank, BankAmerica loaned $1.4 billion to hedge fund D. E. Shaw & Company. When Russian bonds defaulted in 1998, D. E. Shaw suffered massive losses, limiting its ability to repay the loans and thereby weakening BankAmerica's financial position. This led, later that same year, to the acquisition of BankAmerica by NationsBank for $64.8 billion, easily the largest bank acquisition to date. The combined bank controlled $570 billion in assets and operated more than 4,800 branches in 22 states. Although technically NationsBank purchased BankAmerica, the deal was structured as a merger and resulted in the new bank holding company being named the Bank of America Corporation and the banking subsidiary taking the name Bank of America, N.A. 3 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Growth and Financial Meltdown in the New Millennium The new century brought new leadership, new crises, and the growth of shadow banks. NEW LEADERSHIP AND NEW CRISES In 2001, Hugh McColl stepped down, and Ken Lewis succeeded him as CEO. The change in leadership did little to slow the bank's growth through strategic acquisition. (See Exhibit 8 for the level of diversification in 2003.) In 2004, Bank of America purchased FleetBoston Financial (the nation's seventh-largest bank) for $47 billion in cash and stock.6 The next year it acquired MBNA for $35 billion in cash and stock, making Bank of America a major credit card issuer both in the United States and abroad. Shortly thereafter came the purchase of ABN AMRO North America and LaSalle Bank Corporation from Dutch giant ABN AMRO for $21 billion.7 Despite growing storm clouds on the mortgage horizon, 2007 and 2008 saw a repurchase agreement and then outright acquisition of Countrywide Financial, giving Bank of America a substantial position in the mortgage business. The purchase made the newly named Bank of America Home Loans the largest mortgage originator and servicer in the United States, with a service portfolio valued at $1.4 trillion at the end of 2007 (representing 20 to 25 percent of the home loan market). Bank of America must have had at least some suspicions of the developing storm, however: It structured the deal to protect itself in case Countrywide was forced to declare bankruptcy due to losses on subprime home loans.8 Those potential losses were looking more and more real every day. Beginning in 2007, the U.S. economy slid into what has been described by many economists as the most serious financial crisis since the Great Depression.9 Most economists also agree that the cause of this crisis was the housing bubble that peaked in 2005 or 2006, fueled by the availability of low interest rates on a variety of loans caused by an influx of foreign capital into the U.S. market (Exhibit 9). During this time, the debt of the average U.S. consumer rose to unprecedented heights (Exhibit 10).10 Strong historical home value growth (Exhibit 11), combined with easy initial loan terms, incentivized many Americans to take on mortgages they could not afford in the hope that they could refinance later at more favorable terms. A leveling off and slight decline in home values in some parts of the country in 2006 and 2007, combined with rising interest rates, caused the bubble to burst. Refinancing became difficult, adjustable-rate mortgage (ARM) interest rates reset at higher levels, and a wave of defaults and foreclosures followed.11 As the number of mortgage loans (as well as credit card balances and automobile loans) increased, so did the popularity of a financial instrument known as asset-backed securities, or ABS (Exhibit 12). Asset-backed securities are financial instruments securitized by the underlying assets on which they are based. The underlying assets provide a stream of capital from payments made on those assets. In the case of housing, for example, this stream is comprised of homeowners' mortgage payments.12 Banks packaged mortgages and other debt into tranches that were given debt ratings and sold to investors around the world who wanted to invest in the U.S. real estate market. Collateralized debt obligations, or CDOs, are a special form of asset-backed security pioneered by Drexel Burnham Lambert in 1987. Like other asset-backed securities, CDOs carry a credit rating that is based on the fundamental strength of their underlying componentsin this case, investment-grade fixed-income assets. These investments appeal to investors because they offer higher returns than similarly rated corporate bonds and allow the buyer to customize their level of risk through diversification. Because of these benefits, the popularity of CDOs skyrocketed: From 2004 to 2007, the compound 4 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape annual growth rate of global CDO issuance volume was 45 percent. Issuances rose from $157.4 billion to $481.6 billion in value over this same period. When home prices began to decline and foreclosures rose, however, the value of asset-backed securities fell sharply. Mass exodus from the CDO market followed, causing the 2008 issue value to drop to $61.9 billion (Exhibit 13).13 From the standpoint of the CDO and ABS issuers, the precipitous drop in prices, combined with the recent installation of mark-to-market accounting standards, caused massive losses for banks as they were forced to write down the value of assets on their balance sheets. THE SHADOW BANKS The financial crisis had a particularly large effect on the U.S. shadow banking system. Shadow banks are nonbank financial institutions (for example, investment banks, hedge funds, pension funds) that lend corporations the capital necessary to operate, most notably through the use of commercial paper. What differentiated members of this system from traditional banks was their inability to accept deposits, which meant they were not subject to the same regulations as traditional banking institutions. For example, investment banks were not required to maintain minimum capital levels to protect against potential losses. They also did not have the ability to draw on federally insured customer deposits or borrow directly from the federal government in times of financial need. By early 2007, the shadow banking system had grown to roughly the same size as the traditional banking system in terms of assetsmore than $10 trillion.14 Several investment banks and hedge funds had significantly increased their leverage in the ABS market in the years leading up to the financial crisis. They were therefore especially vulnerable to ABS devaluation.15 These shadow institutions used funds from the sale of commercial paper to invest in asset-backed securities, either directly or through structured investment vehicles which they sponsored. As those securities lost value, concerns mounted about the investment banks' ability to repay their debt obligations. The result was a virtual freezing of the commercial paper markets. To encourage lending, central banks around the world felt they had to inject capital into their respective markets. According to Timothy Geithner, then president of the New York Federal Reserve Bank, the size and importance of the shadow banking system, combined with the lack of strict regulation, \"made the crisis more difficult to manage.\"16 Ironically, the first major U.S. casualty was the venerable investment bank and securitization pioneer Bear Stearns. In March 2008, the Federal Reserve Bank of New York furnished Bear Stearns with an emergency loan to prevent its sudden collapse, but the writing was on the wall. Later that same month, JPMorgan Chase purchased the firm for a fraction of its previous market value.17 Meanwhile, the clock was ticking at Lehman Brothers. In September 2007, Lehman Brothers Holding Inc. had closed BNC Mortgage, its subprime mortgage lender, amid deteriorating market conditions. However, the bank was left in an exposed position due to billions of dollars worth of mortgage-backed securities that remained on its books. On September 15, 2008, Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy protection after revealing it had become insolvent. It had bank debt of $613 billion and bond debt of $155 billion while assets totaled only $639 billion.18 Like its peers, brokerage house Merrill Lynch also suffered substantial losses due to unhedged subprime mortgage exposure. Despite the removal of CEO E. Stanley O'Neal for approaching Wachovia Bank about a merger without board approval,19 Merrill Lynch lost $19.2 billion between July 2007 and July 2008 (an astounding $52 million per day).20 New CEO John Thain attempted to bail out the company by selling its commercial finance division to General Electric and selling stock and select hedge 5 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape funds to Singapore investment group, Temasek Holdings, but the bank remained near collapse.21 On September 15, the same day that Lehman Brothers filed for bankruptcy, Bank of America announced its intent to purchase Merrill Lynch for $50 billion, a 38 percent premium over current book value. (See Exhibit 14 for the level of diversification in 2009 after the Merrill Lynch acquisition.)22 The U.S. Financial Industry after the Meltdown In the midst of the financial meltdown, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson were essentially left with two choices, and neither was a good option. On the one hand, they could allow several more of the largest financial institutions in the world to fail, risking a global market collapse. Thousands of working Americans would lose their jobs, pensions, and investments, leading to a dramatic increase in unemployment as the failures rippled through the broader economy. Riots would have been likely in some of the larger U.S. cities, necessitating activation of the National Guard. If Wall Street tanked, repercussions on Main Street would be severe; this clearly was not an attractive choice. Or, the U.S. government could bail out the banks and work toward tighter regulatory controls in the future. This was more in line with Chairman Bernanke's promise to himself that he would not preside over a second Great Depression. GOVERNMENT OWNERSHIP While Main Street strongly opposed a \"Wall Street bailout,\" it did support tighter bank regulations. Thus, during a seven-day period in early September 2008, the federal government took mortgage lenders Fannie Mae and Freddie Mac into conservatorship, which equates to national securitization. The financial markets viewed the move negatively, and financial stocks dropped 31 percent. Stocks fell further in October when President George W. Bush signed the $700 billion Troubled Asset Relief Program (TARP) into law. TARP was designed to stabilize the balance sheets of large financial institutions and to increase liquidity in short-term funding markets. The government's first action under TARP's capital purchase program was to buy $81 billion of preferred shares in seven banks (including Bank of America). Over the next five weeks, financial stocks collapsed, shedding 46 percent of their market value.23 Many have since asked whether the bailout was necessary. By socializing losses while privatizing profits, was the government creating a moral hazard that promoted or even incentivized risk? The U.S. government did not see itself as a long-term investor in bank equities, which helped to ease criticism of government ownership of financial institutions.24 Thus in April 2010, the U.S. Treasury announced plans for the sale of 7.7 billion shares of common stock in Citigroup. (It had previously exchanged its $25 billion in preferred stock for common stock at a price of $3.25 per share.)25 Many similar announcements followed throughout the rest of the year. In March 2011, after three more financial institutions repaid a total of $7.4 billion in borrowed funds, the Treasury announced that the TARP program had turned a profit.26 \"NO MORE SHADOWS\" In order to receive assistance under TARP, several of the remaining large investment banks, including Goldman Sachs and Morgan Stanley, as well as other shadow institutions like American Express, CIT Group, and General Motors Acceptance Corporation (GMAC), were forced to reorganize as bank holding companies.27 As a result, TARP fundamentally altered the shadow banking system that had 6 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape contributed so forcefully to the financial crisis. These firms now fall under the regulation of the Federal Reserve and therefore have a more limited exposure to risk. They are also now permitted to take consumer deposits. THE END OF THE RECESSION The National Bureau of Economic Research (NBER) defines a recession as \"a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion.\"28 According to the NBER's business-cycle dating committee, the peak of the most recent recession occurred in December 2007 and concluded with a trough in June 2009, lasting for a total of 18 months. It was the longest recession experienced by the United States since World War II.29 NBER based its assessment on several statistics, including higher productivity, lower production costs, and increasing factor orders.23 After bottoming out in June 2009, U.S. GDP grew 2.2 percent in the third quarter and increased at an annualized rate of 5.7 percent in the fourth quarter of 2009. GDP growth during the fourth quarter reflected an acceleration in private inventory investment, a deceleration in imports, and increased nonresidential investment. However, it was partially offset by decelerations in federal government spending and in personal consumption expenditures. In addition, the third quarter of 2009 saw worker productivity (amount of output per hour worked) increase at its highest rate (annualized 8.1 percent) in six years, beating Labor Department estimates, while labor costs shrunk by an annualized 2.5 percent. Meanwhile, the Commerce Department reported that factory orders for July 2009 increased for the fifth time in six months, gaining 1.3 percent. This gain was led by the strong performance of durable goods, in particular transportation goods, which surged 18.5 percent at least partially due to the federal government's Cash for Clunkers incentive program.30 Unemployment took somewhat longer to improve, reaching a high of 10.1 percent in October 2009 and hovering between 9 and 10 percent through the end of 2010 (Exhibit 15). Then, after several consecutive monthly drops, the national unemployment rate fell to a two-year low of 8.8 percent in March 2011. Most of the 216,000 jobs created that month were in the private sector, offsetting job cuts by local governments, which were still experiencing financial difficulties.31 BANKS AS A LAGGING INDICATOR Even as other indicators showed signs of recovery, the U.S. banking sector continued to lag. Just three banks were forced to close in 2007, compared with 25 in 2008. In 2009, an astonishing 140 banks were shuttered, leaving the FDIC's insurance fund at its lowest point in more than 15 years. Such a large number of bank failures had not occurred since the savings and loan crisis of the early 1990s. At the time the recession technically ended (second quarter 2009), the FDIC had 416 banks on its \"problem list,\" meaning they were undercapitalized or deficient in some way. Experts predicted another 100 to 300 banks, particularly small ones, could fail while the crisis ran its course.24 In fact, conditions grew even worse in 2010 with 157 closures, and remained elevated through first quarter 2011, during which 26 bank failures occurred (Exhibit 16). Unfortunately for many regional banks, the mantra \"too big to fail\" did not apply. They were too small to be bailed out, and thus became mass casualties of the financial meltdown. One of the most noteworthy failures was the regional commercial real-estate lending giant Colonial Bank, based in 7 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Montgomery, Alabama. With total deposits of $20 billion and assets of $22 billion as of mid-August 2009, Colonial was the sixth-largest bank failure in U.S. history. Its assets and deposits, along with its 346 branches, were sold to BB&T.32 Overall, the dramatic rise in bank failures was attributed to defaults on commercial loans given to developers, many of whom simply walked away from projects as demand dried up. Another potent contributor was rising default rates on traditional prime mortgages, driven by the increase in unemployment. Bank of America after the Crisis As the financial situation regained its footing, Bank of America's senior management came under heavy fire for decisions made during the crisis. Serious questions were raised regarding the role played by the Federal Reserve in Bank of America's acquisition of Merrill Lynch. CRISIS CLEAN-UP An April 2009 report by New York Attorney General Andrew Cuomo alleged that federal officials, namely former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, pressured CEO Ken Lewis into proceeding with the merger without disclosing significant losses the brokerage was carrying on its books. Lewis's concerns proved to be valid when it was ultimately revealed that Merrill Lynch's fourth-quarter losses topped $15 billion.33 Concerned about the viability and value of the merger, stockholders voted (narrowly) to replace Ken Lewis as chairman of the board of directors, but allowed him to remain as CEO for the time being. Outraged Bank of America shareholders also questioned the large bonus pool paid at Merrill Lynch, despite the $27.6 billion in losses incurred by the firm in 2008. In all, the Merrill Lynch compensation committee approved $3.6 billion in bonus payments only three days after Bank of America shareholders approved the merger. Bonus payments were made just one day prior to the deal becoming effective.34 Under questioning from federal investigators, former Merrill Lynch CEO John Thain claimed that Bank of America, and Ken Lewis in particular, were fully aware of the incentive-compensation plan in place when the bank purchased the floundering brokerage firm, effective January 1, 2009. This contradicted Lewis's testimony to the House Financial Services Committee on February 11, 2009, when he claimed to have very little involvement in the Merrill Lynch bonus plan. The SEC also took notice and launched an investigation to determine whether Bank of America's management misled shareholders prior to the December 2008 meeting in which the merger was approved. In August 2009, the SEC filed a civil suit in U.S. District Court for the Southern District of New York, claiming that proxy documents mailed to shareholders failed to disclose Bank of America's prior agreement with Merrill Lynch authorizing the payment of billions of dollars in year-end bonuses prior to the close of the merger. Then in January 2010, the SEC filed a second charge that Bank of America failed to disclose to shareholders the extraordinary losses incurred by Merrill Lynch in the fourth quarter of 2008. Bank of America denied any wrongdoing but agreed to a settlement that stipulated payment of $150 million to shareholders harmed by the disclosure violations. The bank also had to promise to adhere for the next three years to a series of remedial actions designed to improve its corporate governance with respect to executive compensation and financial transparency.35 8 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXECUTIVE SHAKEUP The year following the Merrill Lynch merger saw a massive shakeup of the executive leadership at Bank of America. Starting in early August, several members of the guiding team left and were replaced by fresh faces. According to the official press release, the changes were meant to \"enhance future success at the company.\"36 Brian Moynihan, former head of Global Corporate and Investment Banking (GCIB) replaced Liam McGee, a 20-year Bank of America veteran, as head of Consumer Banking. Tom Montag took over responsibility for GCIB from Moynihan in addition to his role as head of Global Markets. The largest news-grabber, however, was the addition of Sallie Krawcheck as head of Global Wealth and Investment Management. Ms. Krawcheck has a long and accomplished resume and is widely regarded as one of the most powerful women in business. Before moving to Bank of America, she rose from her position as an equity analyst to CEO of research firm Sanford C. Bernstein & Co. She subsequently served as CFO and head of strategy for Citigroup. Most recently, she served as CEO in charge of Smith Barney and the Citi Private Bank, Citigroup's wealth-management businesses. Bank of America expected big things from the addition of Ms. Krawcheck. Upon her hiring, Ken Lewis stated, \"She is acknowledged to be one of the premier executives in the wealth-management industry. Her experience and perspective will lead that business to the next level.\"31 The biggest change came at the end of September 2009 when CEO Lewis announced that he would leave the company at the end of the year.37 Those close to the decision said that Lewis had grown weary of the criticism surrounding the Merrill Lynch acquisition. Those sources said the decision was solely Lewis's and that he was under no pressure from the board of directors or government officials. \"The Merrill Lynch and Countrywide integrations are on track and returning value already,\" said Lewis in his official statement. \"Our board of directors and our senior management include more talent, and more diversity of talent, than at any time in this company's history. We are in position to begin to repay the federal government's TARP investments. For these reasons, I decided now is the time to begin to transition to the next generation of leadership at Bank of America.\" In January 2010, the bank's board named Brian Moynihan as Lewis's successor as CEO. Moynihan inherited a bank with 280,000 employees that was active in more than 180 countries across the globe. TARP FUNDS In June 2009, 10 banks repurchased a combined $68 billion worth of preferred stock that the government had purchased from the banks under TARP to inject capital into the banking system. Included among the ten were major rivals JPMorgan Chase, Morgan Stanley, and Goldman Sachs Group. The repayment was in direct response to government \"stress tests\" of 19 of the nation's largest financial institutions, a test that large banks like Wells Fargo, Citigroup, and Bank of America failed.38 Eager to restore some luster to its tarnished image, Bank of America announced the complete repayment of its own $45 million in TARP funds on December 9, 2009. Despite the fact that the bank lagged behind several of its major competitors in this regard, CEO Lewis looked positively toward the future: \"We owe taxpayers our thanks for making these funds available to the nation's financial system and to our company during a very difficult time,\" said Lewis. \"Now that we have cleared this significant hurdle, which demonstrates the strength of our company, we look forward to continuing to play a key role in the economic recovery and helping to meet the changing needs of our customers and clients.\"39 9 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Critics were a bit less optimistic, however. An analyst cited by huffingtonpost.com argued that the timing was too soon, given the number of delinquent loans that were likely to default in the near future. Using $26 billion in extra cash to pay back TARP funds at the same time the Federal Reserve was in the process of withdrawing other subsidies for large banks was also likely to leave Bank of America in a weak cash position.40 Others argued that the payback was a mere sleight of hand designed to allow Lewis to take a \"victory lap\" 41 before stepping down as CEO. Bank of America continued to take advantage of low-interest loans from the federal government that did not have any of the restrictions that TARP funds did.42 BUSINESS OUTLOOK In 2008, analysts estimated that U.S. property owners lost $3.3 trillion in housing value and that one in six Americans owed more than their homes were worth.43 Unfortunately for homeowners and the banks holding their mortgages, the real estate market continued to struggle even after the technical end of the recession in June 2009. Due to its acquisition of mortgage-lending giant Countrywide Financial, Bank of America had become the leading servicer of mortgages in the United States. This left the bank vulnerable as struggling homeowners continued to abandon their properties at unprecedented rates. In July 2009, Bank of America reached a settlement with the Attorneys General of 40 states to start three programs aimed at relieving homeowners' financial distress. The Foreclosure Relief Program provided $150 million in assistance for certain borrowers who experienced a foreclosure, short sale, or deed-in-lieu of foreclosure on mortgages originated by Countrywide. The second initiative, the National Homeownership Retention Program, was aimed at creating affordable and sustainable mortgage payments for 400,000 homebuyers who financed their purchases with subprime or adjustable-rate mortgages serviced by Countrywide. The third component provided cash assistance for individuals subject to a foreclosure sale who vacated their property voluntarily. In its 2010 Annual Report, Bank of America reported that it had modified nearly 775,000 mortgages since January 2008. It had also reached an agreement to pay $2.8 billion to Freddie Mac and Fannie Mae to resolve claims related to mortgages they had purchased from Countrywide and its affiliates. Despite these positive steps, Bank of America was not yet out of the \"mortgage woods\": The housing market remained weak throughout 2010, with house prices showing a downward trend in the second half of the year.44 However, the Merrill Lynch acquisition was starting to look up. According to an April 2010 article in The Economist magazine, attrition at Bank of America and Merrill Lynch's combined investment banking operations had slowed considerably.45 New management that was brought in to refresh the firm seemed to be having the desired effect. Overall the bank earned $3.2 billion in the first quarter of 2010, driven mostly by a reduction in provisions for credit losses and strength in the capital markets. Thus, while some things were improving, Bank of America still had a long way to go toward full financial recovery. Management's Challenge In Stephanie Milner's conference room, consensus is easy to achieve on one point: Executive management is ready to get the bank back on track to profitability. However, many obstacles stand in the way. First and foremost are the many challenges that come with the merging of any large organizations. 10 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Bank of America's case is even more complicated because it is integrating two distinct entities at the same time, both of which were failing when the bank assumed control. Each has a significant amount of \"baggage\" that needs to be sorted through in order to clear a path toward a better future. Bank of America's Home Retention program represents a significant effort to undo the negative aspects of Countrywide's legacy, but how much longer will the past continue to haunt the bank's financial statements? Major competitors like JPMorgan Chase and Morgan Stanley were able to pay back their TARP funds and put the financial crisis behind them much more quickly. Bank of America cannot afford to fall behind. (See Exhibit 17 for a revenue and net income comparison among major competitors.) Then there is the question of what integration should look likewhich activities should stay, which should be spun off, and what redundancies should be eliminated? The longer it takes Bank of America to sort out these issues, the more likely it is to lose star talent to other firms, especially as the financial sector perks back up. Should the bank go with a single brand and image, or take advantage of the equity that remains in the Merrill Lynch name? (Letting go of Countrywide seems to be a foregone conclusion.) One of the attractive aspects of Merrill Lynch is its international presence and the promise it holds for global expansion. Will foreign countries embrace the bank as readily if it renames Merrill Lynch's worldwide operations as Bank of America? As the bank continues to grow in the future, what competencies should it rely on? Historically, Bank of America has been known for its willingness to innovate and push the boundaries of banking technology. The bank led the way in online banking, including advanced bill-payment options for customers, mobile-banking applications for smartphones, and ATM technology that can accept deposits without envelopes, scan and recognize checks, and count cash. Bank of America has also developed a reputation for developing class-leading, customer-oriented promotions and services, such as its \"Keep the Change\" and \"Privacy Assist\" programs (see Exhibits 18 and 19). Should innovation and service continue to be the building blocks of its future competitive advantage, or have the changes brought about by the financial crisis rendered them less effective going forward? How could these strengths be combined with what Merrill Lynch and Countrywide have to offer? Further, how should the company grow in the future? In the past, Bank of America has displayed a steady appetite for acquisitions, making it the mammoth financial institution it is today. But how big is too big, and how can a firm know when it has reached that threshold? With the number of annual bank failures still quite high, plenty of acquisition targets exist, but do their discounted prices merit taking on even more financial distress? How healthy does Bank of America have to be in order to consider additional purchases? Finally, in order to avoid repeating previous mistakes, Bank of America needs to understand how Merrill Lynch and Countrywide got themselves into such precarious financial positions in the first place. What risk-management mechanisms were in place to prevent such massive losses, and why were they ineffective? Was the financial crisis created by good people making bad decisions at an inopportune time? Or were the people themselves to blame? To what extent did corporate strategy and compensation incentives promote unnecessary risk-taking? And most importantly, how can situations like the 2008 financial crisis be avoided in the future? Stephanie Milner and the rest of the team must assess all of these issues and draft a set of recommendations to help guide future strategy development. Their recommendations need to address weaknesses in past strategy that may have contributed to the crisis at each firm (Bank of America, Countrywide, and Merrill Lynch). In addition, they need to discuss how Bank of America can harness the inherent strengths of the legacy firms and build a stronger, more financially secure organization. The group begins to work. 11 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. 1,998,788 231,444 $2,230,232 2,036,661 228,248 $2,264,909 Total Liabilities Shareholders' Equity Total Liabilities and Shareholders' Equity Source: Bank of America Corporation Annual Reports. 438,521 178,515 448,431 Long-term debt 69,524 65,432 200,494 59,962 255,185 $ 991,611 All other liabilities 71,985 Commercial paper and other short-term borrowings 245,359 Trading account liabilities Federal funds purchased and securities loaned or sold under agreements to repurchase Deposits $1,010,430 683,724 $2,230,232 624,013 $2,264,909 All other assets Total Assets Liabilities 862,928 898,555 Loans and leases, net of allowance 311,441 338,054 Debt securities 182,206 $ 189,933 2009 194,671 $ 209,616 2010 Trading account assets Federal funds sold and securities borrowed or purchased under agreements to resell Assets 908,375 277,589 159,522 82,478 $1,817,943 177,052 1,640,891 67,661 268,292 158,056 57,287 206,598 $ 882,997 $1,817,943 389,979 $ 2008 $1,715,746 146,803 1,568,943 76,392 197,508 191,089 77,342 221,435 $ 805,177 $1,715,746 345,318 864,756 214,056 162,064 $ 129,552 2007 EXHIBIT 1 Bank of America Corporation Historical Balance Sheets at December 31st (in millions) $1,459,737 135,272 1,324,465 58,471 146,000 141,300 67,670 217,527 $ 693,497 $1,459,737 280,887 697,474 192,846 153,052 $ 135,478 2006 $1,291,803 101,533 1,190,270 46,938 100,848 116,269 50,890 240,655 $ 634,670 $1,291,803 222,962 565,746 221,603 131,707 $ 149,785 2005 Bank of America and the New Financial Landscape 12 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 2 Bank of America Corporation Consolidated Statement of Income (in millions) 2010 2009 2008 2007 2006 2005 Net interest income $ 51,523 $ 47,109 $ 45,360 $34,441 $34,594 $30,737 Non-interest income 58,697 72,534 27,422 32,392 38,182 26,438 110,220 119,643 72,782 66,833 72,776 57,175 Provision for credit losses 28,435 48,570 26,825 8,385 5,010 4,014 Noninterest expense, before merger and restructuring charges 81,288 63,992 40,594 37,114 34,988 28,269 2,721 935 410 805 412 115,283 68,354 45,909 40,803 32,695 Revenue Total Revenue, Net of Interest Expense Expenses Merger and restructuring charges 1,820 Total Expenses 111,543 Income before Income Taxes (1,323) 4,360 4,428 20,924 31,973 24,480 Income tax expense (benefit) 915 (1,916) 420 5,942 10,840 8,015 $ 4,008 $14,982 $21,133 $16,465 Net Income (Loss) $ (2,238) $ 6,276 Source: Bank of America Corporation Annual Reports. EXHIBIT 3 Other Financial Data and Ratios 2010 2009 2008 2007 2006 2005 0.26% 0.22% 0.94% 1.44% 1.30% 1.80% 11.08% 16.27% 16.51% 4.72% 26.19% 38.23% 31.80% 5.19% Performance Ratios Return on average assets N/M Return on average common shareholders' equity N/M N/M \u0007Return on average tangible common shareholders' equity N/M N/M Return on average tangible shareholders' equity 25.13% 37.80% 31.67% 10.08 10.38 9.74 8.56 9.27 7.86 Total average equity to total average assets 9.56 10.01 8.94 8.53 8.90 7.86 Dividend payout N/M N/M N/M $72.26 $45.66 $46.61 Earnings (loss) $(0.37) $(0.29) $ 0.54 $ 3.32 $ 4.63 $ 4.08 Diluted earnings (loss) $(0.37) $(0.29) $ 0.54 $ 3.29 $ 4.58 $ 4.02 Dividends paid $ 0.04 $ 0.04 $ 2.24 $ 2.40 $ 2.12 $ 1.90 Book value $20.99 $21.48 $27.77 $32.09 $29.70 $25.32 Tangible book value $12.98 $11.94 $10.11 $12.71 $13.26 $13.51 Closing $13.34 $15.06 $14.08 $41.26 $53.39 $46.15 High closing $19.48 $18.59 $45.03 $54.05 $54.90 $47.08 Low closing $10.95 $ 3.14 $11.25 $41.10 $43.09 $41.57 Total ending equity to total ending assets N/M 4.18% Per Common Share Data Market Price per Share of Common Stock (continued) 13 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 3 Other Financial Data and Ratios (continued) 2010 2009 2008 $134,536 $130,273 $70,645 $183,107 $238,021 $184,586 Allowance for credit losses ($M) $ 43,073 $ 38,687 $23,492 $ 12,106 $ 9,413 $ 8,440 \u0007Nonperforming loans, leases, and fore closed properties ($M) $ 32,664 $ 35,747 $18,212 $ 1,856 $ 1,603 Market capitalization 2007 2006 2005 Asset Quality \u0007Allowance for loan and lease losses (% of total loans) Net charge-offs 4.47% 4.16% $ 34,334 $ 33,688 2.49% $16,231 5,948 $ 1.33% 1.28% $6,480 $ 4,539 $ 1.40% 4,562 Net charge-offs (% of total loans) 3.60% 3.58% 1.79% 0.84% 0.70% 0.85% Nonperforming loans (% of total loans) 3.27% 3.75% 1.77% 0.64% 0.25% 0.26% Ratio of the allowance for loan and lease losses 1.22 1.42 1.79 1.99 1.76 1.1 Source: Compiled from Bank of America Corporation Annual Reports. EXHIBIT 4 Key Dates in the History of Bank of America Year Event 1874 Commercial National Bank was founded in Charlotte, North Carolina 1904 Amadeo Giannini founds the Bank of Italy in San Francisco, California 1922 Bank of Italy purchases Banca dell'Italia Meridonale and rebrands as Bank of America and Italy 1927 \u0007Bank of America and Italy merges with Liberty Bank of America to form Bank of Italy National Trust & Savings Association 1930 \u0007 ank of Italy National Trust & Savings Association merges with Bank of America Los Angelas and rebrands as Bank B of America 1958 \u0007 ommercial National Bank purchases Charlotte competitor American Trust Company and rebrands as American C Commercial Bank 1958 Bank of America issues the first BankAmericard, ushering in the era of credit cards 1960 \u0007 merican Commercial Bank purchases Securities National Bank and rebrands as North Carolina National Bank A (NCNB) 1967 The Bank Holding Company Act of 1967 1975 The BankAmericard association rebrands as Visa 1982 NCNB exbands beyond North Carolina by purchasing First National Bank of Lake City in Lake City, Florida 1983 Hugh McColl becomes CEO of NCNB 1983 BankAmerica Corporation purchases Seattle, Washington-based Seattle First National Bank 1986 \u0007Large BankAmerica losses due to third-world lending lead to unsuccesful takeover attempt by First Interstate Bancorp 1991 NCNB rebrands as NationsBank after the purchase of Atlanta, Georgia-based C&S/Sovran Corpoation 1992 \u0007 ank America Corporation purchases Security Pacific Corporation and gains a foothold in all major West Coast B markets 14 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 4 (continued) Year Event 1994 \u0007 ankAmerica purchases Continental Illinois National Bank & Trust Co. and overtakes NationsBank as the largest bank B in America 1995 NationsBank purchases BankSouth for $1.6 billion 1996 NationsBank purchases St. Louis's Boatmen's Bankshares for $9.6 billion 1997 NationsBank purchases Florida-based Barnett Bank for $15.5 billion 1997 BankAmerica loans hedge fund D.E. Shaw $1.4 billion in exchange for services 1998 Russian bond defaults cripple D.E. Shaw and weaken BankAmerica 1998 NationsBank purchases BankAmerica for $64.8 billion and rebrands as the Bank of America Corporation 2001 Hugh McColl steps down as CEO of Bank of America and is succeeded by Ken Lewis 2004 Bank of America Corporation purchases FleetBoston Financial for $47 billion 2005 Bank of America Corporation purchases MBNA for $35 billion 2005 \u0007Bank of America Corporation purchases ABN AMRO North America and LaSalle Bank from ABN AMRO for $21 billion 2008 \u0007Bank of America Corporation purchases Countrywide Financial and rebrands the firm as Bank of America Home Loans 2008 Bank of America Corporation purchases Merrill Lynch for $50 billion 2008 Bank of America Corporation recieves $25 billion in federal TARP funds 2009 \u0007 ank of America Corporation receives an additional $20 billion in TARP funds, plus $118 billion in guarantees against B Merrill Lynch losses from the FDIC Source: Bank of America (www.bankofamerica.com). EXHIBIT 5 Bank of America-Total Assets ($M) $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 2010 2009 2008 2007 2006 2005 Source: Compiled from Bank of America 10-K filings. 15 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 6 Total Assets of Largest U.S. Bank Holding Companies $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $8,00,000 $6,00,000 $4,00,000 $2,00,000 $0 JPMorgan Bank of Chase America Citibank Wells Fargo U.S. Bank PNC Bank Source: Federal Reserve Board, National Information Center, www.federalreserve.gov/releases/lbr/current/default.htm. 16 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 7 Largest Recipients of TARP Funds $90,000,000 $80,000,000 $70,000,000 $60,000,000 $50,000,000 $40,000,000 $30,000,000 $20,000,000 $10,000,000 rs ne ow me Ho S. U. ga or M Gr hs nS ou p, ta In nle y c. y an ac nS ma old eG Th JP M or ga nC sF ha ar se go & & Co Co mp mp at or rp Co W ell ica er Am of nk Ba an ion c. , In up ro tig Ci Au y . I.G A. to ma ke rs ,G M AC $0 Source: \"Tracking the $700 Billion Bailout,\" The New York Times, www.nytimes.com/packages/html/national/200904_ CREDITCRISIS/recipients.html. 17 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 8 Bank of America's Diversification Strategy in 2003 Asset Manage- ment Global & Corporate 7% Investment Banking Consumer & Commercial Banking 24% 69% Percent of Revenue Source: Blamely, R. S., S. Griffin, Q. Makins, B. Rule, and D. Thompson (2010), \"A strategic perspective on Bank of America,\" Georgia Institute of Technology. EXHIBIT 9 Historic Mortgage Rates, June 2003-January 2011 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Ju n Ja '03 n Au '04 g M '04 ar Oc '05 t M '05 ay De '06 c Ju '06 l Fe '07 b Se '08 p Ap '08 r No '09 v' 0 Ju 9 n '1 Ja 0 n '11 0.00% 30-Year-FRM 15-Year-FRM 30-Year-1-ARM Source: www.hsh.com/mtghst.html. 18 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 10 U.S. Household Debt Outstanding 1979-2010 (in billions) $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Home Mortgage Consumer Credit 09 07 20 05 20 03 20 20 01 20 99 97 19 95 19 93 19 19 91 89 19 87 19 85 19 19 83 19 81 19 19 79 $0 Total Source: www.federalreserve.gov/releases/z1/current/z1r-2.pdf. 19 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 11 Historical U.S. Home Price Indices S&P/Case-Shiller Home Price Indices 24% 20% 20% 16% 16% 12% 12% 8% 8% 4% 4% 0% 0% 24% 24% 28% 28% 212% 212% 218% 216% 220% 220% 224% 1988 1990 1992 1994 1996 1998 2000 10-City Composite 2002 2004 2006 2006 2010 Percent change, year ago Percent change, year ago 24% 224% 20-City Composite Source: www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable =SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Dis position&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1= content-type&blobwhere=1245301368714&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true. 20 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 12 Total Issuance of Asset-Backed Securities 800 700 $ Billions 600 500 400 300 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: The Securities Industry and Financial Markets Association, www.sifma.org/research/item.aspx?id=23319. EXHIBIT 13 Global CDO Issuance (in millions) $5,00,000 $4,50,000 $4,00,000 $3,50,000 $3,00,000 $2,50,000 $2,00,000 $1,50,000 $1,00,000 $50,000 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YTD Source: Securities Industry and Financial Markets Association, http://search.sifma.org/search?q=CDO+issuance&submit=Go &site=SIFMA&client=SIFMA&proxystylesheet=SIFMA&output=xml_no_dtd. 21 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 14 Bank of America's Diversification Strategy in 2009 Deposits Global Card Services 11% Home Loans 24% 14% Global Wealth Global Markets 15% Global Banking 19% 17% Percent of Revenue Source: Blamely, R. S., S. Griffin, Q. Makins, B. Rule, and D. Thompson (2010), \"A strategic perspective on Bank of America,\" Georgia Institute of Technology. EXHIBIT 15 Seasonally Adjusted Unemployment Rates and Non-Farm Payroll Employment Change (Month over Month) 11.0 600 10.0 400 200 Thousands 8.0 7.0 6.0 0 2200 2400 1 -1 -1 0 ar M -1 0 De c 09 Se p -1 0 Ju n- ar 09 M 9 -0 De c- Se p 9 Ju -0 ar 11 ar - M c10 10 De 10 Se p- Ju n- -1 0 9 ar M 09 De c0 Se p- nJu -0 ar M 09 21000 9 2800 4.0 n09 2600 5.0 M Percent 9.0 Source: U.S. Bureau of Labor Statistics, www.bls.gov/news.release/pdf/empsit.pdf. 22 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 16 Yearly Bank Failures, 2000-2011 180 160 140 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2007 2008 2009 2010 2011 Source: FDIC, www2.fdic.gov/hsob/hsobRpt.asp. EXHIBIT 17 Revenue and Net Income of Major U.S. Banks, 2005-2009 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 $(20,000) 2005 2006 2007 2008 2009 $(40,000) Bank of America Revenue Chase Revenue Citigroup Revenue Wells Fargo Revenue Bank of America Net Income Chase Net Income Citigroup Net Income Wells Fargo Net Income Source: Blamely, R. S., S. Griffin, Q. Makins, B. Rule, and D. Thompson (2010), \"A strategic perspective on Bank of America,\" Georgia Institute of Technology. 23 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape EXHIBIT 18 Bank of America's Ranking in the Fortune 500 Rank Company Overall Score 1 Bank of America 6.69 2 JPMorgan Chase 6.53 2 Credit Suisse Group 6.53 4 Wells Fargo 6.38 5 Deutsche Bank 6.03 6 ING Group 5.63 7 BNP Paribas 4.89 Source: Blamely, R. S., S. Griffin, Q. Makins, B. Rule, and D. Thompson (2010). \"A strategic perspective on Bank of America,\" Georgia Institute of Technology. EXHIBIT 19 Bank of America's Fortune 500 Ranking by Attribute Nine Key Attributes of Industry Reputation Rank Innovation 1 Social responsibility 1 Quality of products/services 1 People management 2 Quality of management 2 Long term investment 2 Use of corporate assets 4 Financial soundness 4 Global competitiveness 10 Source: Blamely, R. S., S. Griffin, Q. Makins, B. Rule, and D. Thompson (2010), \"A strategic perspective on Bank of America,\" Georgia Institute of Technology. 24 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape Endnotes 1. \"Top 50 Bank Holding Companies,\" United States Federal Reserve System, National Information Center. 2. Dash, E., L. Story, and A. R. Sorkin (2009), \"Bank of America to receive additional $20 billion,\" The New York Times, January 15. 3. Board of Governors of the Federal Reserve Board System, press release, January 16, 2009, www.federalreserve.gov/newsevents/press/bcreg/20090116a.htm. 4. Robb, G. (2009), \"Bernanke declares 'recession is very likely over,'\" MarketWatch, The Wall Street Journal, September 15. 5. Bank of America Online Heritage Center; http://newsroom.bankofamerica.com/heritagecenter/. 6. \"U.S. banking mega-merger unveiled,\" BBC World News. October 27, 2003. 7. Henderson, T. (2008), \"BOA to 'paint the town red' with LaSalle name change,\" Crain's Detroit Business, April 14. 8. Bauerlein, V, and J. R. Hagerty (2008), \"Behind Bank of America's big gamble,\" The Wall Street Journal, January 12. 9. \"Three top economists agree 2009 worst financial crisis since Great Depression; risks increase if right steps are not taken,\" Reuters, February 27. 10. Krugman, P. (2009), \"Revenge of the glut,\" The New York Times, March 1. 11. Steverman, B, and D. Bogoslaw (2008), \"The financial crisis blame game,\" BusinessWeek.com, October 18. 12. Asset-Backed Security, www.investopedia.com. 13. Mongoose, D., \"Collateralized debt obligations: from boon to burden,\" Investopedia.com. 14. Barr, A. (2008), \"Brokers threatened by run on shadow bank system,\" MarketWatch, The Wall Street Journal, June 20. 15. Greenspan, A. (2009), \"We need a better cushion against risk,\" Financial Times, March 26. 16. Barr, A. (2008), \"Brokers threatened by run on shadow bank system.\" 17. Onaran, Y. (2008), \"Fed aided Bear Stearns as firm faced Chapter 11, Bernanke says,\" Bloomberg.com, April 2. 18. Mamudi, S. (2008), \"Lehman folds with record $613 billion debt,\" MarketWatch, The Wall Street Journal, September 15. 19. Anderson, J., and L. Thomas Jr. (2007), \"NYSE chief is chosen to lead Merrill Lynch,\" The New York Times, November 15. 20. Story, L. (2008), \"Chief struggles to revive Merrill Lynch,\" The New York Times, July 18. 21. Dash, E. (2007), \"Merrill Lynch sells stake to Singapore firm,\" The New York Times, December 25. 22. Moyer, L. (2008), \"They all fall down,\" Newsweek, September 15. 23. Reynolds, A. (2009), \"The government's influence on the stock market,\" Forbes.com, March 25. 24. Crutsinger, M. (2010), \"Treasury plans first Citigroup stock sale,\" Washingtontimes.com, April 26. 25. www.treasury.gov/press-center/press-releases/Pages/tg660.aspx. 25 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies. Bank of America and the New Financial Landscape 26. www.treasury.gov/press-center/press-releases/Pages/tg1121.aspx. 27. \"Fed approves GMAC bank request in boost for GM,\" AFP, December 24, 2008. 28. Business Cycle Dating Committee, NBER, www.nber.org/cycles/recessions.html. 29. www.nber.org/cycles/sept2010.html. 30. \"Who needs more workers?\" The Economist, September 3, 2009. 31. www.bbc.co.uk/news/business-12935003. 32. Pepitone, J. (2009), \"Bank failures stack up: now 106 for 2009,\" CNNMoney.com, October 23. 33. Wingfield, B. (2009), \"Did Bernanke bully B of A?\" Forbes.com, April 23. 34. Fitzpatrick, D. and K. Scannell (2009), \"B of A denies misleading its investors on bonuses,\" The Wall Street Journal, August 25. 35.www.sec.gov/litigation/litreleases/2010/lr21407.htm. 36. Bank of America Online Newsroom, August 3, 2009, http://newsroom.bankofamerica.com. 37. \"Ken Lewis announces his retirement,\" Nasdaq.com, PRNewswire September 30, 2009. 38. \"Ten banks allowed to repay $68 billion to the TARP fund,\" CNBC, June 9, 2009. 39. http://mediaroom.bankofamerica.com/phoenix. zhtml?c=234503&p=irol-newsArticle&ID=1390319&highlight=. 40. www.huffingtonpost.com/2009/12/04/bank-of-america-tarp-repa_n_380776.html. 41. Ibid. 42. http://consumerist.com/2009/12/why-bank-of-americas-tarp-payback-is-bad-news.html. 43. Levy, D. (2009), \"U.S. property owners lost $3.3 trillion in home value,\" Bloomberg.com, February 3. 44. 2010 Annual Report, http://media.corporate-ir.net/media_files/irol/71/71595/reports/2010_AR.pdf. 45. \"Might the most controversial deal of the financial crisis pay off after all?\" The Economist, April 14, 2010. 26 This document is authorized for use only by PJ Jesse (pgjesse@liberty.edu). Copying or posting is an infringement of copyright. Please contact customerservice@harvardbusiness.org or 800-988-0886 for additional copies