The Pac-Man era of banking in the United States has ended for Bank of America. Its transformation from the once sleepy North Carolina National Bank (NCNB) of Charlotte, North Carolina into the largest bank in the nation was truly remarkable. It was made possible by the fact that it was well capitalized with a clean balance sheet at a time when other banks ran into financial difficulties.
NCNB’s first big acquisition was the purchase of First RepublicBank Corporation of Dallas, Texas from the FDIC in 1988. That was followed by the purchase of over 200 thrifts and community banks, many through the Resolution Trust program. Included in those acquisitions was C&S/Sovran Corp of Atlanta in 1991 and at that time it renamed itself NationsBank. It continued its bank purchasing spree by acquiring Maryland National Corporation in 1992, BankSouth in 1995, Boatmen's Bancshares in 1996, and Barnett Bank in 1997.
It was able to acquire and assimilate banks with a speed that took competitors’ breath away. Transitions from old to new management happened swiftly and numerous people lost jobs as cost savings were maximized.
The flurry of acquisitions culminated with the merger of NationsBank and Bank of America in April 1998. The fact that Charlotte, NC was named the official headquarters of the merged entity spoke volumes about the leadership of Hugh McColl, who retired in 2001 after naming Ken Lewis his successor. McColl had been CEO since 1983.
The smooth transition in leadership following the merger and McColl’s departure brought with it a five year period during which management focused its attention internally on integration and efficiency. In 2004 Ken Lewis decided it was time to once again enter the bank acquisition arena as BAC acquired FleetBoston Financial Corporation. Fleet itself was the product of the Pac-Man The Providence, RI based Fleet morphed itself into the seventh largest bank in the nation by the time of its merger.
The year following BAC’s acquisition of Fleet it acquired MBNA Corp., the world’s largest independent credit card issuer. In 2007 it purchased ABN Amro North America Holding Company, which was the parent of LaSalle Bank Corporation.
These bank acquisitions and mergers were blessed by regulatory authorities who embraced the resulting loan diversification and economies of scale as beneficial to the commercial banking industry. The regulatory authorities became so enamored with loan diversification among industrial categories that they allowed Pac-Man banks to operate with significantly lower equity capital ratios. They also allowed them to fund their assets with a greater portion of borrowed funds (fed funds, brokered CDs, commercial paper) than other commercial banks.
Historically, the Federal Reserve Board always examined the concentration of resources that would result within a Standard Metropolitan Statistical Area (SMSA) from a bank merger. It, however, never considered a national problem that might arise from a given bank reaching a certain size. It is doubtful that the top four commercial banking organizations would have been allowed to reach today’s level of 60% of all commercial banking assets if the Fed considered the systemic problem issue.
The first move that drew unwanted attention to BAC and caused people to question Ken Lewis’ leadership was BAC’s purchase of U.S. Trust in late 2006 from Charles Schwab Corp. The purchase price was $3.3 billion and was $600 million more than Schwab had paid for it in 2000. Furthermore, U.S. Trust was rumored to be for sale for more than two years following the July 2004 departure of Schwab Chief Executive David Pottruck.
The acquisition of U.S. Trust and its $94 billion in assets enabled BAC to claim that it had more assets under management, $261 billion, than any other bank. It was apparent that Lewis prized bigness.
In August 2007 BAC made what it dubbed a $2 billion strategic investment in Countrywide. This was done through a 7.25% non-voting convertible preferred security, with a conversion price of $18 per share. On January 11, 2008 BAC then announced that it would acquire Countrywide Financial Corporation for $4 billion. This announcement stunned the financial community, because the embattled Countrywide was the widely accepted poster child for the rapidly bursting real estate bubble.
These two Countrywide transactions marked the beginning of the end for Ken Lewis. Stockholders lost faith and dumped the stock, while the financial press had a field day questioning his decision making ability. He doggedly insisted on closing the transaction in the summer of 2008 even as evidence mounted that the residential real estate market was collapsing.
He wrongly thought BAC’s underwriting standards immunized it from credit problems sweeping the nation. Accordingly, he jumped at the chance to meet with John Thain on September 14, 2008 and agree to buy Merrill Lynch. That was the final nail in his coffin.
The consensus was that BAC grossly overpaid. This view was later confirmed when Lewis told Paulson and Bernanke that BAC needed assistance to complete the deal, because of unforeseen losses in Merrill’s portfolio. Lewis agreed to complete the acquisition only after he allegedly received heavy handed threats from government officials.
The sad thing is Lewis has said that the strategic plan was that one day the organization would include a major investment bank. They had actually thought about Merrill Lynch and its army of brokers. That must have seemed like an incredible dream for a bunch of people from the mountains of North Carolina. Unfortunately for Ken Lewis the dream of owning a major investment bank came true.
The chance of fully integrating Merrill Lynch and Countrywide into Bank of America is remote. After all, Bank of America couldn’t assimilate Charles Schwab which it bought in 1981 and sold back to Schwab in 1987 after a contentious six years.
Commercial banking and investment banking have vastly different corporate cultures and compensation. The Glass-Steagall wall may have crumbled, but the culture wall remain intact.
BAC needs to return to the basics of commercial banking whereby it makes loans and investments that it keeps on its balance sheet. It needs to focus on getting payments or additional collateral on existing loans and investments, while making new loans and investments.
No resources need to be spent on looking for acquisitions. Instead, BAC should consider selling some assets, especially Merrill Lynch, and repaying the U.S. Government as soon as possible. It’s time for banking’s version of Pac-Man to rest while it recovers from a serious case of financial indigestion.
