Bank of America Posts a Loss and Misses Forecast/Bank of America Chief Forgoes Pay for 2009

Bank of America Posts a Loss and Misses Forecast
By JACK HEALY and LOUISE STORY
Copyright by Bloomberg News
Published: October 16, 2009
http://www.nytimes.com/2009/10/17/business/17bank.html?hpw


Bank of America reported a third-quarter loss on Friday, releasing results that showed a bank burdened by credit card delinquencies and mortgage defaults.

The bank, which had big profits in the previous two quarters, reported a loss of $1 billion in the third quarter before accounting for dividends to preferred shareholders, in particular the federal government. When those dividend payments are included, the loss was $2.24 billion.

Some of the red on the bank’s balance sheets actually reflected an improvement in its financial condition after the depths of last year.

The bank took $2.6 billion in write-downs from improvements in the company’s credit spreads, which have narrowed as markets stabilized. And it spent more than $400 million to end a dispute with the government over an agreement to insure its most toxic assets so the bank could complete its acquisition of Merrill Lynch.

In a conference call to discuss the bank’s performance, its chief executive, Kenneth D. Lewis, struck an elegiac note. Mr. Lewis, under fire for the bank’s performance and the Merrill deal, is stepping down at the end of the year.

“I just wanted to say thank you for the ups you’ve shown me during my time with you and the support you’ve shown the company,” Mr. Lewis said. “It’s been a pleasure to lead Bank of America and interact with all of you. I have no doubt that Bank of America will thrive and my absence will not slow the momentum that is starting once again to move forward.”

The loss of 26 cents a share for the three months from July through September compared with a profit of $3.2 billion, or 33 cents, in the second quarter. Wall Street analysts had been expecting a loss of 12 cents a share. The bank earned $1.18 billion, or 15 cents a share, in the quarter a year ago.

Loans at least 30 days overdue are still growing, the bank said in a federal filing earlier this week. Aside from its roster of troubled consumer credit and loan products tied to the sagging mortgage market, Bank of America is beset with problems that run from Washington to civil courtrooms to its own boardroom.

Its earnings put Bank of America squarely in the shadow of banks like Goldman Sachs and JPMorgan Chase, which each posted strong profits this week that beat expectations. Citigroup, which is still tethered to government bailouts, reported a loss to shareholders of $3.2 billion on Thursday.

The losses at Bank of America, with its big consumer-lending and mortgage business, reflect the troubles still roiling the broader economy.

In the third quarter, Bank of America added $2.1 billion to its reserves to cover more credit losses as unemployment surges and households struggle to keep up on their loans. Its net charge-offs grew to $9.6 billion as people defaulted on their credit cards.

Over all, the bank’s revenue grew by $26.4 billion, a 33 percent increase from $19.9 billion a year ago. The bank collected more retail deposits and made money on its investment business, but its finances were pummeled by losses on its businesses connected to home loans and consumer credit.

Now, as the recession gradually fades, questions loom about who can pull Bank of America back to higher ground. With Mr. Lewis’s departure, the bank must searches for a successor who can restore the bank’s tarnished image and remove the government crutches holding it up.

On Friday, Mr. Lewis declined to say when his replacement would be chosen, but said, “I can just say that there’s an appropriate sense of urgency but combined with wanting to obviously make the best decision.”

Bank of America has accepted some $45 billion in taxpayer bailouts since the financial crisis erupted last year, and has issued debts backed up by the government. While rivals like Citigroup and Wells Fargo also remain on government support, stronger competitors like Goldman Sachs and JPMorgan Chase have already paid back their bailouts, freeing themselves of the scrutiny and stigma that came with taking the bailout.

A day before reporting its earnings, the bank tried to quell some of the furor over its management and bonus structure by announcing that Mr. Lewis promised to return the pay he received this year to avoid a confrontation with Kenneth R. Feinberg, the Obama administration’s overseer of executive compensation.

While Merrill’s brokerage business may be adding meat to Bank of America’s bottom line, investigations over the deal that folded the thundering herd into Bank of America still pose legal tangles and publicity headaches for the bank. Regulators, members of Congress and shareholder lawsuits are examining the merger and questions over bonuses paid out to Merrill executives on the eve of the deal.

For Mr. Lewis, Friday marked the last time he would hold court on a quarterly earnings conference call as chief executive, engaging in the ritual back-and-forth with analysts. In the last question of that last call, Mr. Lewis was asked whether he had any lessons learned from the last year, or the last 20.

“Oh, no,” he said. “I sit here at the moment thinking that we have built the best financial franchise in the world and that I look forward — it’ll be from afar, I guess — but I look forward to seeing it play out.”






Bank of America Chief Forgoes Pay for 2009
By LOUISE STORY and ERIC DASH
Copyright by Bloomberg News
Published: October 15, 2009
http://www.nytimes.com/2009/10/16/business/16lewis.html?th&emc=th


Bowing to pressure from Washington’s pay czar, Kenneth D. Lewis agreed on Thursday to forgo his salary and bonus as chief executive of Bank of America, as new legal questions emerged about the troubled takeover of Merrill Lynch that led to his downfall.

Two weeks after abruptly announcing his resignation, Mr. Lewis promised to return the pay he received this year to avoid a confrontation with Kenneth R. Feinberg, the Obama administration’s overseer of executive compensation. Mr. Lewis, who plans to retire on Dec. 31, still stands to collect a $53.2 million pension, which will fall under Mr. Feinberg’s purview.

The move came as new details emerged about the role of a prominent law firm in Mr. Lewis’s star-crossed acquisition of Merrill Lynch at the height of the financial crisis.

The firm, Wachtell, Lipton, Rosen & Katz, initially advised Bank of America to withhold information about the perilous state of Merrill from the bank’s shareholders, but later advised it to alert federal officials to the growing losses, according to four people with direct knowledge of the matter.

The developments thrust Wachtell, a white-shoe adviser to corporate America, into one of the most troubled and closely watched deals of the financial crisis. Bank of America maintains that it did not mislead investors. But its disclosures are now the subject of several state and federal investigations. The legal snarl, and shareholder ire over the deal, prompted Mr. Lewis to resign. Legal experts say the ultimate responsibility may lie with Bank of America, not its lawyers.

Bank of America plans to turn over documents Friday that are expected to shed new light on the deal and on Wachtell’s role in it. The bank could face greater scrutiny if the documents show that executives knowingly misled investors or government officials.

Wachtell also advised Bank of America that it probably could not back out of the deal, even if it tried, according to the people with knowledge of the matter. And Wachtell kept Merrill’s bonuses hidden from investors, without consulting the bank’s management, the four people said. That, however, is often standard practice in preparing merger agreements.

A spokesman for Wachtell declined to comment on the legal advice it provided Bank of America. The bank also declined to comment. The New York attorney general, Congress and the Securities and Exchange Commission are looking into why the bank did not tell shareholders that Merrill had suffered huge losses and had made large bonus payouts just before the deal. The bank has said it does not believe it misled investors.

According to another person briefed on the matter, Edward D. Herlihy and Nicholas G. Demmo, top lawyers at Wachtell, have received subpoenas from the attorney general of New York, Andrew M. Cuomo.

Wachtell was intimately involved in the Merrill merger from the start. The negotiations took place in the law firm’s Midtown Manhattan offices. Mr. Herlihy, a 25-year veteran of the firm who had long worked with Bank of America on other deals, was already close with Mr. Lewis.

In early November, a team that Bank of America put in place to oversee Merrill’s transition spotted large losses as they grew on Merrill’s books. Alarmed, bank executives held marathon meetings on the weekends around Thanksgiving. They contacted Mr. Herlihy with a pressing question: should Bank of America executives disclose Merrill’s gaping losses to shareholders?

As the vote on the merger approached, Wachtell told the bank’s executives that shareholders did not need to know about Merrill’s losses, and needed to be notified only if the losses would be far worse than the fourth-quarter results at Goldman Sachs, Morgan Stanley and other peers, said the four people briefed on the matter.

Some of the documents the bank will submit on Friday will show communications between the bank and Wachtell in which they discussed analysts’ expectations for other investment banks.

Mr. Lewis and his chief financial officer, Joe Price, conferred with Merrill executives, and they determined the losses were likely to be of the same scale as those at the other investment banks, these people said. In the wake of that conclusion, the bank did not send out a warning to its shareholders.

But there was some dissent within Bank of America, according to a person with knowledge of executives’ discussions. Some deputies believed the bank should disclose Merrill’s predicament before the shareholder vote anyway.

Legal experts said they were surprised at the advice Wachtell gave Bank of America about Merrill’s losses.

“I’m taken aback by the advice,” said Donald C. Langevoort, a professor at Georgetown Law. “When shareholders are asked to vote, they deserve a fine-tuned picture and are not to be expected to piece together pieces of public knowledge, public awareness and economic awareness in order to make the right decision.”

Charles Elson, a bank shareholder and professor of corporate governance at the University of Delaware, found Wachtell’s advice defensible but disturbing.

“I think the shareholders are entitled to know everything that management knows on a vote of this size.” he said. “Let the investors decide. The losses might have been in line with Goldman and Morgan, but Bank of America wasn’t acquiring Goldman or Morgan.”


Jack Healy contributed reporting.