By Paul M. Barrett and Dawn Kopecki
Brendan Hoffman/Bloomberg
On the afternoon of Aug. 23, Gary G. Lynch, the global chief of legal, compliance, and regulatory relations for Bank of America, was attending a meeting in Washington when the floor heaved. Although Lynch, a lanky 61-year-old attorney with swept-back white hair, had never experienced an earthquake, he possessed the good sense to get beneath a sturdy conference table, along with several other people. “If the ceiling came down,” he recalls, “I thought we were dead.”
The ceiling held, despite the magnitude 5.8 quake rippling from its epicenter in Virginia. Minutes later, Lynch pulled out his BlackBerry and discovered another startling development: a rumor rattling Wall Street that Bank of America might get swept into an involuntary, government-orchestrated rescue by its smaller rival JPMorgan Chase. “This is really getting nuts,” he thought.
Lynch, who as the head of enforcement at the Securities and Exchange Commission in the late 1980s brought Ivan Boesky and Michael Milken to heel, knew he’d come under heavy fire when he parachuted into Bofa this July. His assignment: Defend against a seemingly endless barrage of multibillion-dollar lawsuits and government investigations concerning defective mortgage-backed bonds manufactured at the height of the real estate bubble. No sooner did one liability bomb explode than it was followed by another. Now Lynch was doing duck-and-cover for real, while the bank’s share price was pounded to within a whisker of $6, down more than 50 percent since Jan. 1. The wild speculation about a forced merger combined ominously with financial analyst chatter that the mortgage onslaught would drain BofA’s capital, requiring it to sell more stock in desperation. Would Bank of America, which just weeks earlier had reported a record second-quarter loss of $8.8 billion, go the way of Bear Stearns or Lehman Brothers?
It was starting to smell like 2008. Hotshot BofA investment bankers gaped at $14 restricted stock units, granted in 2010 and early 2011, which on paper had lost half of their value. They began thumbing smartphones for contact info of potential alternative employers. Managers interrupted vacations to rush into the office and calm valuable dealmakers.
Calm of a temporary sort returned two days later, thanks to a theatrical Buffett-ex-machina intervention. Three years ago, Bear was sold for scrap, while Lehman was allowed to collapse into bankruptcy, setting off a global financial crisis and recession. Announced on Aug. 25, Buffett’s purchase of $5 billion in BofA preferred stock—on typical only-for-Warren terms, including a $300 million annual dividend—allowed the bank to edge back from the abyss, much as Buffett’s $5 billion vote of confidence arrested a run on Goldman Sachs stock in 2008. On Sept. 6, only hours after he sat for an exclusive interview with Bloomberg Businessweek, BofA Chief Executive Officer Brian T. Moynihan grabbed attention again by reshuffling his management ranks, elevating a pair of new co-chief operating officers and ousting Sallie Krawcheck, the high-profile head of wealth management. After all the excitement, the bank’s shares were up 19 percent from their nadir.
For now, Bank of America will not go the way of Lehman or Bear. It has $400 billion in cash and liquid investments and, more important, with $2.3 trillion in assets, it exemplifies the sorry concept of “too big to fail.” No matter what anyone says to the contrary, the U.S. government cannot afford to allow a financial institution of that size to go down and drag the rest of the country with it. BofA’s difficulties are too complex, however, to be solved by Buffett swashbuckling, executive replacements, or the retention of a really sharp lawyer. America’s biggest bank is inextricably intertwined with a still-debilitated U.S. housing market and an unemployment rate stuck painfully above 9 percent.
View the original article here
