Too big to succeed? The scale of Brian Moynihan’s ambitions at Bank of America

Fixing the retail bank JUST OVER A year ago, Merrill Lynch looked like the biggest lemon ever sold in a banking M&A deal and Ken Lewis the biggest sucker.

But this April 16, as Brian Moynihan, the new chief executive of Bank of America Merrill Lynch, announced to investors the bank’s first-quarter profits of $3.2 billion, it was hard to find anyone who didn’t think that the acquisition of Merrill Lynch was a great idea.

The reason was simple. The group’s global banking and markets business unit, driven by Merrill Lynch’s former business, produced almost $10 billion in revenues and $3.2 billion in profits, balancing out weaker performance and continuing losses in some of Bank of America’s traditional retail business lines – without it, the group’s profits would have been zero. "In just about every respect, that acquisition improved and enhanced Bank of America," says Dick Bove, a veteran analyst with Rochdale Securities. "Merrill Lynch is the best part of the whole business."

You can almost sense the relief at the firm. The shotgun acquisition in September 2008 had been plagued with high drama – did Ken Lewis pay too much for the investment bank and brokerage house? Did he fail in his duty by not revealing to shareholders the extent of Merrill Lynch’s bad positions, which resulted in losses that required the bank to be propped up with $45 billion of taxpayer money? Did John Thain pull one over the aggressively acquisitive North Carolina bank with regards to compensation packages at Merrill Lynch?

The Federal Reserve and the US Treasury had encouraged Bank of America to save Merrill Lynch and the US financial system. But within a matter of months the SEC was blaming Bank of America for misleading its own shareholders over the deal, with a series of investigations that forced it to cough up $150 million in settlement and sent Lewis into ignominious early retirement. Bank of America’s humiliation seemed complete when it struggled to recruit a credible outsider to come in as chief executive and repair the damage.

Just what Merrill Lynch cost Bank of America is something of an impossible task to work out, says Jaime Peters, analyst at Morningstar. Bank of America was forced to take on about $38.6 billion of additional preferred stock and issued roughly $1.4 billion new common shares in the transaction. Repaying Tarp and issuing more shares would have adjusted that cost further, she points out.

Now, with the acquisition suggesting it was actually vital to preserving Bank of America, Moynihan sits atop a huge financial firm that seems to disprove all that the regulators and politicians are saying about the need to break up big banks.

The old Merrill businesses held together last year and played a full part in the great investment banking boom of 2009. Bank of America Merrill Lynch’s size and diversity have enabled a quick return to profitability and a speedy repayment of the taxpayer. Losses are now slowing at the consumer businesses as well and Moynihan is super-bullish.

"We have three groups of customers: consumers, from mass market to very wealthy; companies from small and medium-size businesses in the US to the largest corporations in the world and institutional investors," he says. "Against those customers we have put the best product set ever assembled in financial services. No one else has what we have on our scale in cashflows, capital and market size. And I am sure that we will provide shareholders with strong returns, because if we can’t win from this position, then no one can win."

Suddenly, investors’ concerns are more muted and nuanced. Can the new management team – many entirely new to the bank, almost all new to their roles within it – carry on doing such a good job at this large, diverse and complex firm? The only other financial conglomerate that got so big, Citigroup, also enjoyed early successes from combined deals between Citibank and the Salomon investment bankers, rather like Bank of America Merrill Lynch is now seeing. But those early wins were tough to sustain and Citigroup soon proved unmanageable. It is now being broken up.

Struggling with vision

What the vision for Bank of America Merrill Lynch is three or more years from now is hard to see. "The reason why some people struggle with that is because no one has ever had such a strong collection of franchises as we do," says Moynihan. "But the vision is what it always was. What we’re doing is quite straightforward. We’re giving those groups of customers exactly what they want."