"Stay close to the shore." It’s a sophisticated phrase that I’ve always considered full of pregnant implications but never properly understood. Recently a friend explained: "It’s short for stick to things you know or where you have an edge."
After a terrible August when many financial titans were reduced to the status of tadpoles, staying close to the shore has a reassuring resonance rather than appearing to be the slogan for wimps who have no sense of adventure. Watching the share price of big financial institutions wilt like plump spinach leaves in a boiling cauldron was unnerving.
When a share price lurches lower, you always ask yourself: is this cheap or does someone know something I don’t know? In mid-August, the well-run and conservative bank HSBC hovered near the £5 mark – a level that it last traded at in July 2009.
Market participants were mesmerized by the gyrations in Bank of America’s share price. In the month from July 21, it crumpled from around the $10.20 level to an intra-day low of $6. By putting money into one of the largest banks in the US, an investor would have suffered an evisceration of 40% of their capital.
Of course, the problems at Bank of America would never have occurred had Ken Lewis, the former chief executive, stayed close to the shore. Ken had a vision: he wanted to create the biggest financial services group in the US. During his 40-year career at Bank of America and its predecessor organizations, Ken helped to create a finely honed acquisition machine.
But his success sowed the seeds of his downfall. As the US sub-prime housing market started to collapse in 2008, Ken rode to the rescue and purchased Countrywide, one of America’s largest mortgage lenders. Sources murmur that Ken surrounded himself with acquiescent acolytes and did not tolerate dissent. That is a shame because Lewis is now unloved and his legacy is tarnished.
I don’t feel sorry for Ken but I feel a twinge of sympathy for his successor, Brian Moynihan. Much has been made of the fact that Moynihan got the top job by default: no one else wanted it enough. And there is almost an endearing naivety about Brian.
When I met him in mid-2010 he reproached me for being overly pessimistic. He was certain that Bank of America was moving forward and that the strength of the US economy would propel those gains. It is true that I see dragons lurking behind every bush but Brian might have done well to look for a few dragons himself. This summer, as investors decided that the welter of mortgage litigation and liabilities facing the bank were unquantifiable, they fled from the stock.
And Moynihan has done himself no favours by appearing to vacillate. Initially the bank insisted that it had no need for additional capital. But then beefy Brian performed an unseemly pirouette and tumbled into the arms of uncle Warren. Bank of America undertook a $5 billion fund raising with Berkshire Hathaway. This deal has been criticized as being overly generous to Berkshire shareholders. A few days later, Moynihan sold roughly half of Bank of America’s stake in China Construction Bank and thus increased his bank’s capital ratios. (see Bank capital: BofA sells CCB stake, takes Buffett’s cash, Euromoney, September 2011)
The muttering has started. One source grumbled: "Moynihan’s star is waning." This view might be ill conceived. It’s not easy to find bank chief-executives-in-waiting these days. There’s a paucity of talent at the top, especially in the more pedestrian ranks of commercial bankers.
Anyway, we might be looking at the Bank of America conundrum from the wrong direction. Perhaps it’s not Moynihan who lacks the required skills. Perhaps the bank is too big to manage. Why in an era when regulators were paranoid about "too big to fail" did they permit the creation of a multi-headed hydra like Bank of America that employs over 250,000 people globally?
Amid all the fuss about Moynihan’s manoeuvrings, did anyone notice that over at Bank of New York Mellon the chief executive, Robert Kelly, exited the stage? In a bizarre development, it was revealed that Kelly, once hailed as a straight shooter who could do no wrong, had abruptly resigned "due to differences in approach to managing the company".
The fact that Kelly could depart so precipitously when most commentators thought the ship was sailing smoothly is a testament to keeping a low profile. One now has to assume that BNY is a mess. I take no comfort from the fact that Gerald Hassell, president and long-serving board member, was immediately anointed chief executive.
Bank of New York merged with Mellon Financial in 2007. There have been whispers that the integration was uneasy and, perhaps symptomatic of this, rival computer platforms are said to have operated until recently. Before the merger Kelly was Mellon’s chief. Hassell, however, had a senior role at Bank of New York, having been named president of the company in 1998. Perhaps fiefdoms persist within the new empire?
It is often said that Moynihan won the top job at Bank of America because he was favoured by the "Boston mafia" within the bank. This refers to the board members who once worked at Fleet Bank, which Bank of America acquired in 2004. That might be true. I find it intensely ironic that before Moynihan’s appointment in December 2009, Kelly was one of the external candidates rumoured to be in discussions with the board about succeeding Ken Lewis. Wall Street is a small place. However, less than two years’ later, I doubt Kelly’s name would be in the frame to succeed Moynihan.
Market histrionics and rioting hooligans are an indigestible combination. The August riots in London were an unwelcome backdrop to the bungee-jumping stock markets. I was intrigued by commentators’ attempts to link the two. "There’s still a lot of rage against the banks," one talking head expounded. "That’s why today’s disaffected youth are on the rampage." This is nonsense. The looters were greedy criminals who realized the police had lost control of the situation. We’re talking "yobbo summer" rather than "Arab spring".
