Bank of America: CEO Defends Actions As Shares Sink

Troubles at the nation's largest consumer bank

Aug. 10, 2011— -- Embattled Bank of America CEO Brian Moynihan today fielded questions from 6,000 investors, analysts other participants in a 90-minute conference call devoted to the bank's cratering stock, its pile of bad mortgages, and its exposure to a mounting bank crisis in Europe.

By mid-afternoon, at the time of the Q&A session, the bank's shares were down 4 percent. They are down some 47 percent for the year and had plunged 20 percent on Monday, making BofA the biggest loser of any S&P 500 stock on that day--the worst for stocks in almost three years. They recovered 17 percent Tuesday, amid the 430-point Dow rally in the market overall.

The whole banking category was down today, depressed by worries about a possible downgrade of France's Societe Generale, the European debt crisis, and the weakness of the U.S. economy. The 24-company KBW Bank Index was down 4.6 percent.

Moynihan gave what at times was a ringing defense of himself and BofA's top management. Asked why insiders weren't buying more of the stock, he shot back, "My entire net worth is in this company, investors should rest assured. All of us in top management are paid in stock. We believe in it, and you'll see us buy it." Asked when BofA might again start paying a dividend, he demurred, saying he would have "no success" in trying to predict that.

He insisted that BofA continues to enjoy "the best franchise in the business."

Richard Bove, an analyst with Rochdale Securities, dismissed the stock's rebound yesterday as divorced from fundamentals. He told ABC News he attributed it merely to "bottom fishers" stepping in to buy it on the cheap. To buy the stock even at its present discount, he says, is a mistake. "Being bold and trying to scrape it off the bottom," he said, "is not the right approach."

Moynihan was asked if it would be possible for the bank in future to average a 1 percent return on assets and 10 percent return on equity. "In other words," he said, rephrasing the question, "can we earn enough to have this business make sense?" He thought the targets were achievable in a normal business cycle. "If you don't achieve that, you're not going to get investors to invest in this industry."

As for BofA's exposure to Europe's sovereign debt credit crisis, he dismissed it. "There's nothing there," he said, "that's a capital question for us." The bank, he said, had started reducing its exposure 18 months ago. Within Europe, he said, BofA has an exposure of $16.7 billion, and that $1.6 billion of that was to sovereign entities. And, $1.5 billion of that he said was protected by credit default swaps, in effect an insurance policy against losses.

The lender's troubles include a $10 billion lawsuit brought Monday by insurer American International Group, which claims it was misled about the quality of $28 billion in mortgage-backed securities sold it by BofA between 2005 and 2007, during the height of the housing boom.

Some 40 percent of these securities were false, AIG asserts, meaning that the mortgages were riddled with mistakes, fabrications and untruths. Investors, an AIG spokesman argued, had bought them in good faith based on the bank's "numerous written representations."

The AIG suit has helped call into question the legitimacy of a sweeping $8.5 billion settlement reached earlier between BofA and 22 similarly-aggrieved institutional investors. On Friday the attorney general of New York state moved to block that settlement, raising the prospect that BofA would have to pay billions more to make final restitution.

Moynihan, asked in the teleconference about that possibility, said of the existing settlement, "We think it's fair for us and fair for them. We will let the courts decide."

That prospect, in turn, raised fears that the bank lacked the capital sufficient to deal with its manifold problems, which include the slowing of the U.S. economy.

Early in day analyst Meredith Whitney told CNBC that such financial giants as BofA, Citigroup and Morgan Stanley would be, for the next ten years, "Zombie Banks," meaning they will have too little net worth to function effectively. J.P. Morgan Chase CEO Jamie Dimon responded almost immediately, calling her remarks "hogwash."

Standard & Poor's, in a quarterly U.S. banking teleconference Tuesday, pronounced itself "more concerned" that the profits and credit quality not just of BofA but of U.S. banks in general would be depressed by a combination of sovereign debt issues, mortgage-related risk and the further slowing of the economy. The rating agency's base forecast for 2011 predicts a "moderate decline in revenues" but also a "modest rise" in banks' net income.

Moynihan today insisted BofA has no capital problem. The bank's capital levels he described as "among the highest they have ever been" and "more than sufficient to run the company."

Costs, meantime, have been reduced "by driving head-count down" and by the closing, in the second quarter, of 63 branches. He described BofA as being, today, in a much better position to weather a recession than it had been going into the last downturn.

Asked yesterday in a CNBC interview if he foresaw a double-dip recession, he said no: "We're not seeing it. People are still spending on their credit cards. The consumer is not slowing down as much as had been feared." He repeated that belief today.

He is also reaching out to his employees at the nation's largest consumer bank. In a letter, which was posted on Bank of America's internal website Monday night and obtained by the Associated Press, Moynihan said, "the management team and I understand that this is an unsettling time not just for our shareholders, but also for all of our teammates across our company...."