Why BofA needs to shrink

By Felix Salmon
January 5, 2010
Brian Moynihan's first speech as CEO of Bank of America was a big one -- and, judging by the sometimes-clumsy writing, he wrote it himself. He certainly seems pretty contrite about what happened:

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Brian Moynihan’s first speech as CEO of Bank of America was a big one — and, judging by the sometimes-clumsy writing, he wrote it himself. He certainly seems pretty contrite about what happened:

The surge of growth in the financial services industry over the past decade obviously went way too far. The broad industry over-lent, and consumers and companies over-borrowed, and we all overleveraged as we believed the risks of the new products could be managed effectively. This led to our recent economic crisis.

Moynihan does not, however, draw the obvious conclusion. If the surge of growth in financial services went way too far, and given that Bank of America was one of the largest and fastest-growing financial-services groups in the country, doesn’t it follow that BofA should get a lot smaller? Moynihan hints a couple of times that it might, but ultimately can’t bring himself to go there:

We will see changes in three primary areas: Consumer issues, including pricing and access to credit… capital markets… and the structure of the industry, including the idea of companies that are “too big to fail.”…

The third area of reform is the structure of the industry. The issues here are the idea of “too big to fail,” leverage and capital requirements, proprietary trading and related activities and taxpayer support…

The key lesson here is “never again.” We can never again get our company or our industry in this position. This will require more capital and more liquidity for all participants, which we support.

We are more concerned with the view that somehow the integration of capital markets and commercial banking is a flawed structure for companies in our industry. It is not. It represents what our customers need from us as an industry.

It’s far from obvious what Moynihan thinks about the issue of too-big-to-fail banks. If the lesson is “never again” then doesn’t that require smaller banks? After all, giants will always fall eventually, no matter what their customers need. But no: Moynihan is perfectly happy with Bank of America’s enormous size.

At Bank of America, we are out in the marketplace every day, making every good loan we can. It is how we build relationships…it is how we make money… it’s the most important thing we can do to help boost the economy. And, it is simply how we serve our customers. Overall, over the past four reported quarters, we have extended three quarters of a trillion dollars in credit.

As I’ve said before, that number is nothing to be proud of: it’s a single number which encapsulates the moral hazard of too-big-to-fail. But Moynihan goes on to make matters worse by underlining how little of that money actually went to small and medium-sized enterprises, the real engine of job creation in the US:

Just last month, we announced that we will increase our lending nationwide to small and medium-size businesses by $5 billion – an increase over 2009 production levels of about 40%.

By my calculations, that means BofA lent just $12.5 billion to small and medium-size businesses in 2009: that’s just 1.6% of its total lending. This is the benefit we get from having a monster too-big-to-fail bank with a balance sheet of $2.25 trillion? A promise to increase lending to small business by a whopping $0.005 trillion? Sorry, but that’s no way to justify the existence of a bank the size of BofA. It should be cut down to size soon, and if Moynihan won’t do that, the government should force his hand.

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