Brian Moynihan: People Who Think We’re In Trouble – I’ll See You In Court If That’s What It Takes

brian moynihan

Brian Moynihan just spent 90 minutes on a conference call with Fairholme Capital and Bruce Berkowitz willingly submitting himself to a grilling by those sceptical that the bank can bounce back from failed attempts to settle mortgage set-backs, regulatory issues, and perceived dwindling capital.

Below is our coverage. Interesting points are bolded.

So far, Bank of America’s share price is down since his big conference call started.

1:03 The call is beginning. A transcript will be on Fairholme’s website later, the operator says.

1:05 Brian Moynihan and the CFO are on the call. “We set this call up a month ago…

1- Our core franchise continues to perform in the market. BAC’s core businesses are the strongest across the sector, he says 

2- Selling non-core assets, focusing on our clients, — we’ll talk more about these and our focuses

3- Capital is higher than it has been in years

We’re going to get our costs down across the board, lower the risk in our company.

1:06 He’s talking about the economy right now, saying that BAC’s customers spent 5% more in July 2011 than July 2010

We expect that business will be slow but steady and a grinding recovery

1:08 Now he’s taking a look back over the past year and a half — reminiscing about buying Merrill and Countrywide.

“Obviously, there aren’t many days when I get up and think positively about the Countrywide transaction in 2008.”

“We can’t keep polluting our shareholders to improve our balance sheet”

Selling non-core assets will continue over the next 2-3 years and we’re going to focus on driving returns, and creating long term shareholder value

1:11: HOW: We’ve built reserves from a small amount to over $18 billion. Today we’re at over 5% equity capital

1:12: We’ve dramatically reduced risk , and got prop trading out of our company, we’re not doing any acquisitions

1:13: Why he’s not selling core assets (AKA Merrill) – why sell core assets when you have non-core assets to sell?

1:15: Core expenses have been running about flat. last month they started an effort to take out costs internally and costs will be cut materially and substantially. He says he’ll have more info on the 3rd quarter earnings call

1:16 Mortgage risk has been lowered in the past few months.

He says BAC is the best franchise in the business


Excluding the mortgage charges, he says, they did pretty well. 

Shifting focus from product services to customer-focused ; Eliminating 750 branches , adding 250k new customers

1:20: Our non-core portfolio gives us capital, but hurts our balance sheet

Mortgage risk: th’re trying to take it off the table; reminds us he’s built $18 bil in reserves

We’re eliminating delinquent customers – AKA foreclosing on them

1:23: CFO is on now

They have some mortgages on their balance sheet that are deducted from Basel capital requirements, and they’re trying to eliminate them

1:26 BM is back on now. We have enough capital, he insists

1:27 Bruce is talking – talking about capital requirements under Basel III – min tier 1 standard is 3.5%; That will grow to 9.5% by 2019

“we expect our ratios to be inexcess of all required minimums”

1:29 $150 billion risk-weighted assets that they have to and will get rid of

1:30 Moynihan is bullish on BAC’s prospects and will now take questions

over 6,000 listeners are on the call

1:31  Q: “How can you trust the current reserves?” BM A: “We adjust our estimates, we look at them…” CFO: We reflect our reserves… We got a settlement done on the monolines… ” BM: we have gotten tons of criticism in our industry over the past 4 years and so we’re very careful now CFO: “Right.”

1:37 Q: “How do owners get comfortable with the idea that there’s no big hole left in the balance sheet?”

BM A: “We’ve gotten through them. Think about what we’ve been doing over the past 3 quarters. If you think about the mortgage putback risk, we’ve been working on it. There will be debate until we get the final decision from the judge in some of the cases, of course that doesn’t mean that people might not intervene, which they have done in the past, but the period of time for them to do that is ending…

You should assume that we continue to adjust our litigation estimates based on those costs

1:40 Q: “How can customers check your numbers?” BM A: We have to test them first and get comfortable… Remember that we’re not alone. We have regulators looking over our shoulder. 

1:43 “We’re beyond the tipping point.”

1:46 We’re underwriting a better customer now

1:47 We have 3 kinds of Bad assets: legacy assets (mortgage servicing assets) ; non-performing assets ; special portfolios in the legacy assets

1:48 We’ve reduced one of our CRE portfolios down from 80 billion to 40 billion 

1:52 Q: How do you get more income over time?

BM A: We need a better economy just to turn out some of the profits — better  (higher) interest rates. We can get out of $1.5 bil losses per quarter

1:55: Q: “is this earnings power enough to NOT raise capital in the future?”
BM A: We feel very comfortable. If you gave me a multi-year recession environment, it would be a different story 

1:56 Q: is it possible for the bank to manage a better return on equity for shareholders?

BM A: Those are reasonable targets, but we need a more normal business cycle

1:58: Q: “When will BAC pay dividends??”

BM A: The expectation for us to give return has to be very very modest. 

If we put our capital to risk to give returns, we’d have to raise capital.

2:02: Q: “Why aren’t more insiders buying?”

BM A: Everybody should rest assured that my entire net-worth is in this company. We are all paid in stock. We all own lots of stock on my management team

Q: “Why not consider a chapter restructuring for Countrywide?”

BM A: Can’t comment.

2:04 Q: “What about going on offence?”

BM A: We are on offence, we’re adding officers, adding international business.

Clearly there’s been a lot of talk about our company in the past couple of days… just step back and look at the facts. Think about the sheer amount of capital, amount of liquidity.”

2:05: Q: “How do you grade your performance?”

BM A: “In terms of creating shareholder value, not strong. In terms of changing internal business for the better, strong.

We’ll be around centuries from now.

2:07: Q: “How are you making up for overdraft fees?”

BM A: We’re going to re-price fees to monthly fees. Our customers prefer a much clearer set of fees. The retail business made $500 mil last quarter because of that. They will continue to go up. As rates up, we’ll add more of a rate-structure ; closing branches and expanding mobile banking

2:12: BM : SIGHS OF RELIEF then let’s Bruce take over for a question about foreclosures

Bruce: We’ve seen a 10% decline in the number of seriously delinquent home loans recently. 

BM: We have 15 million mortgage customers.. what’s really happening is early stage delinquencies keep moving down slowly, quarter by quarter, customers continue to make it through


2:15 Q, Jim Mahoney from Oxford Financial: “Brian, can you comment on the degree of your Euro exposure? It seems like things are deteriorating .. how do you see that impacting you guys?”

BM A: “What we did in the past few months in 2010 when the Euro crisis kicked at first, and markets frozem things shut down and we looked at it and said, lets bring down our risk, we continued to and are still now, and so we started getting rid of risk last year, this is not a surprise.. 

Bruce: We’re very focused on looking at exposure and the area that’s drawing the most attention Italy Greece Protugal and Spain. In 2010 we started thinking about sov exposure. We made sure we were comfrtable in case this was extended. Within that region we had 16,7 bil; 1.6 bil was to sov entities. we had CDS on 1.5 of that 1.6 bil. 

Also remember: all of the non-loan books are mark-to-market every night . 

Q: “Longshore equity guy : How are you estimating rep and warranties?

Bruce A: We’ve already settled one big case… BM A: the total liability risk is manageable and we’ll keep you posted

Q: Richard Jan from Lichmond Gregory: “Can you give us a $ amount of the worst downside risk that you might have associated with your derivative exposure? and how confident can you be in this assessment?”

Bruce A: We establish within each country how much risk we’re willing to take in each country, We monitor every night the amount of counter-party risk that we have. The majority of the counter-party risks we take, there’s always a requirement to post capital. 

Repeat Q: “Can you quantify a dollar amount?”

We don’t put that out there. You can look at our VAR.

BBerkowitz Q: “Given all the confusion, the wide range of speculation [as to your capital needs, etc], do you have a message for people out there?

BM A: Where people have a reasonable guess that’s close to our guess, we do what we can to change things, but right now people seem to think there’s more and we’ll see them in court, if that’s what it takes.