First it was JP Morgan’s $US6 billion ‘London Whale’ trading loss, then it was The Federal Reserve slapping Citi for inadequate structural controls.
As of Monday morning, you can also add Bank of America’s maths mistake to that list of what CLSA analyst Mike Mayo is calling, “The Trifecta of Misery on Wall Street.” It’s a list of mishaps that show Wall Street is it is now is too big to manage.
In this most recent incident, Bank of America announced that it miscalculated, and doesn’t actually have as much capital as it previously reported. The Fed responded to that by asking the bank to change its plans to return money to shareholders and boost its stock price through a buy back, punishing the company and its stockholders.
“How can the board not come to the conclusion that Bank of America is too complex to manage?” Mayo said to Business Insider. “I think the incident today impacts the controls, capital and credibility… I mean, banking is a business of numbers and getting the numbers right is paramount.”
Since the financial crisis, Bank of America has engaged in a restructuring and cost cutting plan called ‘New BAC’. By and large analysts have considered it a success since it has contributed to the bank’s significantly healthier balance sheet.
But there are downsides, according to Mayo, who asked, “How do they [Bank of America] know when the restructuring cuts into meat instead of fat?”
In other words, how does Bank of America know its cuts aren’t cutting corners? Earnings have been lumpy anyway, so perhaps the time has come for bigger divestments out of businesses that aren’t performing.
The bank has its annual shareholder meeting in Charlotte, N.C. on May 7th, and Mayo will be there to ask those questions and more.
Since this latest mishap directly impacts shareholders, he’ll also be asking how management’s interests are aligned with those of shareholders, and how management defines success now.
“The world we should live in would treat annual meetings like big events… It’s the only opportunity to publicly hold the Chairman Chad Holliday accountable to investors.”
To Mayo, Wall Street has found itself in what he calls the “Big Brother” era of banking, where the government is watching everything banks do and coming down on mistakes hard. It’s the opposite of what we had before the financial crisis, but that doesn’t make it better for everyone.
“Big brother doesn’t need anymore excuses to regulate the banks more aggressively but it’s getting them,” said Mayo.
And no matter who the CEO is, it seems the shareholders are paying for those excuses.
“A more effective public, private sector solution is needed,” said Mayo, “and that means making boards hold people accountable.”
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