Fueled by the Fed’s easy money policies and an improving economy, U.S. stocks just closed their best year since 1995. Prior to the final day of trading for 2013, the Dow was up 29%when dividends are included and the S&P 500 32%. The market smiled particularly favorably upon the financial services sector.
After all the reporting of financial services firm malfeasance, the “deferred prosecution” stance by the White House and Attorney General, and the pennies repaid on the billions absconded, the financial stocks have been amongst the most stable and profitable investments in the market over the past couple years. This would have been inconceivable only a few years ago. However, we are informed that banks made the right changes, with a little help from the government, and appear to be firing on all cylinders. In particular, Bank of America (BAC) appears to be headed even higher. Below are some reasons why investors might be considering investing in the financial giant right now.
- Over the past several years, BAC has impressed investors with its expense management and its net income growth. Although revenue has dropped, the company has done a much better job of managing expenses. In 2010, revenues were $134.2 billion; in 2011, $115.1 billion came through the BAC portals, and in 2012, revenues were $100.1 billion.Yet, in the face of declining revenues, the company’s net income over the past three years has swung from a 2010 loss of $2.24 billion to a nice turnaround of positive $1.45 billion in 2011, to netting a robust $4.19 billion in 2012. An analyst advises us the bank has become more efficient and productive which has made cost-cutting more effective. The theory goes if Bank of America can continue to grow its net income by becoming more cost sensitive, investors will continue to profit both from capital appreciation and dividends.
- We are informed another reason to like Bank of America’s fundamentals is the combined revenue during the 4th quarter 2012 and 1st quarter 2013 of $48.94 billion. For those two quarters, total revenue was $50.65 billion. Indeed, those are some impressive numbers.
Clearly, there must be a reason shares of BAC have soared by more than 185%. Indeed, this surge would lead one to the tentative conclusion that Bank of America has a lot going for it. The company has demonstrated strong, consistent financial performance over the past several years, which includes efficient management, cost savings and net income growth. The revenue growth also has picked up over the past couple of quarters which makes the upcoming earnings report even more intriguing. Reason for celebration?
Not so fast. The persistent charges of ethics breaches continue. Not only are they unabated, they appear to be increasing. There has been little change in the propensity to mislead consumers as to the quality or strength of its financial products and services. The lack of transparency, so evident during the Countrywide days, persists. Lastly, needed tangible and visible governance reform
Just a few weeks ago, on the December 4, 2013 broadcast of MSNBC’s “All In with Chris Hayes”, it was noted that 40% of mortgages in Detroit are underwater. Yes, you heard it right. Forty percent of Metro Detroit homeowners had negative equity on their mortgages in 2013, according to real estate tracking firm Zillow’s “Negative Equity Report.”
However, it was still far below the leading metro areas with negative equity rates, including Las Vegas (71.5 percent); Atlanta (64.1 percent); and Riverside, Calif. (59.7 percent).
Throughout the country, more than 13 million homeowners with mortgages were in negative equity situations. Government-mandated refinance programs have been a disaster with BAC promising, but not delivering, reform. Zillow forecasts that about 1.4 million of those homeowners will move into positive equity territory by the first quarter of 2014, bringing the national average of homeowners that are underwater on their homes to 23.5 percent.
The MSNBC show was lamenting the fraud and misrepresentation underlying those horrific negative equity statistics. The part of this that Bank of America hopes you forget is that Countrywide Financial, a subsidiary of BAC, was a key culprit in the sub-prime mess five years ago giving rise to these underwater mortgages. Lest you forget, Bank of America has settled lawsuits against the former Countrywide Financial Corporation said to be in the tens of billions of dollars.
Even so, since settling, unrepentant bailed out banks have been playing “fast and loose” with the promises they made to snatch a settlement and avoid prosecution. HAMP (Home Affordable Modification Program) was designed by the government to help homeowners that are struggling to make their monthly mortgage payments and are in risk of foreclosure. Working with a bank or lender, the borrower’s loan is reworked under specific guidelines outlined by the government. The goal is to lower the monthly payment and make payments more affordable for the homeowner. With Bank of America as loan servicer, it is not working as intended.
Homeowners allege many infractions, including (1) servicer payment calculation or payment credit errors, (2) problems following a transfer of mortgage ownership or servicing rights, (3) lost paperwork, (4) dual tracking – when a servicer moves ahead on foreclosure even while a homeowner is in the HAMP modification process, a procedure prohibited under HAMP guidelines, and (5) a servicer not honoring a HAMP permanent modification.
As Matt Taibbi, reporter for Rolling Stone and Men’s Journal among others, blogged on March 12, 2012, “It’s been four years since the government, in the name of preventing a depression, saved this megabank from ruin by pumping $45 billion of taxpayer money into its arm. Since then, the Obama administration has looked the other way as the bank committed an astonishing variety of crimes – some elaborate and brilliant in their conception, some so crude that they’d be beneath your average street thug. Bank of America has systematically ripped off almost everyone with whom it has a significant business relationship, cheating investors, insurers, depositors, homeowners, shareholders, pensioners and taxpayers. It brought tens of thousands of Americans to foreclosure court using bogus, “robo-signed” evidence – a type of mass perjury that it helped pioneer. It hawked worthless mortgages to dozens of unions and state pension funds, draining them of hundreds of millions in value. And when it wasn’t ripping off workers and pensioners, it was helping to push insurance giants like AMBAC into bankruptcy by fraudulently inducing them to spend hundreds of millions insuring those same worthless mortgages.”
But despite being the very definition of an unaccountable corporate villain, Bank of America is now bigger and more dangerous than ever.
As I write this, the ink is still drying on the latest settlement – a $39 million gender discrimination lawsuit by female brokers on Wall Street.
Their human resource practice and corporate culture are still considered horrific. A December 30, 2013 lookat the Glassdoor website, at which employees rate their employment experiences, notes one employee referred to the culture as “slave labor” while others noted being “Over worked, under paid, horrible work environment, history of racism. Advice to Senior Management – Treat your employee’s with respect, reward them for their hard work, treat everyone equally. Final conclusion- No, I would not recommend this company to a friend – I’m not optimistic about the outlook for this company.”
As this is a New Year, perhaps we should suggest some resolutions for BAC. Like honesty, integrity and transparency for starters. The media has widely covered leaders and institutions engaged in practices that were neither sustainable nor responsible. Bank of America was prominently featured in these stories. This has given rise to champions of integrity stepping up to defend the true mission of their organization by resisting illicit practices, defective products and refusing to sacrifice their organization’s integrity. They acted not out of self-interest but to expose that which could endanger or defraud the public. It is their very loyalty that compels them to advise their management when policy or the law is broken.
So, how about this final New Year’s resolution … No retaliation against whistleblowers. None. Instead, listen to them. Consider implementing their ideas for doing the right thing. Say it. Mean it. Put it in your policy manual. Punish management for retaliating. The Bank is certainly scarred by the battles. Look at the fortune paid out in settlements. By doing the above they just might transform the culture and win the war.
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Michael G. Winston was formerly Managing Director, Enterprise Chief Leadership Officer for Countrywide Financial Corporation. Prior, over a thirty-three year career, he held similar positions at Motorola, Merrill Lynch, McDonnell Douglas and Lockheed Corporations.
This post is from a guest blogger, and not GAP staff. If you are interested in authoring a guest post related to whistleblowing, please email Blog Editor & GAP Communications Director Dylan Blaylock at [email protected] with your idea.
Editor’s Note, from GAP President Louis Clark: Michael Winston is a former executive at Countrywide Financial Corporation who blew the whistle on the company’s clearly fraudulent activities that contributed to the 2008 financial crisis and subsequent recession. A guest on GAP’s American Whistleblower Tour initiative and a close collaborator of ours, Winston has agreed to publish several entries on The Whistlebloggerregarding both his experience as a truth-teller in the finance industry, and the continued lack of accountability enforced by the government toward the officers of large-scale financial institutions.