Over the last few weeks, news about executive compensation on Wall Street has started to leak out.
In the middle of last month, the board of directors at JPMorgan Chase & Co. (NYSE:JPM) slashed its CEO Jamie Dimon’s 2012 compensation in half, down to $11.5 million, following the $6 billion London Whale debacle. On Tuesday of this week, alternatively, Bank of America Corp (NYSE:BAC)‘s board gave its CEO Brian Moynihan a 73% raise, increasing his total payout to over $12 million for last year.
For some, it may seem shocking that reticent and relative newcomer Moynihan made more than the suave and debonair Dimon. But based on last year’s performance alone, it’s hardly shocking at all. With this in mind, here are three reasons Moynihan is dead-right for B of A not only now, but going forward as well.
1. He’s a lawyer
For those of you who have followed the B of A saga over the last few years, you know the bank’s biggest challenge has been its legal liability for the sins of Countrywide Financial. Between 2004 and 2008, the year B of A acquired Countrywide, the nation’s largest mortgage originator at the time underwrote a staggering $1.562 trillion in residential home loans.
Of this massive figure, it sold roughly $800 billion worth of mortgages to Fannie Mae and Freddie Mac. And the other $700 billion it packaged into mortgage-backed securities and marketed to institutional investors like university endowments, pension funds, etc. Large swaths of these mortgages have since gone bad in the meantime, and investors are now looking to B of A to make them whole.
As I discussed at length in a recent series on B of A’s legal liabilities, the bank has already spent more than $35 billion to resolve claims related to its sale of mortgages to Fannie Mae and Freddie Mac and the manner in which it serviced the mortgages themselves. But while this is a staggering figure, by my estimate, it could still owe as much as $15 billion to $25 billion above and beyond allocated reserves. It’s for this reason, in turn, that having a lawyer at the helm couldn’t have come at a better time for B of A.
2. He’s foresworn acquisitions
Many investors perceive acquisitions as a good, if not necessary way for companies to grow. When it comes to banks, however, nothing could be further from the truth, as evidenced by B of A’s purchases of Countrywide and Merrill Lynch. Speaking very roughly, the former could ultimately cost B of A upwards of $100 billion, and the latter was the primary impetus for the egregious dilution of B of A’s stock in 2009 and 2010.
Speaking more broadly, a good general rule to keep in mind is that bank acquisitions are bad and should be avoided. As I discussed in a recent exchange with a reader, particularly under the heightened capital requirements of Basel III (assuming these get fully and finally implemented), the goodwill that accompanies an acquisition exerts an inordinate influence on a bank’s profitability. You’d rather have assets that both earn and don’t count against your capital, as opposed to an intangible asset such as goodwill, which serves as dead weight on a balance sheet. As opposed to buying another bank, in other words, I believe most banks would better serve their shareholders by simply buying Treasuries.