"Ken Lewis Is Insane (TRANSCRIPT, Video)
This is fun. According to Lewis everything is playing out with the Merrill acquisition just how he planned. In an interview with Bloomberg Ken Lewis says the Merrill acquisition, "still looks like a thing of beauty" at the 2:16 marker. Then 40 minutes later he says he wanted to dump Merill but the government wouldn't let him. What an odd plan he laid out.
KEN LEWIS:
02:17:07:00 And look at our ranking-- for the-- for-- for what the-- for all of January and for the-- two or three weeks in-- in February. This powerful-- corporate bank, coming together with our investment bank, you know, and-- and then Merrill-Lynch on top of it, it-- everything we thought is playing out.
...02:56:55:00 Okay. Merrill Lynch. You tried to pull out in December-- you had stated that you talked to people in-- among the regulators who said, "Sorry, you can't." (LAUGHTER) Right, you can't back out right now, and we're not going through three months of re-pricing either. What do you need to survive? (LAUGHTER) Okay, who-- how did that go? Can you tell me that story?
KEN LEWIS:
02:57:23:00 Well, I-- I think it's-- I think that's-- I know it's been characterized that way, but-- but-- I would say we were strongly advised, with the emphasis on the strongly, by the government that they didn't-- that they did not think it was in our best interests or the system's best interest to do it.
MARGARET POPPER:
02:57:43:00 And who in the government?
KEN LEWIS:
02:57:44:00 I-- I had-- I had that told to me by-- by-- Secretary of Treasury Paulson and-- Chairman Benanti (PH).
MARGARET POPPER:
02:57:54:00 Okay, and when they said that to you, and they said, "It's not in your best interests," what did they mean?
KEN LEWIS:
02:58:00:00 Well, the-- the-- the downsize is that you-- downside is that you don't-- that you don't win. And so, you've got a company that may be bankrupt that you've got to take. Or that you get sued for a jillion (PH) dollars and-- and so that's-- they just thought the downside was so severe that-- and-- and the-- the hit to the system, in us not doing it-- and then-- and then the interrelationship between-- you know, what's good for America's also good for Bank of America. 'Cause we're so intertwined that it just made sense.
MARGARET POPPER:
02:58:31:00 I mean, did you argue that point with 'em? 'Cause I can see the point about, you back out of Merrill Lynch and then you've got another Lehman on your hands, right? Nobody wants that. I certainly see the terror in that.
KEN LEWIS:
02:58:43:00 Right.
MARGARET POPPER:
02:58:43:00 I-- I still-- I mean, in terms of the downside for Bank of America, it seems to me that shareholders made it clear, they would have loved you to back out. (LAUGHTER)
KEN LEWIS:
02:58:54:00 Right. Well, I mean, you've got make that call at some point, and-- and we just thought-- that it was in the best interests of the shareholders to-- to not expose them to the downside that I just mentioned, because it would be-- it'd be pretty severe. And so--
MARGARET POPPER:
02:59:09:00 So-- to not expose them to--
KEN LEWIS:
02:59:10:00 To-- to the fact that you-- let's say you-- you didn't do it. They all went bankrupt, but then you lose the case. Then you have to take 'em and-- and it's a disaster.
MARGARET POPPER:
02:59:20:00 I see.
KEN LEWIS:
02:59:21:00 Or, you-- something else happens but-- but Merrill's shareholders sue you and win, and it would be a large amount.
MARGARET POPPER:
02:59:29:00 Okay, so either way, it's gonna cost you a lot of money.
KEN LEWIS:
02:59:32:00 And-- and-- and to their credit, they said-- "We will work with you-- we-- we know this is a Merrill issue." I was told, "We view you as a strong company that has done-- that has-- has done the right thing in a difficult situation, and that-- we-- the money will be there. We'll--"
FULL TRANSCRIPT
MARGARET POPPER:
02:11:55:00 That's right. Thank you, Laurie (PH). Ken, welcome, and thanks for joining us here. We are in a period of frenzied talk about nationalization. One day it's on, another day it's off. You've made a very strong statement, and you got out ahead of everybody on this, saying, "We do not need to go back to the government for more." But then I look at half a billion more of losses at Merrill-Lynch than you reported at the end of the year. I look at unemployment rising, potentially, now to nine percent a lot of people are saying. How do you keep that commitment.
KEN LEWIS:02:12:29:00 Well, think about it-- from-- from the standpoint of our revenue generation. If-- if you look at our-- potential revenue, even this year, without-- without some huge meltdown which we don't will-- in the credit market. We'll be-- we'll be well and north, or projected to be well north of $100 billion. And if you then-- if you then look at our expense page, you're looking at a company with-- probably $45 to $50 billion in pre-tax, pre-provision-- income. And that can-- that can (UNINTEL) a lot of money.
MARGARET POPPER:
02:12:58:00 All right. Let me ask you this. When you look at that $100 billion.
KEN LEWIS:
02:13:01:00 Plus.
MARGARET POPPER:
02:13:04:00 Plus. What percentage comes from what I would call legacy Bank of America. Before countrywide. Before Merrill. What percentage comes from countrywide. And what percentage comes from Merrill, in those projections?
KEN LEWIS:
02:13:16:00 That-- we-- we didn't do it that way. So-- I can't tell you that. What I can tell you, though, is that for the-- first-- whatever number of days of the quarter, almost two months now, the two stars, the ones that are doing the best are Merrill-Lynch and countrywide.
MARGARET POPPER:
02:13:32:00 Okay. Let me ask you this. I'm gonna push you on this, only because, as I talk to analysts, they say, "When I hear that $100 billion number, I really want to know how much is Merrill. Because Merrill's earnings, obviously, go up and down."
KEN LEWIS:
02:13:44:00 Right.
MARGARET POPPER:
02:13:44:00 With trading.
KEN LEWIS:
02:13:45:00 Right.
MARGARET POPPER:
02:13:46:00 Any sense of that? Are we talking 20 percent? Less than 20? More than 20?
KEN LEWIS:
02:13:48:00 We-- we look-- we looked at a more normalized-- trading environment. So, it wasn't-- it wasn't a great year. I think-- I've forgotten the year. But I think it was like 2004-2005 kind of numbers. And so, it wasn't a great year. Another way of looking at-- at what I'm talking about. If you take Bank of America, and look at 2005-2006. And-- and (UNINTEL) on that income number-- that would probably be somewhere between $18-$21 billion. Okay? So, pick a number there. And then look at-- then look at Merrill-Lynch back to even 2004. And you're gonna get-- a range of about $4-$7 billion. So, pick the low end. Pick $4 billion. Same thing for countrywide. When you look at their normalized earnings, $2.1 to $2.7 billion, pick $2 billion. Then-- then on top of that just put the (UNINTEL) for countrywide and Merrill-Lynch. That's $30 billion after taxes. Free (UNINTEL).
MARGARET POPPER:
02:14:46:00 Okay. So--
KEN LEWIS:
02:14:46:00 And you can actually back and tell them to look at some inherent earning streams. And it's-- it's pretty powerful.
MARGARET POPPER:
02:14:51:00 All right. But I'm listening to four out of 26 as roughly the ratio of Merrill earnings in that mix that you just described.
KEN LEWIS:
02:14:59:00 No, four plus seven of (UNINTEL).
MARGARET POPPER:
02:15:02:00 Okay.
KEN LEWIS:
02:15:02:00 So-- so-- after tax effect the (UNINTEL) is $7 billion plus the $4 billion.
MARGARET POPPER:
02:15:07:00 Okay. So, that's-- okay. So, that's a much bigger chunk of your projection here. Now, I want to ask you, in terms of-- what you're seeing at Merrill. You talked about Merrill having a good beginning of the year. My understanding is that some of the lost last year was about what we call the basis trades, correlation trades. Which are buying credit default swaps. And also owning the bond. And the idea that those two go in opposite directions. They didn't do that enough in December. And there was more of a loss. How much of that was in the $15 billion?
KEN LEWIS:
02:15:44:00 Well, I don't have a percentage. But-- but it-- it was some of that. And-- and-- to John Thane's (PH) credit. He-- he kept on saying, th-- a lot of this-- these losses are embedded credit positions. And-- and we had a credit meltdown, and some things will come back. And so, we've seen that.
MARGARET POPPER:
02:15:59:00 And I guess my question is, you know, will we see that again? You're seeing a positive January, probably from some of those same trades. Could you see a lousy-- I don't know how February shaped up.
KEN LEWIS:
02:16:11:00 February's fine, but-- but-- absolutely. You can-- in-- in this market environment you can have two good months. You can have a bad month. You know, out of the blue. So, I'm not predicting what the quarter's gonna look like, just what's happened so far.
MARGARET POPPER:
02:16:25:00 All right. So, if you look at this Merrill-Lynch acquisition now, are you still glad you did it?
KEN LEWIS:
02:16:31:00 Yeah, I-- I think if you look back over the last 18 months, over the short term, it's hard to like anything, because nobody expected the severity of what's happened. Or very few expected. But the long term-- it still looks like a thing of beauty. And I-- and I can-- I can say that in two ways. One, we're seeing our financial advisors at Merrill-Lynch-- selling Bank of America products and a lot of deposits. When-- and they don't really have a lot to sell, because of the investment-- investments being as they are. Secondly-- going to-- I think it's deal logic (?), where you can actually see fees being generated.
MARGARET POPPER:
02:17:05:00 Right.
KEN LEWIS:
02:17:07:00 And look at our ranking-- for the-- for-- for what the-- for all of January and for the-- two or three weeks in-- in February. This powerful-- corporate bank, coming together with our investment bank, you know, and-- and then Merrill-Lynch on top of it, it-- everything we thought is playing out.
MARGARET POPPER:
02:17:24:00 Well, let me ask you, in terms of capital here, and your capital position. You said you don't need to go back. We've got this stress test now. And banks have been told that today that they've got six months to earn the money-- or to raise the money, rather, if they don't have it. Is Bank of America gonna past that stress test?
KEN LEWIS:
02:17:46:00 I would think. I mean, first of all it's a stress test on top of a stress test. Because what have we been through? And-- and we stress, we stress test all-- all the time. And-- and look at incr-- increased-- charge off rates, and-- and various other scenarios. And so, we-- we have a pretty good feel for-- we-- we don't know exactly what-- what's gonna be brought to us, in terms of the-- how much the stress is, but-- but-- we feel very good that we'll pass any stress test.
MARGARET POPPER:
02:18:11:00 Do you have enough tangible common equity to pass what the government might impose on you there? You're down to 2.6 percent. You were at about 2.8 in-- at the end of December.
KEN LEWIS:
02:18:22:00 Right. And-- and that-- the effect of Merrill was the-- was the difference. That's about $8 billion. To get to three percent. Which most people think is kind of a threshold now. And, of course, this is-- that's an obscure ratio that's never been talked about much. And that was the ratio they (UNINTEL). But the-- the market is, in fact-- looking at that. And we-- and we recognize that. But you can get-- you can-- improve that ratio a number of ways. The-- the best way is earnings. It takes about $337 million pretax dollars to move it a basis point. So, you can kind of think that (?). Secondly, you can look at marginal assets. Ones that are very thinly priced.
MARGARET POPPER:
02:18:58:00 I was just gonna ask you.
KEN LEWIS:
02:18:58:00 Get your assets (UNINTEL)--
MARGARET POPPER:
02:19:00:00 What-- what might you sell? I'm looking at Jamie Diamond (PH) at J.P. Morgan, cutting his dividends. You don't have that option.
KEN LEWIS:
02:19:05:00 Right. No, but-- but you can-- there are marginal assets that-- that you can-- that you can actually bring down. And we're looking very hard at that. The third thing is, strategic non-strategic assets. And Merrill brings-- some of that, so that-- that we can-- we-- we'll have a chance to sell some things, which aren't strategic.
MARGARET POPPER:
02:19:23:00 Black Rock?
KEN LEWIS:
02:19:24:00 No, not Black Rock. (LAUGH)
MARGARET POPPER:
02:19:26:00 Just guessing. (LAUGH) I mean, that is obviously a jewel in the crown. If you had to raise money fast.
KEN LEWIS:
02:19:31:00 Yeah. That-- that would be-- that would be-- that would not be our intention. I mean, obviously you could. But that would not be our intention. So-- so-- but there are some other assets within-- within the-- the (UNINTEL) division. That-- that we-- that we are considering as we speak. And so we think over the next-- toward year end-- we will-- we would have a real good chance at being-- at three percent, without having--
MARGARET POPPER:
02:19:53:00 Are-- are Banco Ital (PH) or China Construction Bank (PH) on that list?
KEN LEWIS:
02:19:58:00 No. Well, we-- we may overtime sell more of-- C.C.B., but-- but the point with-- with China Construction Bank is, it is a strategic partner. And we always want to have a relatively substantial stake.
MARGARET POPPER:
02:20:12:00 Now, I want to move on here to the news of the minutes, which is Andrew Quolmo (PH) and his investigation of the bonuses that were paid at the end of the year by Merrill-Lynch. I understand you're going to be going to New York-- tomorrow, to talk to Quolmo about this. It's been positioned that you-- or Thane's camp seems to be trying to position it, that you could have known about this. You could have done something about this. Is that true?
KEN LEWIS:
02:20:41:00 Well-- well, first-- I'm not sure anybody at Bank of America had said we didn't know something about it. Because we-- we were consulting. But-- but I-- I better leave that to the process. The-- the time-- the timing on when I'm gonna be there is kind of fluid. So, we-- we don't quite know. But-- but-- I-- I have-- I look forward to the chance to speak candidly and forthrightly and honestly. And-- and tell the story.
MARGARET POPPER:
02:21:05:00 Is it true as John Thanes has said that you directed, or Bank of America directed him not to reveal the names of the five people that he has not yet revealed. Who got--
KEN LEWIS:
02:21:17:00 Yeah, I better-- I better leave it to the process now. And--
MARGARET POPPER:
02:21:20:00 All right. And when you go to talk to Quolmo, what do you expect the questioning to circle around? Is it sort of timeline? Is it authority? Your contractual authority? Do you have a sense of where that--
KEN LEWIS:
02:21:33:00 I have some sense. But-- but I-- I think it will be-- a broad-ranging-- session. With-- you know, on-- on a lot of topics. And so-- I'm ready, and I look forward to telling our story.
MARGARET POPPER:
02:21:47:00 All right. Well, thank you very much Ken Lewis, Bank of America, Chairman and CEO. And Laurie and Mark, back to you.
02:24:43:00 (OFF-MIC CONVERSATION)
MARGARET POPPER:
02:26:05:00 So I want to do one final question on John (PH) staying here, because I think people obviously want to know about this in terms of its effect on the bank. Is there anything about this, if this went the wrong way, that could either affect your job, or the future of Bank of America, if Andrew Cuomo decided that there was more to investigate, or that you had the authority and you didn't use it? What's your worst nightmare there?
KEN LEWIS:
02:26:35:00 I don't have a worst nightmare on the-- on that. I think when we get the facts out, and we show the-- what we've done and-- and how we did it, that we'll be fine.
MARGARET POPPER:
02:26:45:00 Okay. So now let's turn to more of the news here. Last night, President Obama, on television, giving a very hard-hitting, more populace-sounding view of how he was gonna treat the banks than I think he has before. One of the things he said, and I'll just quote this to you, 'cause I thought it kind of put it in a nutshell-- he said, "I know it's unpopular to help these big banks, because their bad decisions got us into this crisis."
02:27:23:00 That's pretty strong language. He's not spreading the blame here. And then he said, "If-- if we do this stress test, and anybody has to come back for more, we are gonna hold the decision-makers accountable." When you heard that, did you think, "I better brush up my resume?" (LAUGHTER)
KEN LEWIS:
02:27:44:00 No, I-- I didn't (UNINTEL). Which-- this just says we need to get (UNINTEL) focus on is to getting through this and getting the government money paid and getting on with our lives. And so, that just reinforced what we want to do.
MARGARET POPPER:
02:28:00:00 Okay, and how do you pay the government money back at this point?
KEN LEWIS:
02:28:04:00 Well, you know, I mentioned-- or (UNINTEL) I've mentioned to you before this, $30 billion in core earnings, when you kind of go back and look at some of the historical performances of the-- of the different companies. And so, that-- that gets to be a powerful-- you know, number, that you can pay back things pretty quickly. But another way of looking at it is, if you-- if you think about six percent of being well-capitalized by repertory standards, on your tier one, we used to have-- our standard was eight percent.
02:28:30:00 Keep it 200 basis points above that. Now, because of the time, you know, ours is 10.6 percent now. Well, if you take-- if you take the difference between eight percent and two point-- the (UNINTEL) between 60 basis points, it's about the tarp money. It's about $45 billion. And so all you'd have to do is to go back to a more normalized environment and you pay it back very quickly.
MARGARET POPPER:
02:28:53:00 All right. And let's talk about-- you know, getting back there, getting to this more normalized environment. One of the comments that President Obama made again was banks are fearful of lending. And he was talking about the credit market, as if they were pretty well frozen. Has he been missing your message?
KEN LEWIS:
02:29:17:00 Yeah, I-- I don't think that's true. I do think it's true that in our recession that we're in, you would not be making as many loans as before, because you would see the error of your ways and pull back in some areas. I mean, ones that we're doing sub-prime obviously aren't doing sub-prime. We didn't do that, but-- and-- and you're putting back on loan values, things of that nature. But-- but let me tell you the other side of it. $115 billion in loans originated in the fourth quarter. $30 billion of mortgages at Countrywide in January.
MARGARET POPPER:
02:29:47:00 Countrywide.
KEN LEWIS:
02:29:47:00 Countrywide and-- and our brokerage company. I shouldn't say just Countrywide, but-- but mortgages at Bank of America.
MARGARET POPPER:
02:29:53:00 Okay, and--
KEN LEWIS:
02:29:54:00 One month.
MARGARET POPPER:
02:29:55:00 --in one month. How's February looking, or do you know those numbers yet?
KEN LEWIS:
02:29:57:00 I don't know. I haven't see those.
MARGARET POPPER:
02:29:59:00 Okay. Is the feel at Countrywide continuing as-- do you think it's continuing as strong into this later part of the quarter?
KEN LEWIS:
02:30:08:00 Their strength was-- (UNINTEL), and so they're-- they're in the heart of what they do best.
MARGARET POPPER:
02:30:14:00 Okay, and in terms of interest rates and what that could do for them, do you think-- they've been bouncing around a bit on mortgages? They're up, they're down.
KEN LEWIS:
02:30:22:00 You-- you need to have it below five percent, with-- with rates below five percent, and then you get action.
MARGARET POPPER:
02:30:27:00 And is that-- do you think we're gonna get it down there and get it-- and keep it there?
KEN LEWIS:
02:30:31:00 I think everyone-- everyone in the government realizes that-- that it needs to be in that four and a half percent, five percent range and-- and we'll keep it there. I do believe that.
MARGARET POPPER:
02:30:39:00 When you heard Ben Bernanke's comments, now he sounded a little softer on nationalization when he was talking this morning, and he was saying, you know, real nationalization, where the government takes you over and runs you and is the CEO. We're not doing that. Did you hear his comments and think, "Okay, that's the line I want the administration to take," or-- you know, who's running the shop there? Who are you listening to?
KEN LEWIS:
02:31:07:00 Well, first of all, I don't get to listen to-- to Ben Bernanke, in every speech. And so I-- I did not hear him. But I did-- I did see some lines come across, that said that. Yes, I-- I-- we have urged the administration and-- the Federal Reserve, to go ahead and take apart (?)-- to take the stand. Either you are for nationalization or you're not. And to say it, and-- and-- and I'm so pleased that they-- that both have said it.
MARGARET POPPER:
02:31:36:00 Okay. Let me ask you. In this environment, you obviously have been dealing with the government looking over your shoulder and running the bank, more than ever before. How is that working?
KEN LEWIS:
02:31:49:00 You know, that's-- that's really not true. You've got, obviously, the-- the requirements of the tarp.
MARGARET POPPER:
02:31:57:00 You've got the salary cap.
KEN LEWIS:
02:31:58:00 But-- but you-- you don't have-- we don't have people second-guessing our decisions and things--
02:32:03:00 (OVERTALK)
MARGARET POPPER:
02:32:04:00 Well, for example, you have, you know, Northern Trust that can't have a golf outing, you know? (LAUGHTER) To reward their producers.
KEN LEWIS:
02:32:11:00 Well, that's true. The-- the cosmetic things of-- all the banks-- that is a fact. Again, that's why we'll pay the money bank, because we want to run the company like we've run it, and marketing-- is a vital part of-- of doing that.
MARGARET POPPER:
02:32:26:00 All right, let's talk about expectations for this year. You, right now, have about 22 billion in reserve against bad loans--
KEN LEWIS:
02:32:35:00 23.
MARGARET POPPER:
02:32:35:00 23 billion-- sorry. Analysts I'm talking to are expecting that to need to go up to 28 or 29 billion by the end of the year. Does that sound outrageous to you?
KEN LEWIS:
02:32:49:00 No, not at all.
MARGARET POPPER:
02:32:50:00 You think that's quite possible.
KEN LEWIS:
02:32:50:00 'Cause that's-- that would be easily done within our forecast.
MARGARET POPPER:
02:32:54:00 Okay, so you're at--
KEN LEWIS:
02:32:55:00 I think the concept is ridiculous, that you-- that you build reserves during bad times, and release them during good. But that's a whole 'nother story.
MARGARET POPPER:
02:33:01:00 Well, I-- I want to get to that too. (LAUGHTER) But I just want to finish--
KEN LEWIS:
02:33:04:00 Okay.
MARGARET POPPER:
02:33:05:00 --in terms of you being adequately reserved. You're expecting those to go up.
KEN LEWIS:
02:33:10:00 We expect to have-- substantial reserve fills in the first and second quarter.
MARGARET POPPER:
02:33:15:00 So let me ask you about the trajectory of charge offs (?) here, in the accounting for banks is obviously complicated. You take a provision against future expected losses. That comes out of your income statements. It gets added to a reserve on the balance sheets. And when you actually charge of a loan, and say it's-- you know, deadbeat, the balance sheet goes down but the income stays and doesn't move.
02:33:39:00 But those charge-offs are the key to kind of-- how the pulse of-- of the loans are doing. Where do you expect them to go from here? You've got credit cards, you had said. You know, you expect it to follow one-- unemployment, plus maybe one percent. Is that eight? Is that nine? What are you expecting?
KEN LEWIS:
02:34:01:00 We expect unemployment to be eight and a half-- I'm actually-- eight and a half to nine (LAUGHTER) and-- and then ten plus, you could get to, if that happens on your card (?), the ten that's coming in. And-- and so, yes, we expect charge-offs to rise for the entire year and to peak in the fourth quarter.
MARGARET POPPER:
02:34:18:00 And are you-- is your idea that you will be adequately reserved against that by the end of the second quarter, from what you were--
KEN LEWIS:
02:34:26:00 Yes.
MARGARET POPPER:
02:34:25:00 --just telling me?
KEN LEWIS:
02:34:25:00 And the way the accounting works, you-- you actually might see-- provisions (?) start going down in the second-- I mean, the third and the fourth, because you'd reserve so much in the first and second.
MARGARET POPPER:
02:34:36:00 Right, and-- and you're trying to look ahead and say, "What, realistically, do I need to be protected against?" Let's talk about mortgage-backed securities. There was an article out in the Journal today-- saying that Bank of America's mortgage-backed securities are among the worst performers of the top banks. I see tidbits like that and I think, "Okay, are those (UNINTEL) adequate?"
KEN LEWIS:
02:35:00:00 Right.
MARGARET POPPER:
02:34:59:00 Tell me--
KEN LEWIS:
02:35:00:00 Yes.
MARGARET POPPER:
02:35:01:00 --can you withstand worse performance on the mortgage-backed securities?
KEN LEWIS:
02:35:04:00 Yeah, remember-- I think the article also said that-- that ours were-- the ones we had originated were about a third of that who-- and had performed much, much better. And so, that would be the counter to the-- to that-- to the whole thing. Ours actually performed well, and then two-thirds were generated by others.
MARGARET POPPER:
02:35:21:00 By others meaning this was mortgage brokers who--
KEN LEWIS:
02:35:23:00 Yes.
MARGARET POPPER:
02:35:23:00 --generated-- I see.
KEN LEWIS:
02:35:24:00 Right.
MARGARET POPPER:
02:35:24:00 So these are packaged-- you packaged them--
KEN LEWIS:
02:35:27:00 Right. A third of which were our origination-- and performed very differently from the others.
MARGARET POPPER:
02:35:31:00 All right, so as you look at that business going forward, what have you changed?
KEN LEWIS:
02:35:35:00 Mainly, you-- you just-- you're not doing-- we're not doing sub-prime. We're not doing (UNINTEL). Bank of America did not anyway. And then we do-- right now, it's mainly 30-year big (?).
MARGARET POPPER:
02:35:47:00 And are you not using mortgage brokers? Is it all originated--
KEN LEWIS:
02:35:48:00 We use--
MARGARET POPPER:
02:35:50:00 --in house?
KEN LEWIS:
02:35:51:00 We use-- some, but a lot less. And we use some correspondent or-- or is-- other banks, but-- but banks (UNINTEL) perform pretty well. So-- but-- the-- loan to values and the scores are really good.
MARGARET POPPER:
02:36:05:00 Okay, and so can you just give me-- a metric there, sort of, "They've come up from-- you know, 100 percent loan to value," I'm inventing these, obviously, but-- (LAUGHTER)--
KEN LEWIS:
02:36:16:00 You'd have to-- go state by state, because the-- we're requiring-- lower loan to value in certain states like California, Nevada-- Florida. And so it-- it actually does vary by state.
MARGARET POPPER:
02:36:29:00 Okay, in terms of-- you know, other things that could rock that boat and shake that 100 billion plus revenue--
KEN LEWIS:
02:36:37:00 Right.
MARGARET POPPER:
02:36:37:00 Merrill Lynch. Some of these losses were trading losses, is my understanding.
KEN LEWIS:
02:36:43:00 A lot of them were embedded losses that-- that-- or embedded positions, and then losses because of market to market, because of an epic-- credit meltdown, in the fourth quarter.
MARGARET POPPER:
02:36:57:00 So what-- that's what I want to understand. What is the breakdown between just the rough and tumble of trading? We had these positions. We got bit. And the market to market of assets they were holding on the book securities that they held.
KEN LEWIS:
02:37:14:00 It's my understanding, from-- from John and others that-- that that was the-- that was the big piece bucket, the embedded credit position.
MARGARET POPPER:
02:37:23:00 About 15 billion.
KEN LEWIS:
02:37:23:00 Right.
MARGARET POPPER:
02:37:24:00 So, and-- so embedded credit positions are just trading, is that right?
KEN LEWIS:
02:37:28:00 Yeah, but it's-- it's instruments that-- that are in liquid that you can't get-- that you can't trade, and therefore, you're taking the right down-- and-- and usually, in a very thin market, where there's not a lot of-- marketability.
MARGARET POPPER:
02:37:41:00 Okay, so then I understand Merrill made some money back on some of these correlation trades in January?
KEN LEWIS:
02:37:52:00 I can't specifically say about each of the trades, but it-- but I can say that the mark-- some of the marks have come back and volumes have been very good. And you're not getting the further decline, and so you're-- you're now getting to see the-- the real benefit of the customer flows and the-- and the-- and the trading business.
MARGARET POPPER:
02:38:09:00 And is the fixed income business holding up? Did it hold up--
KEN LEWIS:
02:38:11:00 Yes.
MARGARET POPPER:
02:38:12:00 --in February?
KEN LEWIS:
02:38:12:00 It's-- it's held up so far, yeah. As we-- as we've talked about before, on previous occasions-- that doesn't guarantee that it-- it-- that it'll stay that way.
MARGARET POPPER:
02:38:20:00 That it holds up--
KEN LEWIS:
02:38:21:00 Right, right.
MARGARET POPPER:
02:38:21:00 --tomorrow. Okay. (LAUGHTER) When you try to manage this business at Merrill, there are obviously a lot of moving parts. There are trading losses. Have you changed anything about risk management there?
KEN LEWIS:
02:38:38:00 We have put-- mostly our risk management team, in-- in-- in place. And so, if you-- if you look at-- if you look at it from, in some way, that-- Bank of America risk management, but-- a lot of the line units are-- are still (UNINTEL).
MARGARET POPPER:
02:38:55:00 Okay, and so are you-- how's that integration going? Is there a culture clash, if you're putting in bankers as risk managers and not investment bankers?
KEN LEWIS:
02:39:03:00 Well, but these-- these-- this-- these credit people or risk people came from our investment bank, and so it's not-- it's-- they're not bankers. They're not commercial bankers.
MARGARET POPPER:
02:39:13:00 Okay, (LAUGHTER) so they-- then--
KEN LEWIS:
02:39:15:00 They know what they're doing.
MARGARET POPPER:
02:39:16:00 All right, and what are the caps on things like leverage? Have you set levels like that for the Merrill Lynch (UNINTEL)-- the investment banking business, specifically?
KEN LEWIS:
02:39:26:00 Yeah, we've-- we've got caps in-- on everything, and then hold positions on-- on loans, and-- and we're using ours. But-- it hasn't-- it hasn't dramatically affected their ability to do business-- you'll see that when you look at-- some of the-- the fee comparisons between different institutions. We look pretty good.
MARGARET POPPER:
02:39:47:00 If you had to give a rough-- you know, I think about Wall Street and a lot of these banks-- investment banks have gone down from, you know, 40 times leverage to somewhere-- somewhere between 15 and 20.
KEN LEWIS:
02:40:01:00 Right.
MARGARET POPPER:
02:40:01:00 Is that about where Merrill is right now, in terms of leverage for that unit, how it's--
KEN LEWIS:
02:40:07:00 Yeah, I don't-- I don't-- I don't know the leverage for that unit. And I look at the-- the (UNINTEL) ones, not just-- you know.
MARGARET POPPER:
02:40:11:00 And for the-- for the bank overall, where is it?
KEN LEWIS:
02:40:15:00 It would be probably 13, 14. I haven't looked at it lately, but that's-- that's usually where we're on.
MARGARET POPPER:
02:40:22:00 That's kind of your target.
KEN LEWIS:
02:40:23:00 Right, and interestingly, now, because the investment banks seem to be kind of taking the stocks, gonna be taking off in commercial banks, not-- I looked just recently, because of (UNINTEL), about a third of our assets now are actually market to market.
MARGARET POPPER:
02:40:37:00 At-- at Merrill Lynch, you're saying.
KEN LEWIS:
02:40:39:00 Throughout-- I mean, the company now, a third of our assets, because of Merrill Lynch, and in our trading book, because there's now, you know, pretty severely large-- to market.
MARGARET POPPER:
02:40:47:00 Okay, and what further marks (?) can we expect, and where would they come? And now I'm talking bank-wide.
KEN LEWIS:
02:40:54:00 We're-- you-- you-- you would-- you would think that-- things had been so severe that you wouldn't have anymore, but that's-- but we know that's not true. (LAUGHTER)
MARGARET POPPER:
02:41:03:00 Okay, so the people I've been talking to are saying, "There are gonna be more marks," and so I'm-- I['m wondering. Is that gonna be in mortgage-backed securities? Is that gonna be, you know, just defaults on credit, as we expect those to play out? What is that gonna be?
KEN LEWIS:
02:41:19:00 Actually, if I had to be just pressed on what's the year gonna look like, I do think that, if you look at the underlying-- the underlying asset, that-- that we now have on our book, that most cases, most people would say the intrinsic value is higher than those-- than those value. And so this year may just be a good old-fashioned recession with credit being what you talk about. And-- and that's not pleasant because you're gonna have large consumer losses. And it still looks like it's a consumer story, not a commercial story, if you get away from housing-related.
MARGARET POPPER:
02:41:56:00 Okay, and the consumer story. Where do you see those-- you know, how high do you charge off debt, 12 percent? And I--
02:42:07:00 (OVERTALK)
KEN LEWIS:
02:42:08:00 Well, you have to tell me what unemployment's gonna be, and then you can kind of correlate it and-- and the most-- the most efficient correlation is the credit card fees. But of course, you've got (UNINTEL). We were not in-- in the sub-prime. We've got the-- we took some pretty big write-downs at-- in Countrywide, so we-- we got that pretty much handled, so that the issue for us is going to be probably small business. And-- and-- credit card.
MARGARET POPPER:
02:42:34:00 Okay, and when-- what's the trajectory of the charge-offs? Do we see them peak this year or next year?
KEN LEWIS:
02:42:41:00 We think they'll peak in the fourth quarter.
MARGARET POPPER:
02:42:42:00 In the fourth quarter--
KEN LEWIS:
02:42:43:00 This year--
MARGARET POPPER:
02:42:44:00 --of this year.
KEN LEWIS:
02:42:44:00 (UNINTEL) right.
MARGARET POPPER:
02:42:44:00 Okay, so--
KEN LEWIS:
02:42:45:00 Right.
MARGARET POPPER:
02:42:46:00 --and so that's why your reserves are gonna pop midyear--
02:42:49:00 (OVERTALK)
MARGARET POPPER:
02:42:49:00 --right, in the first-- okay.
KEN LEWIS:
02:42:51:00 The first year quarters, right.
MARGARET POPPER:
02:42:52:00 Got it. And then, as you see the commercial piece start to deteriorate, that sounds like it's lagging--
KEN LEWIS:
02:42:59:00 Right.
MARGARET POPPER:
02:42:59:00 --consumers. What's-- what do those charge offs looks like?
KEN LEWIS:
02:43:05:00 Well-- we-- they-- we don't see a lot of embedded charge offs at the moment. It's not to say we won't, in-- in certainly 2010 we might. The-- the irony of this reserve bill during-- during good times-- I mean, bad times, excuse me, and then releasing them as-- as the-- as the losses peak, actually then gives you available reserves to go against your commercial loans that are going up. So that-- that's the-- the hidden beauty of this--
02:43:33:00 (OVERTALK)
MARGARET POPPER:
02:43:34:00 So we might actually see reserves come down because consumer charge offs are coming down--
KEN LEWIS:
02:43:39:00 Right.
MARGARET POPPER:
02:43:40:00 --but commercial charge offs--
KEN LEWIS:
02:43:41:00 Right.
MARGARET POPPER:
02:43:41:00 --are rising. Is that your--
02:43:42:00 (OVERTALK)
MARGARET POPPER:
02:43:43:00 --expectation?
KEN LEWIS:
02:43:43:00 Yes, and so you just take those reserves and put 'em somewhere else, but you don't have to build 'em.
MARGARET POPPER:
02:43:48:00 All right, so let's talk about this accounting issue. Very interesting to me, when all of you were down on the hill, talking to Congress (LAUGHTER) and Lloyd Blankvine (PH) came out, from Goldman-Sachs, and said, "I love market to market accounting."
KEN LEWIS:
02:44:03:00 Right.
MARGARET POPPER:
02:44:04:00 And I thought, "I didn't think I would hear that in this room today." (LAUGHTER)
KEN LEWIS:
02:44:05:00 (UNINTEL)
MARGARET POPPER:
02:44:06:00 And he said, "It kept us to our risk management."
KEN LEWIS:
02:44:11:00 Right.
MARGARET POPPER:
02:44:12:00 Is there value to that, or do you just look at it and say, "It au-- it just forces you to reserve at the wrong time. If-- you know, what--"
KEN LEWIS:
02:44:21:00 Well, there's reserving and then there's market-to-market.
MARGARET POPPER:
02:44:23:00 Right.
KEN LEWIS:
02:44:25:00 And-- I actually like market-to-market also, but I think they're-- my common sense tells me there are times when it's not marketing to fair value, because there is no value, because the markets are so thin.
MARGARET POPPER:
02:44:36:00 It's marketing to panic.
KEN LEWIS:
02:44:38:00 Right. And so-- it seems that-- that you could come up with some way to say, "There are certain times where it-- it loses its value, because things are-- are so distorted, and that you would suspend it (UNINTEL)." But that would be my only-- challenge to the mortgage market account stuff.
MARGARET POPPER:
02:44:57:00 Now in terms of the reserves, the irony is, of course, the banks got beat up to change their reserve accounting in the boom time.
KEN LEWIS:
02:45:04:00 Right.
MARGARET POPPER:
02:45:04:00 Which boosted revenue.
KEN LEWIS:
02:45:06:00 Right.
MARGARET POPPER:
02:45:06:00 And boosted earnings in the good times, unless you completely flat-footed at the turn.
KEN LEWIS:
02:45:14:00 Right.
MARGARET POPPER:
02:45:15:00 How do you try-- how-- what do you do with reserves, to make them so that they don't manage earnings, but they don't leave you-- you know, without protection?
KEN LEWIS:
02:45:27:00 Right. Well, it-- it's-- to your point, you look-- you look worse, at a time that you really need to look better. (LAUGHTER) And then you look better, at a time you don't need to look so-- to look so good. And-- what-- what I would do is say that-- that banks-- at all time have to have extra set of-- of reserves for consumer loans.
02:45:50:00 Call it, say, two percent. And then, from that point on, you-- you cover your charge offs with your-- with your provision. And-- and you-- and you can see how the bank's doing-- if it's charge off. And then, I still-- I-- I do think commercial provisioning is-- is right, because-- you can-- if that's granular, you can see the individual credits, as the risk ratings go down. You can increase the reserves, and that makes sense. But to con-- to do that on consumer just makes no sense (UNINTEL).
MARGARET POPPER:
02:46:21:00 So then what do you do with consumer? You go back to the old way, where you-- you're building reserves when you've got the money to build them?
KEN LEWIS:
02:46:29:00 That's what I would do.
MARGARET POPPER:
02:46:30:00 Really, and you're not--
KEN LEWIS:
02:46:30:00 No, excuse me. I would-- I wouldn't do that. I would just fix that-- I would just say, "Your loan loss reserve has to be X percent of loan, of consumer loans, at all times." And so if they grow, you have to increase the reserve. If they shrink, you know-- you know, you release some. But you charge offs, you pay for 'em as you go.
MARGARET POPPER:
02:46:48:00 Got it. All right. So then you're-- you're unlinking. You're changing that accounting.
KEN LEWIS:
02:46:52:00 Right.
MARGARET POPPER:
02:46:53:00 So that it-- charge offs are not just a balance sheet item.
KEN LEWIS:
02:46:55:00 Right.
MARGARET POPPER:
02:46:56:00 Okay. You-- you know, we talked about the government sort of looking over your shoulder and potentially, the signals that we were hearing last night are, you know, ready to do more of that. (LAUGHTER)
KEN LEWIS:
02:47:10:00 Right, right.
MARGARET POPPER:
02:47:13:00 Do you, as you-- obviously, you're talking to people in Washington. Do you have a sense of their feelings and understanding of issues, like reserves, adequate capitalization? You know, are you concerned that some of the people who might impose these rules, and they haven't yet, get it?
KEN LEWIS:
02:47:35:00 Well, the-- obviously, they-- there would be some who would-- who would not get it as much as others. But I certainly think-- Larry Summers and Tim Geithner get it, and-- and I do think that people with-- within the administration would go to them-- for advice.
MARGARET POPPER:
02:47:50:00 Now, some people have read this speech last night as, you know, if you had to divi-- you know, divide the administration camp into more populaced, more understanding the financial system, you put Geithner and Larry Summers on the understanding the financial system, understand that you make sure the banks are capitalized. You put Mr. Axelrod on the other side. And last night was a victory for Axelrod. Do you-- is that how you're seeing this?
KEN LEWIS:
02:48:23:00 No, I-- I think, understandably, the American people are very angry about all of this, and using taxpayer money to-- to bail out banks-- et cetera, et cetera. And-- if you're the president of the United States, you-- if-- why wouldn't you acknowledge that, and-- because of-- it's (UNINTEL), and-- and I-- and I think many would-- I would-- I would bet that many reacted very positively to that. And that's just where we are in the cycle.
MARGARET POPPER:
02:48:50:00 Okay, and obviously, the government has been talking a lot about loan modification. Bank of America has been working on it.
KEN LEWIS:
02:48:56:00 Right.
MARGARET POPPER:
02:48:57:00 One of the criticisms that I continue to hear from people, kind of out in the field, is we're not changing the principal amount. We're doing forbearance. That's-- that is the thrust of all of these modification programs. Is that your perception? Is that what you're going for? And does that solve a problem?
KEN LEWIS:
02:49:19:00 Yeah, I think you can. I mean, it doesn't solve all of-- obviously, because some we're gonna need-- the principal reduction in-- or at least-- (UNINTEL). But in many, many cases, the-- the ability to-- reduce the interest rate, and then incentives for you to do that-- I think's pretty powerful. And I actually think that program was pretty well thought out.
MARGARET POPPER:
02:49:43:00 All right, and so did you-- is that a crucial piece of getting our financial system back on track and getting everything functioning again?
KEN LEWIS:
02:49:54:00 You used the operative word, a piece. But the-- to me, the fact that the stimulus package addresses it, the fact that you've-- got so many things being done by the fed, including a focus on keeping the rates down-- the stimulus package in general-- this thing's gonna break. There's too-- there's too many-- there's too much ammunition being-- thrown at it for it not to break at some point. So, it's just a matter of time. And it would not surprise me that sometime in the second half of next year, we do see a housing-- crisis bottom, and I think that's gonna be the signal that-- things are gonna get a lot better.
MARGARET POPPER:
02:50:33:00 I want to talk about another troubled area. (LAUGHTER) It seems like that's what we get to talk about these days.
02:50:38:00 (OVERTALK)
MARGARET POPPER:
02:50:39:00 But again, when all of you, chairman of the banks and CEO of the banks were down on the hill, everybody talked about the car company, and exposure to the car company. But it was clear that all down that line of eight people, that car companies were an issue, be it directly, GM or Chrysler or Ford, or indirectly to suppliers. You mentioned that you were working on a negotiation, I believe, about-- debt for Equity--
KEN LEWIS:
02:51:10:00 Debt for Equity-- right--
MARGARET POPPER:
02:51:11:00 --slot--
KEN LEWIS:
02:51:11:00 Right.
MARGARET POPPER:
02:51:12:00 How's that going? What's the status of that?
KEN LEWIS:
02:51:14:00 You know, I haven't heard-- I haven't heard the status in-- in the last-- week or so. We-- we did something very similar, for GMAC, and so we have a lot of expertise in-- in the area, and it was successful.
MARGARET POPPER:
02:51:24:00 And this is with GM, in the current one.
KEN LEWIS:
02:51:26:00 This would be-- well, I shouldn't mention the name, but-- but it's-- it's a similar thing that we did for GMAC.
MARGARET POPPER:
02:51:33:00 Okay. And what would-- how would the debt-to-equity swap work, if you don't mind explaining what you did with GMAC? How did that--
KEN LEWIS:
02:51:38:00 The-- that-- just-- just that simply, that you-- that you get equity for that and-- and--
MARGARET POPPER:
02:51:44:00 But what's the ratio? Or is that--
KEN LEWIS:
02:51:45:00 I don't--
MARGARET POPPER:
02:51:46:00 You got to--
KEN LEWIS:
02:51:46:00 You do have-- you'd have to know the-- that-- this particular situation-- so--
MARGARET POPPER:
02:51:51:00 When you do that, are you concerned-- okay, then you got equity in, of all things, a car company? (UNINTEL) have a very uncertain future, particularly if it's American right now.
02:52:01:00 (OVERTALK)
MARGARET POPPER:
02:52:03:00 Does that decrease value for the bank, eventually, or how do you--
KEN LEWIS:
02:52:07:00 Well, we're doing it for debt. We're doing it on behalf of the company, in talking to debt-- it's not our debt. All right-- except we have very limited exposure to the automobile industry. We do-- it-- it-- it's problems (?) when you get to suppliers, obviously, but-- but-- not-- not-- not-- a real large exposure.
MARGARET POPPER:
02:52:29:00 Okay, so, you know, 'cause obviously you're worried that all these banks--
KEN LEWIS:
02:52:32:00 Yeah.
MARGARET POPPER:
02:52:33:00 --who are saying, "I'm not gonna go back for tarp--"
KEN LEWIS:
02:52:34:00 Right.
MARGARET POPPER:
02:52:35:00 More tarp money, if you've been lending to the auto companies and they don't get their deal--
KEN LEWIS:
02:52:39:00 Right.
MARGARET POPPER:
02:52:39:00 --then what happens? (LAUGHTER) All right, so, I want to go back now to the buying of Merrill Lynch. You obviously have done a lot of acquisitions. I chuckled today when I saw Hugh McCall's piece in the Observer, saying, "You know, this isn't the first time that Ken has been lambasted. Let's look at--"
02:52:59:00 (OVERTALK)
MARGARET POPPER:
02:53:00:00 "--fleets (?), and that was a brilliant success." As you look at merger integration, which you point out, you guys do very well, is that a concern at Merrill? Is this a tougher nut to crack than some of the previous ones?
KEN LEWIS:
02:53:16:00 It will be publicity-wise, tougher, because-- these names-- you know, names are known in the marketplace. There seems to be-- you-- you-- you wouldn't-- you wouldn't get a Wall Street Journal article on three branch managers lo-- leaving, but you might get it-- a reinvestment bank-- banker's leaving. And so, I think it will-- that will be a degree of difficulty that we haven't experienced before.
02:53:41:00 But in general? I don't think so. I-- I actually do think that-- that already, investment bankers are seeing the power of that huge corporate bank and you know, 90-- 99 percent of the Fortune 500 companies bank with us. 30 percent of the commercial--
02:53:55:00 (OVERTALK)
MARGARET POPPER:
02:53:56:00 So describe that. How are they feeling the power of that? What difference does it make to a guy, you know, trying to do-- a debt raising?
KEN LEWIS:
02:54:03:00 You're-- you're talking to-- now you're talking to-- someone in the company who knows that you do-- the-- the company does the treasury management-- has had a lot of credit for 30 years, 50 years or whatever, where there's contacts (?) all throughout the organization, and so you're-- you're already a very important partner and-- and so, this may be a one-off deal. But you've got contacts and connections and a relationship that-- a one-off investment bank just wouldn't have.
MARGARET POPPER:
02:54:32:00 All right, when you talk thing of beauty, you always link back to the brokerage force. You've decided to pay retention bonuses, is my understanding. Wells Fargo decided they wouldn't. When I hear that, I think, "Gee, maybe Wells is onto something," because in this environment, where are those guys gonna go get jobs? Do you need to pay them a retention bonus?
KEN LEWIS:
02:54:56:00 We-- we pay retention bonuses to the top performers, and top performers can always go somewhere and-- and in fact, you're still seeing wars between then-- the-- the various companies in terms of trying to hire somebody else's talent. And so-- I have no-- I have no second guesses on that. You want-- that is the finest-- financial advice-- advisory firm in-- in the world. All the metrics say that. And-- and you want that intact.
MARGARET POPPER:
02:55:27:00 Okay, and when you look at-- you know, how you're set up comparatively, particularly between the Merrill brokerage force and your branch network, I look at Wells Fargo and I think, if anybody has kind of come along and-- and set up something similar, it's--
KEN LEWIS:
02:55:46:00 Right.
MARGARET POPPER:
02:55:47:00 --Wells. Do-- are they your main competition right now, and how do you view them?
KEN LEWIS:
02:55:53:00 Yeah, they-- obviously, they-- they're going through something-- on a geographical basis that's a little different from us, and so hopefully we'll have some opportunities to-- you know, with disruptions-- to get-- to get business. But-- but they-- they are-- they are very good at executing, and they are very good competitors. They'll-- however, they're rational competitors, and so you don't see crazy pricing things-- things like that. So it's-- it's somebody that you'd rather compete with, but-- but it's an outstanding-- company in terms of execution.
MARGARET POPPER:
02:56:25:00 Okay. You did the Countrywide deal. Are there-- you know, is there anything there that you look at and you think, "I-- I wish I had known that before I bought this."
KEN LEWIS:
02:56:42:00 No-- I think, actually, you're-- you're seeing the-- you know, the beauty of it now, because their strength is-- is refis (?), and we're right in the middle of one-- so it's-- it's turning-- it couldn't turn out any better, in that sense.
MARGARET POPPER:
02:56:55:00 Okay. Merrill Lynch. You tried to pull out in December-- you had stated that you talked to people in-- among the regulators who said, "Sorry, you can't." (LAUGHTER) Right, you can't back out right now, and we're not going through three months of re-pricing either. What do you need to survive? (LAUGHTER) Okay, who-- how did that go? Can you tell me that story?
KEN LEWIS:
02:57:23:00 Well, I-- I think it's-- I think that's-- I know it's been characterized that way, but-- but-- I would say we were strongly advised, with the emphasis on the strongly, by the government that they didn't-- that they did not think it was in our best interests or the system's best interest to do it.
MARGARET POPPER:
02:57:43:00 And who in the government?
KEN LEWIS:
02:57:44:00 I-- I had-- I had that told to me by-- by-- Secretary of Treasury Paulson and-- Chairman Benanti (PH).
MARGARET POPPER:
02:57:54:00 Okay, and when they said that to you, and they said, "It's not in your best interests," what did they mean?
KEN LEWIS:
02:58:00:00 Well, the-- the-- the downsize is that you-- downside is that you don't-- that you don't win. And so, you've got a company that may be bankrupt that you've got to take. Or that you get sued for a jillion (PH) dollars and-- and so that's-- they just thought the downside was so severe that-- and-- and the-- the hit to the system, in us not doing it-- and then-- and then the interrelationship between-- you know, what's good for America's also good for Bank of America. 'Cause we're so intertwined that it just made sense.
MARGARET POPPER:
02:58:31:00 I mean, did you argue that point with 'em? 'Cause I can see the point about, you back out of Merrill Lynch and then you've got another Lehman on your hands, right? Nobody wants that. I certainly see the terror in that.
KEN LEWIS:
02:58:43:00 Right.
MARGARET POPPER:
02:58:43:00 I-- I still-- I mean, in terms of the downside for Bank of America, it seems to me that shareholders made it clear, they would have loved you to back out. (LAUGHTER)
KEN LEWIS:
02:58:54:00 Right. Well, I mean, you've got make that call at some point, and-- and we just thought-- that it was in the best interests of the shareholders to-- to not expose them to the downside that I just mentioned, because it would be-- it'd be pretty severe. And so--
MARGARET POPPER:
02:59:09:00 So-- to not expose them to--
KEN LEWIS:
02:59:10:00 To-- to the fact that you-- let's say you-- you didn't do it. They all went bankrupt, but then you lose the case. Then you have to take 'em and-- and it's a disaster.
MARGARET POPPER:
02:59:20:00 I see.
KEN LEWIS:
02:59:21:00 Or, you-- something else happens but-- but Merrill's shareholders sue you and win, and it would be a large amount.
MARGARET POPPER:
02:59:29:00 Okay, so either way, it's gonna cost you a lot of money.
KEN LEWIS:
02:59:32:00 And-- and-- and to their credit, they said-- "We will work with you-- we-- we know this is a Merrill issue." I was told, "We view you as a strong company that has done-- that has-- has done the right thing in a difficult situation, and that-- we-- the money will be there. We'll--"
MARGARET POPPER:
02:59:50:00 So I want to just-- one last topic here, 'cause I think it bears on nationalization. Citigroup, obviously, is in very direct talks right now with the government about changing that preferred to common equity. And you-- you referred to TCE as being kind of the fad--
KEN LEWIS:
03:00:12:00 Right.
MARGARET POPPER:
03:00:13:00 --ratio of the minute.
KEN LEWIS:
03:00:14:00 Right.
MARGARET POPPER:
03:00:14:00 But having said that, it is the ratio that the market's--
KEN LEWIS:
03:00:16:00 It is.
MARGARET POPPER:
03:00:17:00 --looking at.
KEN LEWIS:
03:00:18:00 It is.
MARGARET POPPER:
03:00:22:00 How-- there-- there have been a lot of attempts, in the media, in analysis by analysts, to say, you know, "Citi, Bank of America, same thing." What's the difference?
KEN LEWIS:
03:00:37:00 Let me see if I can answer that and not-- and not just specifically talk about Citi, because they're-- there are several banks around the world that have lost tens of billions of dollars, both in 2007 and 2008. Bank of America made $15 billion and $4 billion in those two years. And so that-- that's the first striking difference is that-- we got (UNINTEL) with the (UNINTEL), I think, because the amounts were the same on the tarp. And in retrospect, I would pick another number. (LAUGHTER)
03:01:08:00 (OVERTALK)
MARGARET POPPER:
03:01:08:00 Say, we didn't get-- we got 26 (LAUGHTER).
03:01:12:00 (OVERTALK)
KEN LEWIS:
03:01:13:00 Because it-- the comparison, and I won't just use Citibank, but to a lot of banks, we got (UNINTEL). This is a company with-- two point seven percent-- tangible that we can get-- we can get to (UNINTEL) with-- with $8 billion of capital. We-- we-- we're profitable. We've had one-- loss in seven-- in one quarter, in 17 years. So, we're not-- we should not be painted with that same brush, and for some reason-- we have, and it's been really unfortunate.
MARGARET POPPER:
03:01:45:00 So the other thing that strikes me in this is the deposit game. It seems to me that Bank of America got that. Again, I'm using Citi only because of the top banks, as the poster child for having missed that, starting with John Reed, continuing through Sandy Weill, continuing through Chuck Prince. You've got this deposit base (?). Wells Fargo now rivals you.
KEN LEWIS:
03:02:08:00 Right.
MARGARET POPPER:
03:02:09:00 That-- describe to me to power of that-- why that's important.
KEN LEWIS:
03:02:14:00 Well, you-- you're right and-- that was-- you did something for me that I should have done, was to have talked about this and deposit base fee. The-- total deposits now are pushing a trillion (UNINTEL) at Bank of America. And 860 billion are core (?), just day in and day out deposits that you get--
MARGARET POPPER:
03:02:33:00 But sit there.
KEN LEWIS:
03:02:34:00 --not purchase money-- but very stable and that-- that's-- that's the best core deposit franchise in the world. And-- and as you say, the only-- the one that would begin to rival it would be Wells, but they don't. I mean, it-- we're (UNINTEL)-- and the second piece, dominant position in everything we do. We're not scattered around the world like some companies are.
03:02:56:00 We're very focused. You know, born in the US, and-- and so when we manage these businesses, they-- it-- it-- it's easy to control, easier to manage. And you always want to be-- have a dominant position. We're one or two virtually everywhere.
MARGARET POPPER:
03:03:10:00 And how does that play into this stress test, 'cause I-- I keep thinking, somehow, you know, is the government gonna get us back, and how?
KEN LEWIS:
03:03:24:00 Yeah, I don't-- I don't know, because I haven't seen it, but there are two things about-- about our liquidity. One-- just the sheer deposit base. Everybody acknowledges that and then-- and the government-- (UNINTEL) do as well. Second is, we've been so concerned-- at the holding company level, we have about two years of funding at the-- at the holding company, which means that we could pay every single maturity coming to-- without raising one penny of outside capital.
MARGARET POPPER:
03:03:48:00 Right now.
KEN LEWIS:
03:03:49:00 Right now.
MARGARET POPPER:
03:03:50:00 Stop everything--
03:03:51:00 (OVERTALK)
KEN LEWIS:
03:03:51:00 Two years.
MARGARET POPPER:
03:03:52:00 You've got two years.
KEN LEWIS:
03:03:52:00 Yeah, right.
MARGARET POPPER:
03:03:53:00 Okay. But just final question here. If you don't pass the stress test, and I don't know what-- how ugly that would have to be (LAUGHTER) but if you don't pass the stress test, what's the next step? Government's talking about, "You got to go raise it privately." Is there private equity out there to do that?
KEN LEWIS:
03:04:15:00 We will pass the stress test.
MARGARET POPPER:
03:04:18:00 (LAUGHTER) All right, fair enough.
03:04:20:00 (OFF-MIC CONVERSATION)
* * *END OF AUDIO* * *
* * *END OF TRANSCRIPT*"
Me:
Posts
I've just spent 15 minutes trying to comment on this, but words fail me. I think it's because I feel that our leaders believe him. It sounds like demonic possession. Maybe we need an exorcist.