What is the story of Bank of America?

Yesterday was a rough day on the stock market. Jerome Powell announced interest rate cuts will slow in 2025 since inflation is still hovering above their 2% target. This decision shouldn’t have surprised anyone who took an unbiased view at the CPI reports the past two months…

Founding

“What would you like the power to do?” is the company motto for Bank of America. This letter is not about mottos, but I would rank this in the top five for sure. My number 1 is obviously Schwab with “Own your tomorrow,” and my number 2 is Owala with “water bottles designed exclusively for people who drink water.” 

In 1904, Amadeo Peter Giannini (A.P. for short), the son of Italian immigrants, started the “Bank of Italy in San Francisco.” At the time, banks catered to wealthy clients and businesses (more so than today), not giving loans or accounts to immigrants and the working class. A.P. took a different approach and convinced immigrants to store their gold with him. 

On April 18th, 1906, a massive earthquake crumbled San Francisco. The large banks with cartoon-like metal doors and vaults couldn’t open and retrieve deposits due to the risk of fire. The much smaller Bank of Italy didn’t have that luxury. A.P. ferried $80,000 in gold out of the city and began giving out small loans to help rebuild the city.

He filled a void by providing loans to working class people. This strategy worked. When A.P. died in 1949, his bank had grown to 500 branches with $6 billion in assets making it the largest bank in the world, at the time.

In 1930, the Bank of Italy in San Francisco changed its name to Bank of America. WWI, WWII, and Bank of America - Italy may not always start on the right side, but they figure it out in the end.

Countrywide Financial and the 2008 Recession 

Throughout its history, Bank of America slowly grew by merging or purchasing local banks and expanding internationally. Until 2007, Bank of America had largely avoided the home mortgage business including the derivatives and insurance packages that caused the great recession. With historically bad timing, Bank of America announced a deal to purchase Countrywide Financial in 2007 making its first step into home loans in a big way. 

In 2006, Countrywide financed 20% of all mortgages in the United States. To get this big, Countrywide pushed subprime, adjustable rate mortgages to anyone who asked. Their risky lending practices caused serious financial trouble for them in 2007. Bank of America, not knowing how big the crisis was about to become, saw this as an opportunity to purchase them at a steal for only $4.1 billion.

If only they knew… this purchase meant Bank of America also bought all the soon-to-be-filed lawsuits from Fannie Mae for Countrywide’s business practices from 2000-2008. In 2013, Bank of America reached an $11.2 billion dollar settlement… more than twice what they paid for Countrywide.

Bank of America went from staying out of the mortgage crisis to the center of it with one horribly timed acquisition (hindsight is always 20/20).

Merrill Lynch and the Bonuses 

In keeping with the theme of acquisitions that will cause great trouble, Bank of America acquired Merrill Lynch in 2008 to save them from collapse at the height of the financial crisis. Merrill Lynch, like Lehman Brothers (which did fail), is an investment and wealth management firm. In 2008, it was exposed to the market crash since a large portion of its assets were the infamous mortgage backed securities and derivatives. 

The deal closed in January of 2009, and when Bank of America released its fourth quarter earnings, Merrill Lynch’s $21.5 billion in losses surfaced causing Bank of America’s stock to plumpet like a skydiver without a parachute.

During congressional testimony, the Bank of America CEO said he tried to back out of the deal in 2008 but felt pressured by government officials to finalize the deal. His claims of coercion are supported by subpoenaed government emails. 

The funnier lawsuit from this acquisition was Bank of America omitting a tiny detail in its packet to shareholders prior to the vote. Bank of America failed to disclose that of the $50 billion purchase price, $5.8 billion or 11.6%, will be used to pay bonuses to Merrill Lynch executives. It is reported that over 700 employees received over $1 million and the top four executives received a total of $121 million in bonuses. So, in the same year that Merrill Lynch lost $21.5 billion dollars and had to be acquired before bankruptcy, the executives thought “yeah, I deserve a bonus. Good work, me.” As a supporter of capitalism, it’s things like this that make it really hard to defend. 

I should clarify, Bank of America settled with the SEC for $33 million dollars and did not admit to or deny any of the allegations. That’ll teach them!

Today

Bank of America is the second largest bank in the world by assets under management with over $2.5 trillion. It operates over 3,700 branches. 

Following the financial crisis, Bank of America downsized its work force and refocused its business with a new CEO. It has slowly been growing in a “sustainable” fashion ever since. 

Warren Buffett used to hold a large position in Bank of America but sold a substantial portion in 2024. Does he know something we don’t know??

Debrief on Deck

Next week we are going to talk about the deals after Christmas. Should you delay Christmas shopping to save money? Is that even possible?

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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