Five years after a global financial meltdown shook Charlotte, big banks are on sounder footing. But not all the damage has been repaired, and industry insiders say the financial system remains vulnerable to threats that could produce another crisis.
Bank of America, Wells Fargo and other major financial institutions have stockpiled billions more in capital as a buffer against future losses, but some critics say these banks are still too big and risky. Congress in 2010 passed the sweeping Dodd-Frank financial reform law, but many of its provisions have yet to be implemented.
“So much of the reform has just been incremental,” said former Federal Deposit Insurance Corp. Chairwoman Sheila Bair, one of three industry insiders who discussed the five-year anniversary of the crisis with the Observer. “It’s working around the edges. Any truly transformative change is hard to find.”
The impact of the financial crisis is obvious in Charlotte, a city where banks built the skyline, attracted well-paid workers, financed charitable causes and brought national attention to a once sleepy Southern town.
Bank of America has downsized its workforce, and Wachovia branches and offices are now emblazoned with red-and-yellow Wells Fargo signs after the San Francisco bank bought the North Carolina icon.
Mecklenburg County had about 53,100 finance and insurance jobs in the first quarter of this year, down about 1,200 from the end of 2007.
The crisis has spurred anger from the general public around the world about the culpability of bankers for the economic crash that followed the banking meltdown. Protesters have swarmed Bank of America’s annual shareholder meetings here in recent years.
The banks’ investors have also absorbed painful blows. Bank of America shares have fallen more than 50 percent since Sept. 12, 2008, the last trading day before Lehman Brothers’ disastrous bankruptcy. Wells Fargo shares are up more than 20 percent, but a former Wachovia share is only worth about one-fifth of a Wells share under the terms of the deal.
The decline of Bank of America’s once-lucrative dividend has hit especially hard. In 2007, Bank of America paid out $10.9 billion in cash dividends to its shareholders. Last year’s payout: $1.9 billion.
“I have talked to many shareholders who were totally dependent on Bank of America’s dividend to support their lifestyle,” said Jon Finger, a Bank of America shareholder who has been critical of the bank’s management and board of directors.
“It was a stock that had been handed down generation to generation. A number of people faced real changes in their retirement.”
David Carroll, head of wealth, brokerage and retirement at Wells Fargo, said the financial crisis and its aftermath continue to color the views of investors. A survey released by the bank on Friday showed that four in 10 nonretired investors are “extremely worried” or “very worried” about a repeat of the crisis in their retirement years.
“I think it will impact this generation of investors and consumers in a way that the Great Depression did,” said Carroll, who joined Wells from Wachovia. “People’s sense of risk, their trust level in institutions and individuals has been shaken.”
Overall, the industry is much better equipped to deal with adversity, with twice as much capital and tighter supervision, Carroll said, but he added a note of caution. Since the crisis, new problems keep cropping up, from trouble at European banks to congressional wrangling over budget cuts to the latest Mideast turmoil.
“The industry, including our regulators, has proven to be very effective at preventing the last disaster,” he said. “Whatever comes next will be totally different.”
For Sheila Bair, the financial crisis hit home on Thursday, Sept. 25, 2008, when the FDIC closed savings and loan Washington Mutual, marking the largest bank failure in U.S. history. The next day, investors started worrying about the health of Wachovia.
Commercial depositors started pulling money from the Charlotte bank, and the cash crunch meant the bank might not be able to meet its obligations on Monday morning. Wachovia CEO Bob Steel would begin talks with Citigroup and Wells Fargo on a possible deal.
Recalling those tense days, Bair said she was proud of how FDIC staff reacted to the crisis. Since the Great Depression, the agency has been in charge of protecting depositors from bank failures. But she said she was continually frustrated by the lack of information she received from fellow regulators and banking executives.
“I felt like I had to make decisions reactively instead of proactively,” Bair said.
Citi would initially agree to buy most of Wachovia’s assets over the weekend, only to be trumped by an offer from Wells Fargo announced on Friday, Oct. 3. Later that day, Congress would pass the Troubled Asset Relief Program, or TARP, which regulators would use to inject capital into some of the biggest banks, but not Wachovia.
Asked if TARP could have saved Wachovia, Bair turned the question around. She said troubled banks such as Merrill Lynch and Citigroup shouldn’t have received bailouts either.
Wachovia made a lot of mistakes, she said, citing the bank’s 2006 acquisition of mortgage lender Golden West Financial and its own bad bets on commercial real estate loans. “That clearly wasn’t just an institution getting caught up in the broader problems,” she said. “So bailouts I think in those situations are never what you want to do.”
Bair said too little has been done to prevent another crisis. Banks have more capital now, but she’d like to see them hold even more as a buffer against losses. “We need a lot more capital and a lot less leverage at the major financial institutions,” she said.
As for concerns about whether some banks are still so big they will receive government bailouts if they falter, Bair said she would welcome legislation to bar commercial banks from riskier investment banking activities. But she doubts that will happen.
Instead, she would like to see these activities cleanly walled off inside larger conglomerates with their own boards of directors.
Bair left the FDIC in 2011 and penned a best-selling book, “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself.” She has faced some criticism for the shock the Washington Mutual failure applied to the financial system, but she has largely won praise as the lone regulator who took a stand against bailouts. Bair also raised early red flags about the foreclosure crisis.
She spends much of her time leading the Systemic Risk Council, a group of former regulators and policymakers who advocate for financial reform.
“It’s harder than I thought it would be, but I keep telling myself if we weren’t doing this it would be a lot worse,” she said. “We’re going to keep in there swinging.”
In September 2008, as a top lieutenant to Wachovia CEO Steel, David Carroll was embroiled in merger talks with banks ranging from Morgan Stanley to Citigroup to eventual buyer Wells Fargo.
“I think about it pretty frequently,” Carroll said of those turbulent times. “It has colored my view on things like risk management, how you run your business and thinking about what you don’t know on any given day. So I would say it had a pretty big impact on me.”
In October 2008, shortly after the peak of the crisis, the executive had surgery to rebuild a heart valve, and in 2011 he led a major fundraiser for the Greater Charlotte American Heart Association. He’s the highest-ranking former Wachovia executive at Wells Fargo.
In his current role, he is in charge of one of the nation’s largest brokerage businesses, helping clients with financial planning and investment decisions. The financial crisis still causes consternation for customers facing foreclosure, he said, but overall Wells Fargo has seen its businesses grow, as banking and investment clients place more money with a bank seen as a safe harbor.
Some politicians continue to press for the breakup of big banks, which Carroll said Wells Fargo takes seriously. The bank is talking more with lawmakers in key states and in Washington, he said.
“There are clearly things that we think advantage our country by having large well-managed and well-supervised institutions,” Carroll said, noting how banks recently helped a major U.S. employer, Verizon Communications, with a $49 billion bond offering so it could complete a major deal.
As for the Wells Fargo merger, Carroll said the integration has gone smoothly.
“The whole thing feels a lot more natural after five years than maybe I would have guessed it would,” he said.
Charlotte is the largest employee hub in the company and has more employees here – nearly 21,000 – than Wachovia had at the time of the merger. The city serves as the East Coast hub for many of its businesses and is the center of the company’s capital markets and investment banking operations.
Wells last month said it was laying off 284 mortgage employees in Charlotte, as part of nationwide cutbacks amid declining demand for refinancings. But Carroll said the city is a “go-to” location for the company that will see growth over time.
“Charlotte,” he said, “is not one of the identified geographies where we don’t want to grow.”
Jon Finger, a Houston-based Bank of America investor through a family firm called Finger Interests, remembers the confusion that reigned in the fall of 2008.
“It was difficult to ascertain whether the market reactions were valid or what the true health of the financial system was,” he said.
One of the firm’s major holdings was Bank of America, which the family gained when Jon’s father, Jerry, sold a Texas bank to Hugh McColl Jr., who led the bank’s rapid expansion in the 1980s and 1990s.
Bank of America’s shares began falling after it agreed to buy Merrill Lynch in September 2008, and they took an even bigger plunge when the bank needed a government rescue package in January 2009 to plug Merrill’s losses. At the time, the family had around 1.5 million of the bank’s shares.
The Fingers would emerge as major critics of the bank’s management, file a shareholder lawsuit and push for change on the bank’s board at the April 2009 annual shareholder meeting. CEO Ken Lewis would lose his chairmanship at that meeting and would leave the bank by year’s end.
“We had a long relationship with the bank and Hugh McColl,” Finger said. “We were really reluctant to engage in this battle at first. But at some point, we felt it was important to take a stand. …People placed a lot of trust in management and the board of directors to protect the interests of shareholders.”
Finger won’t discuss the family’s losses, but he notes others suffered as well. The family has sold some of its Bank of America stock but still has about 900,000 shares.
“The financial crisis of 2008 was obviously a gut-wrenching experience for all bank investors and investors in general,” he said. “We were not exempt from that situation.”
Since the crisis, Bank of America and other banks have made strides in shedding risky assets, but they still don’t provide enough information about their holdings to investors, Finger said. Another financial crisis is possible, but it’s less likely to start in the United States, he said.
“Our banks are so much better capitalized than the rest of the banks,” he said. “I think another crisis could start in Europe or perhaps in the emerging markets. Right now, you’ve got a lot of capital leaving the emerging markets for the U.S. and other developed markets. It’s just not clear how much stress that puts on foreign financial institutions.”
A major lesson of the crisis is that big investors need to keep a closer eye on boards of directors and their attention to risk management, he said.
“Institutional shareholders have been more aggressive about contacting boards of directors and exercising oversight, but I think there is definitely room to improve,” he said. “We have to guard against complacency.”
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