Bank of America chief executive Ken Lewis on Tuesday spoke with banking reporters Rick Rothacker and Christina Rexrode. Questions and answers are edited for clarity and brevity.
Q. You're cutting 35,000 jobs over three years related to your purchase of Merrill Lynch and the weakening economy. Where are you in that process?
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We're early into it. We hope to get about 45 percent of the cost saves this year, so we're close to having a fourth of it done.
Q. Does that mean you're about a fourth of the way through the job cuts?
Q. How many jobs will be lost here in Charlotte?
I don't have a breakdown by city.
Q. Can you characterize how Charlotte will fare overall in this?
Well, I think we'll grow as soon as the economy gets going again, and to that extent, Charlotte usually does disproportionately well because this is the headquarters city.
Q. We hear from people who say they were laid off or their colleagues were laid off without any warning, that they had to pack up their things immediately. Is there a better way to do the layoffs, or is there anything you would tell those employees?
Well, you'd have to know the individual situation, but there are issues of access to customer information and other privileged information. Once you tell somebody they've lost their job, you have to relieve that access. But again, there's no intent to do anything other than to make it the least impactful to the associate. We know it's devastating, and nobody finds it anything but that.
Q. What are you doing to try to boost morale?
We've tried to communicate as frequently as possible, so virtually every week I put something on (the Intranet) to talk about the current environment. And then secondly I get out quite a bit to do town halls, and we encourage other leaders to do the same, so we are out talking to our people as much as we can. I was doing that last week, then I'll be out all next week doing the same thing.
Q. What are you hearing from employees?
Everybody knows that we'll get through this, and that we're going to be very strong and positioned very well on the other side. But obviously this is very difficult for everybody.
Q. We hear from some of the former executives and some within the company that the culture Bank of America has built up over time, as this scrappy Southern bank with a can-do attitude - that some of that's been lost under your tenure, that it's not as friendly a place and that some of that spirit isn't there. How do you feel about that?
We don't see any of that in our associate surveys. We still think of ourselves as a scrappy Southern bank that cares about each other.
Q. What do you say to shareholders who are distressed over the drop in the share price and the big cuts in the dividend?
The drop in the dividend is something that I resisted for quite some time, because I knew that many of our stockholders had relied on it. It was one of the most difficult things that I've ever had to do. But at the end of the day, it was frankly the only thing we could do given the circumstances. Virtually every other major bank in the country (has done the same thing).
I'm as disturbed as anybody about the decline in the stock, since virtually all my net worth is tied up in it.
Q. With the TARP money, the government seems to emphasize cutting the dividend and other statements that almost seem like a punishment against shareholders. Do you think the government has been too harsh on shareholders?
Well, we have to step back and reflect on the fact that these are extraordinary times. We understand the burden the shareholder shoulders when the TARP money is injected, and that is why we are so anxious to pay it back and get back to business as normal.
Q. You said in your last earnings report that the bank extended $115 billion in new credit in the fourth quarter. How did that compare to the previous quarter?
I think it was either flat or down slightly, which is pretty remarkable when you think about how unemployment is rising so you have less-qualified borrowers and they're not spending as much. So that probably is a gain in market share in terms of the total market. And we originated $48 billion in January, so it would be about $163 billion in originations in four months.
Q. We hear from customers who say their credit card rates are being raised, or they're not able to get a mortgage, or their home-equity line was frozen, even though they have good credit. Why aren't they getting the credit they want?
In some cases, you have predictive models that suggest that someone might be, on a prospective basis, going to have problems. To the extent that you can (avoid) having the charge-offs, that's to the benefit of the bank and to shareholders. On the other hand, we are making quite a few loans if (we're) making $48 billion in loans in one month.
Q. Obviously Charlotte's really been shaken in the past year with the loss of Wachovia. What are your thoughts on having just one big bank headquartered here?
Hopefully the losses in jobs, etc., have been overblown. I do know that as we compete with Wells Fargo in other cities, that they are very good corporate citizens. In terms of just operating the company and the relationship with our clients, Wachovia made us better. But I think Wells will also.
Q. The money from TARP(the government's Troubled Asset Relief Program) has come with a lot of scrutiny of banks' marketing expenses. Will that change any of your marketing here, whether it's Bank of America Stadium or the Bank of America 500 (at Lowe's Motor Speedway)?
No, we've got contracts for those. I don't plan to cover up our name on Bank of America Stadium.
Q. How firmly do you see the headquarters still based in Charlotte?
As I've said before, we're still a scrappy Southern bank that plans to be in Charlotte for a long time.
Q. You've been committed to that, but how much could that change under your successor? Is that something that you'll keep in mind as you're picking a successor?
I think the board composition would matter also, because the person would have to have the board approve that, and I don't think our board would ever agree to a move such as that. But secondly, we have a huge infrastructure here that you just would not want to see go to waste. Plus it's a great place to live.
Q. Are you spending more time in New York now with the acquisition?
Not any more than I usually do.
Q. There's been criticism that you haven't done enough to groom a successor. Is that a fair assessment?
No, it's not fair. There are several people on this management team that could be my successor, and when we get closer to the moment then we'll make it apparent. …
Q. Do you have a timetable for that?
Well, I'm going back to (my goal of the bank earning annually) $30 billion after tax.
Q. How soon can you meet that?
I would think that 2011 could be the year that you have a shot at doing that.
Q. When your bank was told back in October to take the TARP money, did you want it or need it?
No. We had just raised $10 billion in common equity the week before.
Q. Couldn't you and the other stronger banks have pushed back against the Treasury and the other regulators?
When you have the head of the FDIC, the head of the OCC, the head of the Federal Reserve and the Secretary of the Treasury saying, ‘We think you should take the money,' it's hard not to heed that advice. We wondered if they knew something we didn't know. And what I said then was, ‘Gosh, we have to have a healthy fear of the unknown given the way the economy's been acting,' so we did what we did as a result of that.
Q. Do you think TARP has been successful in stabilizing the financial industry?
I can only reflect on what (Federal Reserve) Chairman (Ben) Bernanke has said. I think he said that he felt the financial system was in crisis and that TARP money was needed because of that. I think it did calm the financial markets somewhat and I do think the banks have been able to lend more money because of TARP investments.
Q. Are there any changes you would make to TARP now to make it more useful?
No. I want to make it more useful by not having it.
Q. You've expressed frustration about people lumping Bank of America and Citigroup together. Can you talk about what makes the two banks different?
I don't want to kick Citigroup - let me talk about us. In each of the last three years, we've had the first or second highest level of profits in the financial services industry in the United States. We grew our deposits by $42 billion in 2008. We did not lose deposits, and we did not lose tens of billions of dollars like others have.
Q. There's been pretty persistent talk about nationalization. Why do you think Bank of America should not be nationalized?
Well, I've just described a bank that is very liquid, has been profitable throughout this crisis on an annual basis, and is lending a lot of money. So the discussion is absurd.
Q. Who keeps fostering it?
I don't really know. I think there's frustration in general about the amount of taxpayer money going into the financial services system, and some would think that some sort of nationalization at several of the big banks would stop that. But I think just the opposite: It would create a nightmare for the financial system and would cause much more concern than things being solved.
Q. Have you heard any talk from regulators or legislators about nationalizing Bank of America?
I have never talked to anybody in the administration or any regulatory body who thought nationalization was the right way.
Q. There are reports that the bank was urging the (Obama) administration to quash some of this talk about nationalization. Do you think they've done enough to play down the possibility?
I think they've done a good job recently in downplaying nationalization and also being more optimistic about the economy and business in general.
Q. There's been pressure on banks that take TARP money to stop lobbying. Does that restrict your ability to get your message to the government about how you'd like some of this new regulatory structure to be put together?
We can talk directly to Congress and we do.
Q. On the Merrill acquisition, why didn't you just tell them that they couldn't give out the bonuses? (New York Attorney General Andrew Cuomo is investigating why Merrill rushed out $3.6 billion in bonuses shortly before it was bought by Bank of America.)
I can't talk about that issue because I was deposed, and by New York state law it does not allow you to talk about the issue.
Q. In the original agreement to buy Merrill, there was a provision allowing for up to $5.8 billion in bonuses for those employees. Were you aware of that when the deal was signed?
Again, that's something I can't talk about.
Q. Why did you wait until Jan. 16 to tell investors about Merrill's losses and the need for more capital from the government?
There are lawsuits around that issue so I can't comment.
Q. With the departure of (former Merrill CEO) John Thain, who was supposed to hold an executive position at Bank of America, what did that do to the management team?
Well, nobody knew John very well because he'd not been here very long. And everybody likes and respects Brian (Moynihan, Thain's replacement) so much, and he had been doing that job before, so it wasn't too different from what we had experienced in the past.
Q. Any regrets on how the John Thain situation played out?
Well, my experience has been, things turn out for the best over time.
Q. Last week there was a movement by one of the larger shareholders to vote to remove you as chairman of the bank's board. What do you think of that effort?
On the issue of separating the chairman and CEO titles, if we look at the four largest losses I think in the history of financial services, which occurred in 2008, we had four companies that represented those four losses. All of them shared one characteristic: They all had a separate chairman and separate CEO. So that would tell me that there's some empirical evidence that that may not be the end-all that some think. I've always contended that it's not necessarily bad, but it shouldn't be characterized as the answer in all cases.
We do have a lead director, Temple Sloan, and he talks to me every single day and we see each other fairly frequently. I don't know what more he would do if we changed his title from lead director to chairman.
Q. Vikram Pandit at Citigroup did the symbolic gesture of saying he'd work for $1 a year. Is that something you've thought about?
No. But I've said before that I didn't make $800 million selling my hedge fund to the company, so I'm a different category from Vikram.
Q. Thinking about the bank's future, are there any areas of the country or any products that you're not in, that you'd like to be?
No, I think we have assembled the finest financial services model in the world, and that will be borne out as the economy improves. We need nothing else to be successful.
Q. Talk a little about the management team that you've built. How do you feel about its strengths, what are those meetings like, what kind of feedback are you getting?
Everybody's comfortable with each other, so there's not tension among the individuals. Everybody speaks freely. And we always discuss a wide range of topics from how we're doing financially to all the external factors we're dealing with. I think everybody's very comfortable with saying what they need to say.
Q. What's it been like in working through a period like this?
I think there's a mutual respect for what everybody's having to go through and the seriousness of what we're doing. But I don't see a lot of change in personality. The strain doesn't seem to be showing to me.
Q. There have been some departures of Merrill executives, and your treasurer left a couple of weeks ago. When you're losing talent, what is that saying?
Well, when you need to eliminate 35,000 positions, you're going to have people leaving the bank. And so you've got to determine which are the ones that are leaving because they've been asked and which are the ones that are leaving because of other things. And this is the time of year that you do lose some people that you don't want to lose – that's the nature of an investment bank. Have we lost people that we did not want to lose? Yes. But we've replaced them, in all the cases I know, with very, very good people.
Q. Will you need to raise any new capital?
From everything I can see, there is no need to.
Q. With the TARP money, there's been a lot of scrutiny over corporate aircraft. It sounds like you are changing your policy in that area.
We had a rule that the top executives could use the airplanes for personal use, but we had a charter equivalent that they paid taxes on. And we just made an arbitrary decision that we would not do that till we pay (the TARP money) back.
With regard to use of corporate aircraft by the top executives, I do think it's more effective and efficient than public transportation. Next week I'll be in about five different cities, and I go from breakfast to dinner meeting with clients and associates, and I couldn't see nearly as many if I were using public transportation.
Q. You got criticism for flying to the Cuomo deposition in a corporate jet. Was that a mistake, or was that an unfair criticism?
I think that's unfair. I think that was the most effective use of my time. To compare that to the automobile companies going to Washington to ask for bailout money – I think the characterization is unfair.
Q. Related to your having TARP money, will you make any changes to your sports marketing?
You obviously worry a lot more about any cosmetics, but our studies show that for every dollar spent in sports marketing, it generates $10 in revenue and $3 in profits and that's a pretty good return on investment. Interestingly, there was some publicity over a so-called party at the Super Bowl, which actually was an event that we sponsored for families. It was open to the public, where families could get autographs from the players, throw the football, just a lot of family activities. We had tickets for 2,000 disadvantaged youth, and then we had a small price for ticket sales, which we donated to a local charity. Yet it got portrayed in the press as some elaborate Super Bowl party.
Q. Regulators are partly to blame for the financial crisis, yet they're getting all these new powers. What's your take?
One of the new powers being contemplated is them having a broader view of the financial services industry beyond just banks. I think that's a good thing because as we saw with AIG, there are other (industries) that can cause systemic risk that were not regulated and caused the most problems. Think about the mortgage banking industry and some of the things that happened there; they were not regulated on a national basis.
Q. What do you think of Obama's plan to have banks report their small business loans every month?
That's fine. We report now on total loans, and small business loans are a subset of that. I think it's a misperception that banks aren't lending or don't want to lend. In its purest form, a commercial bank takes deposits and lends money. To the extent they don't do that, they do not optimize their profits.
Q. There's been some frustration among banks in how the government programs are being rolled out piecemeal, with new rules applied retroactively. Is that something you're worried about?
I think the most difficult thing has been how do you price the so-called toxic assets to get them off the banks' balance sheet, in a way that's fair to both the banks and the investors. Clearly if it was simple it would have been solved several months ago. So I think that's been the hang-up.
Q. You've talked about regulatory changes you'd like to see in mark-to-market accounting and capital provisioning. How much would those changes help the banking system?
Well, I'm afraid that by the time anybody gets to it, it will be closing the barn door after the horse is gone. But first, on mark-to-market accounting. It makes no sense to mark something to market when there's no market. The market is so thin that any transaction is probably a forced transaction and therefore doesn't represent any sense of fair value.
On provisioning, somebody needs to start dealing with these pro-cyclical things, particularly provisioning, where you build reserves in bad times and release them in good times. If you think about that at Bank of America, we over the last several years have built reserves to $23 billion. That's $23 billion worth of common equity after tax - the after tax effect would be a huge amount of tangible equity. Secondly, we would have paid taxes on it, at a time when the government needs tax revenue. So it makes no sense at all to make a bank look worse during bad times and then much better during good times.
Q. What's your opinion about restrictions on compensation for bank executives that take TARP money?
The issue with me is not me or the top four others. I've said before that we have a management team that cares a lot about each other and about our company, so they're not going anywhere as a result of not getting a bonus for a year or two. It does concern me, though, to (restrict the pay of the other top) 20 officers. Those people are paid a lot of money because they produce a lot of revenue, and they can be hired away by foreign banks and boutique investment firms, which do not have TARP money.
Q. So do you see dramatic changes in how banks pay their employees?
I said on Sept. 15 that I thought the golden era of banking and bank pay was over. However, some of the things being considered now could be very good in the sense that people are looking at compensation and saying that the very high proportion of pay being incentive-based caused behavior that was not appropriate. In hindsight, perhaps there's a better mix.
Q. What about at Bank of America specifically?
Not in the main. Remember, investment banking is a pretty small proportion. Mortgage bankers aren't going to be paid this way. Neither is a teller, neither is a consumer banker.
Q. The Glass-Steagall laws (which segregated commercial and investment banks) were brought down in the '90s, and now we've got all these issues with investment banks. Do you see any changes coming to that model of the broad, diverse universal bank that you've created?
It would be counter to what we've constructed, and our bank is different from some in that we integrate our activities in the way we serve our clients. And by the way, we see the benefits of our large corporate and investment bank coming together with Merrill. We're now doing deals that neither company would have done by themselves.
Q. We've had a little bit of a rally in bank stocks lately. What do you think is driving that, and can it be sustained?
I think over the next six months there will be enough signs to show that we're getting close to the bottom, so people will have to make that decision as to whether they will invest in the business or invest in the stock market. I'm looking forward to that time, obviously.