Friday, December 12, 2008
I was interviewed on Bloomberg Television this morning about my reaction to the 35,000 job cuts announced by Bank of America (BAC). Since the nearest video up link is 100 miles away, Bloomberg just did an audio interview. Thank goodness for that because I would not have been a pretty site at 5:30 this morning in my bathrobe. Here is what I told the interviewer. The job cuts were not a surprise to me. After Citigroup cut 15% of their work force a few weeks ago, I expected job cuts from all the big banks. In this regard, BAC's 11% cuts were more modest than Citigroup's. I think the job cuts were 75% about the weak economy and only 25% about BAC's recent merger with Merrill Lynch. There will be some redundancy between Merrill's and BAC's investment banking operations, but it should not amount to much. BAC is just using the Merrill merger as an excuse to lower their cost structure. This, however, is an important step when considering that banks face more quarters of loan losses. BAC's job cuts will improve operating earnings by reducing costs by nearly $7 billion over the next three years. Aside from the obvious negatives at the personal level for those people who will lose their jobs, it is a negative that BAC will take a hit to net capital of some magnitude for the severance pay. This is important because capital is at a premium for all banks and this action will, indeed, lower BAC's net capital. I believe the job cuts are necessary and the key question is how rapidly and effectively they can get them done. If these job cuts drag on for three years, the morale at BAC will collapse and the productivity will suffer, diminishing the positive impact of the cost savings. It is a question of execution. In this regard, I am more optimistic than I was when I heard the news that BAC was buying Merrill Lynch. I would have preferred BAC stick to their knitting with more traditional banking activities. But the deal having been struck, BAC has an impressive record of integrating acquisitions. Their Fleet Boston and MBNA mergers, by most accounts, went very well. I'm guessing the Merrill Lynch merger will be the same. I told the interviewer for the present we were holding our BAC, but we were carefully analyzing all of the public statements BAC executives were making about future business. BAC and other banks must offer some hope of a turnaround for us to want to continue to hold them.