Fine Print - November 2009

Grading U.S. choice
By G.D. Gearino

Without meaning to, two North Carolina banks this year turned themselves into unwitting participants in a business-school case study that MBA candidates will chew on for years to come. In fact, let’s kick this off by framing the topic as an exam question: What decision made individually by Bank of America Corp. and First Citizens Bancshares Inc. caused them to have wildly different fortunes during the Great Financial Panic of 2008-09?

Answer: The first chose to become the federal government’s partner and suffered; the second chose to put as much distance as possible between it and the feds and avoided the pain.

Of course, describing the federal government as Charlotte-based Bank of America’s “partner” requires an elastic definition of the word. The relationship is uniquely and profoundly complicated. The government is an investor in BofA, thanks to $45 billion in Troubled Asset Relief Program money over the past year or so. But it is also — depending on the day of the week — a regulator, policymaker, prosecutor, compensation auditor and invisible power whispering instructions from behind a curtain. The appearance of any one of those multiple personalities usually is invoked by the actions of another. The invisible power pushes BofA to complete the acquisition of Merrill Lynch & Co., which prompts the regulator to punish the bank for not revealing information that would have killed the deal the whisperer ordered.

Conducting business in an environment like that is akin to navigating a maze of mirrors. Every time you think you’re headed in the right direction, you collide with something. You quickly learn that you can’t believe what you see (or in this case, what you hear from your “partner”). A little more than a year ago, BofA’s list of challenges was no longer than that facing any other major financial institution. It had toxic assets but enough tensile strength in its balance sheet to put $4 billion on the table to buy Countrywide Financial in July 2008. How does BofA look now? It’s being investigated by the New York attorney general and a congressional committee; a federal judge wants the scalps of bank executives; CEO Ken Lewis has said he’ll quit by the end of the year (if he isn’t forced out sooner); and for good measure, its federal “partner” demanded $425 million when BofA said it wanted to unwind one relationship with the government — essentially imposing a prenup agreement after the marriage.

All those woes flowed directly from BofA’s decision to embrace the government as something other than an arm’s-length regulator. First Citizens understood from the beginning that the waters are calmer when the distance from government is greater. A year ago, the Raleigh-based bank announced it would accept no money from the feds, despite the government’s desire to spread as much of it as possible throughout the financial system so that no stigma would be attached to any taker. (The list of bailout-money recipients totals more than 700, but some gave it back with almost indecent haste.) That decision was entirely in character for First Citizens, a company I dealt with — and often was frustrated by — during my tenure as business editor of The News & Observer. The publicly traded, family-controlled bank has a long history of reporting what it is required to and not a word more. That conservatism extends to its business operations. First Citizens has experienced the falling tide that afflicts everyone, posting a 76% drop in second-quarter net income this year, but remains healthy enough to snap up two failed West Coast banks — one in Washington, the other in California.

Where BofA rushed into its takeover of Merrill Lynch, at the government’s urging (and financing, essentially) with only a weekend’s worth of due diligence, First Citizens waited until properties in affluent markets became available — and at favorable terms from the Federal Deposit Insurance Corp. There is no small irony that on the day that its latest acquisition was announced, a federal judge in New York voided the $33 million settlement between BofA and the Securities and Exchange Commission over the Merrill Lynch deal. He ruled that the SEC was less of a regulator and more of a participant in a “cynical relationship” in which the agency gets to pretend it is vigilant and BofA gets to pretend it had been “coerced into an onerous settlement by overzealous regulators.” The case appears headed for trial, with much more dramatic consequences for BofA executives.

Such are the hazards of doing business with the government. When you lie down with regulators and bureaucrats, you get up with subpoenas, bad reputations and unhappy, litigious shareholders.