(Updated at 8:30 a.m. and 10:47 a.m. with additional detail and comments)
Two years after hiring her, Bank of America is giving the heave-ho to Sallie Krawcheck, head of global wealth and investment management at the firm, which includes the brokerage force at the bank’s highly profitable “crown jewel” Merrill Lynch. Also out is Joe Price, president of Global Consumer and Small Business Banking. Their departures are effective immediately.
Bank of America CEO Brian Moynihan announced the moves as part of a larger reorganization at the company, which will “delayer” management and split the company into two halves, according to a release. Moynihan appointed David Darnell and Tom Montag to the newly-created positions of co-chief operating officers, accountable for all of the company's operating units.
Darnell, formerly president of global commercial banking for the firm, will be responsible for the consumer side of the business, taking the reins of the wealth management operations from Krawcheck, and also managing retail banking. Montag, a former head of trading at Goldman Sachs, will run commercial banking, investment banking and other units tied to institutional investors.
At least one of Merrill's top advisors, contacted Wednesday morning, was very unhappy that Krawcheck would be replaced by a commercial banker. “It’s just a joke,” he said bitterly. “She was obviously a very good manager. I think to say that there is now a commercial banker in charge of the world’s largest wealth management organization, yeah, that’s disappointing. A commercial banker recently selling loans in Fort Lauderdale.”
He continued, “I would say at this point it wouldn’t make me think about leaving the firm, but all these things are making people lean that way. The firm is in the papers every day. It’s tiresome discussing it over and over and over again with clients. There’s not going to be any exodus but it’s tipping in that direction.”
Sanford Bernstein analyst Brad Hintz was equally disappointed in her departure. “This is certainly good news for Morgan Stanley Smith Barney,” he said. “MSSB has not been catching up with Merrill Lynch’s retail business and much of the credit goes to Krawcheck and her sensitivity towards supporting the unique culture and brand equity of Merrill.”
He continued, “Managing a retail FA channel requires a balancing act of supporting the brokers in order to minimize turnover and retain clients while controlling costs and attempting to cross sell other products. Ms Krawcheck knew how to successfully maintain that balance. Let’s hope that BAC management doesn’t damage the crown jewel of the Merrill acquisitions. It’s very unlikely that the Merrill Lynch thundering herd will start wearing red BAC blazers.”
Why Oust Krawcheck?
Some suggest that Krawcheck was a divisive figure at the bank, trying to appease the financial advisors she led by talking down "cross-selling," one of the ways Bank of America hoped to profit from its purchase of Merrill Lynch. CNBC is reporting that Krawcheck was offered a job under Darnell but decided to leave rather than accept demotion.
Merrill advisors have been encouraged to sell Bank of America loans and other consumer products to their clients, and some advisors are not happy about that. Because these products are captive, they aren't always the best deal for clients, and because extra paperwork is required to disclose away the conflicts, they are often a pain in the butt for advisors regardless.
But Rochdale Securities analyst Dick Bove doesn't think that cross-selling has anything to do with her ouster. He believes she was canned because the bank plans to reduce the influence of its consumer divisions and put more emphasis on its institutional divisions: The former have gotten too expensive and litigious in the new regulatory environment, he says. Felix Salmon agrees with Bove, saying that Merrill Lynch just isn't that important to Bank of America anymore.
“She’s just been mistreated by a whole bunch of people and she doesn’t deserve it,” said Bove. “She’s extraordinarily brilliant and capable woman and she’s making the wrong decisions career wise.”
Krawcheck has long been an advocate for both clients and financial advisors. Before joining Bank of America in August of 2009, Krawcheck was head of the wealth management division at Citigroup, a post she left in September of 2008 after she made it clear to management she felt the bank should cover losses in bad hedge funds sold to Citi clients.
Other reasons for her departure were floated Wednesday morning, including the idea that Krawcheck was ousted because she was blocking an overhaul of advisor compensation to salary plus bonus, a rumor we wrote about in May after it first began circling. This idea was dismissed as nonsense by Krawcheck herself when it first began, and some said that rival Bob McCann, head of the UBS Wealth Management Americas was responsible for planting it in the press. Recruiters have said that any such change to compensation would cause a mass exodus, which is likely true.
Some say the reorg means a spinoff of Merrill is not in the cards, something that has increasingly been rumored in recent weeks as the battered bank struggles to raise capital.
“It would appear that the company is going I the opposite direction and Merrill will be the surviving piece,” said Rochdale Securities analyst Dick Bove in an email. David Benoit, a Wall Street Journal columnist made a similar call this morning, saying the reorg further aligns the wealth management division with the bank.
Bank of America's stock price has fallen dramatically as the bank faces mounting legal liabilities and losses from the housing meltdown, with shares closing at $6.99 Tuesday, down nearly 52 percent on the year. Federal regulators filed suit against the company on Friday alleging it sold bad mortgages to Fannie Mae and Freddie Mac. The company already faces huge liabilities from similar additional mortgage-related lawsuits. In all, some analysts estimate the liabilities could run in the many tens of billions of dollars.
Bank of America got a little reprieve on August 25 when Warren Buffett invested $5 billion in it (an idea he reportedly had while "taking a bath"). But the Federal Reserve has asked the bank to prepare a plan to raise capital if losses mount. Last week, CNBC reported that Bank of America may create a tracking stock for its Merrill Lynch division to generate funds, something that rekindled rumors that the bank might look to sell Merrill if it got desperate. The bank has also sold off its international credit card business and half of it's stake in China Construction Bank.
How much capital does Bank of America have or need at this point? That depends on the value of the mortgages it sold and the size of its legal liabilities, which is still up in the air. Chris Whalen, of Institutional Risk Analytics, has gone so far as to call for the bank to declare bankruptcy, while banking analyst Meredith Whitney has said just the opposite: that the bank has plenty of capital.
Bank of America has been in cost-cutting mode since the Spring, when it launched a firm-wide initiative called New BAC, by which it plans to cut costs by 10 percent. Phase two of that cost-cutting program was to start next month.
In the meantime, though, the global wealth and investment management division has been a bright spot for the bank, generating healthy profits. Net income for the unit rose 54 percent to $506 million in the second quarter. “Sallie has led the wealth management businesses through an important integration with the broader franchise,” said Moynihan in a release.