Back from the Brink at B of A : How Some Tough Characters at the Top Produced a Comeback Story That May Rival Chrysler’s

In the fall of 1986, losses were rising at Bank of America and regulators feared that the institution was out of control. Rumors swept Europe that the bank was on the verge of failing. Similar stories had contributed to the collapse of Continental Illinois Bank two years before.

A. W. Clausen, who had presided over Bank of America’s heyday in the 1970s before retiring in 1981, was brought back to lead a rescue effort. But he was also being blamed for the difficulties, raising questions about whether he was up to the new task.

The first real test for Clausen came fast. In early November of 1986, he and two other top bank executives flew to Washington with a hastily assembled plan to avert a possible federal takeover and buy time to stabilize the gush of red ink.

In meetings with the nation’s top banking regulators one Thursday, the executives laid out their blueprint for saving the bank: Sell billions of dollars worth of prized assets to raise cash, eliminate thousands of jobs, impose tight controls on expenses and loans.

“I made a financial judgment and a little prayer that it would all work out,” L. William Seidman, chairman of the Federal Deposit Insurance Corp., recalled in a recent interview.

Then-Federal Reserve Board Chairman Paul A. Volcker and Comptroller of the Currency Robert L. Clarke concurred in granting the new management time to work out the problems that had dragged the institution from the pinnacle of U.S. banking to the depths.

The decision was a turning point for the San Francisco-based bank and its parent company, BankAmerica Corp. It provided the opportunity for Clausen and a crew of tough outsiders to pull off one of the most dramatic turnarounds in U.S. business history.

Today, Bank of America’s stock has risen sharply as investors and Wall Street conclude that the rebound is for real, the shareholder dividend has been restored and the bank has posted back-to-back quarters of record profits. Industry analysts describe the resurrection of California’s biggest banking company in glowing terms and compare it to the Chrysler comeback.

This is the inside story of that turnaround, pieced together from interviews with top bank executives, other employees and ex-employees, regulators and outside experts. In some ways, it is a story without an ending because the company still faces enormous challenges.

Its $8-billion portfolio of troubled loans to Third World countries is among the highest in the world. The sale of revenue-generating operations to stay afloat has left the bank weak in some areas and diminished its role as a global power, perhaps irrevocably. Competitors in California, where B of A remains the biggest bank, are reluctant to surrender turf won at the bank’s expense during the problem years.

And the price of survival has been high in human terms, too. More than 20,000 jobs have been eliminated since Clausen’s return. Longtime executives were pushed aside or dumped, often replaced by former competitors from archrival Wells Fargo. A culture that promised jobs for life--a contributing factor in the decline--has been replaced by one in which performance is king and those who can’t perform are shown the door.

If the story’s end cannot be written yet, the plot appears to be clear. The threat of a federal takeover is long gone. The red ink has turned to black. Most skeptics have turned into true believers. BankAmerica has reported seven straight quarters of rising profit and improving loan quality.

When rivals Wells Fargo and Security Pacific extended weekday banking hours earlier this year in a bid for more consumer business, Bank of America weighed in with Saturday hours. It was an expensive move, probably costing $10 million a year, but competitors were forced to follow suit and the public discovered that B of A was back in full force.

Once Was the Best

“Its recovery is better than Chrysler’s,” said Donald K. Crowley, senior vice president in the San Francisco office of investment bankers Keefe, Bruyette & Woods, the premier specialists in bank stocks. “I think Bank of America is coming out of its problems on very strong footing to be perhaps one of the best, if not the best, in the industry within five to 10 years.”

Bank of America, founded as the Bank of Italy in 1904 by the legendary A. P. Giannini, used to be the nation’s best bank. By 1981, it was in its fourth decade as the world’s largest bank.

B of A dominated California then, boasting that 90% of the state’s population lived within 1 1/2 miles of one of its 1,100 branches. Its 400 foreign offices--in 94 countries on four continents--conferred a vibrant international presence. It had reported increased profits for 58 consecutive quarters.

The man who presided over this unrivaled expansion and prosperity from 1970 to 1981 was Alden Winship Clausen, known as Tom.

He was a tough Midwesterner of Norwegian extraction who spent 32 years rising through the ranks before retiring at age 58 to become chief of the prestigious World Bank in Washington.

Before leaving, Clausen chose his successor--42-year-old Samuel H. Armacost. But the story turned out far differently for the protege.

In Armacost’s first year on the job, profit dropped $200 million from 1980. It was a harbinger of problems to come. The years of growth and profit had disguised serious problems with Bank of America, and deregulation would create new pressures on the entire industry. Armacost, while regarded widely as an extremely able banker, proved unable to handle the burden.

More Shocks for Bank

By 1984, examiners from the Office of the Comptroller of the Currency were concerned about severe loan problems at the bank, but Armacost persuaded B of A’s board that the examiners were wrong. The next year, after regulators forced the bank to set aside funds to cover huge loan losses, BankAmerica lost $337 million.

The regulators’ worries ran so deep that a team of examiners moved into the bank full time in the spring of 1985. But the shocks continued. In January, 1986, the board suspended the stock dividend. Six months later, the bank declared a $640-million loss in the second quarter.

By the summer of 1986, the regulators had given the board a short list of the names of acceptable chief executives. Armacost’s name was not on it, but Clausen’s was. On Oct. 12, a Sunday, the board rehired Clausen as chief executive.

Not everyone was pleased with Clausen’s return. People inside and outside the bank felt that he had pushed up profits during his first tour at the expense of updating technology and systems, paving the way for many current problems.

“Frankly, when Mr. Clausen went back in, many people had attributed the previous problems to him, and his return was a matter of concern,” Seidman, the FDIC boss, said.

Clausen is not interested in assessing his responsibility for problems inherited by Armacost, preferring to leave it at this: “It’s a tough question. My record is there for the world to see, to analyze, to criticize.”

When Clausen walked back into his 40th-floor office on a Monday morning that October, he did not have the luxury of looking back. The institution was in chaos. Not only were the losses continuing, but First Interstate Bancorp in Los Angeles had started an unfriendly takeover attempt the week before that threatened the worst blow yet to B of A’s wounded pride.

Loan Problems Hidden

But even then some elements of the turnaround were in place.

An overwhelming problem was plainly that bank management did not know what woes were hidden in its loan portfolio. B of A culture taught loan officers on the line to keep quiet when a borrower got in trouble and try to work out the problems himself.

It was a structure designed to slow the spread of bad news. So when loans started going bad in big numbers in the 1980s, top managers were surprised and found that it was too late to salvage the credits.

In April, 1985, the bank had hired Glenhall E. Taylor Jr., a loan expert who had spent 35 years at Wells Fargo. He started at B of A as a consultant and became the full-time head of credit policy in September, 1985, with the backing of the regulators.

“With loans, you know you gotta make ‘em, monitor ‘em and collect ‘em,” Taylor said in a recent interview. “God knows this place made ‘em.”

One of Taylor’s first acts was to limit loan amounts to new customers. It was no solution, but he did not want any more big loans on the books until a system was in place to monitor them and until the bank discovered how bad the news was in existing loans. (It would turn out to be terrible; the bank had $6.6 billion in loan losses between 1983 and 1987.)

Taylor also created B of A’s first bankwide process for assigning specialists to work with borrowers to restructure troubled loans, a standard practice at Wells Fargo and other top banks but one that had somehow been missed at Bank of America.

In March, 1986, he persuaded another loan expert, Lewis W. Coleman, to leave Wells Fargo and join the rebuilding effort. Coleman’s assignment was to get control of the deteriorating loans in the bank’s international operations.

Created New Culture

He found the same problem as Taylor. “The credit problems that were endemic here were typified by the fact that nobody knew where the credit problems were,” Coleman recalled. “There’s a huge difference between having problems you know about and those you don’t know about. People had to understand that it was OK to raise your hand and say you had a bad loan.”

So Coleman and Taylor set about creating a new culture for loan officers in which the sin became not notifying management early about a potential loan problem. Allen W. Sanborn, a longtime B of A executive, summarized the new spirit in 1986 when he told colleagues, “We only shoot the messenger if he’s late.”

If loan quality was the chief concern, reversing the steady deterioration of earnings and getting control of expenses were next on the list.

On Oct. 6, the week before Clausen returned, Frank N. Newman had come to the bank as chief financial officer. Newman, another Wells Fargo veteran, replaced John S. Poelker, who had resigned in frustration after less than six months at B of A.

Newman had agonized over whether to take the job, but in the end he could not resist the challenge. When he accepted, he had no way of knowing that his first day in the post would present another challenge.

“I arrived on Monday and over the weekend the letter had arrived from Joe Pinola,” said Newman, referring to the takeover offer proposed by Joseph J. Pinola, the brash chairman of First Interstate. “I expected to deal with the turnaround, and now I had this, too.”

Newman had played a central role in Wells Fargo’s recent acquisition of Crocker National Bank and his takeover expertise would play a big part in ultimately fending off First Interstate.

Attention Diverted

In a perverse way, the takeover attempt boosted the battered morale at B of A. Employees started sporting “No FIB” buttons and T-shirts, and when the offer was withdrawn in February, 1987, it was a brief victory in a string of sour losses.

But the defense diverted management’s attention when the focus should have been devoted to implementing the rescue plan outlined in Washington in November, 1986, by Clausen, Taylor and Newman.

Vital to that plan was getting control of expenses. Revenue had declined and would drop more sharply with the sale of such assets as the Charles Schwab discount brokerage, its consumer banks in West Germany and Italy, and its foreign credit card operations. The bank had to find a way to bring expenses in line with the new reality of less money.

A key sign of business efficiency is the ratio between expenses and revenue, or how much money it takes to make money. In 1979, the bank’s best year, B of A spent 59 cents for every $1 in revenue, one of the best marks in the nation. By late 1986, it cost 85 cents for every $1, one of the industry’s worst figures.

The impact goes right to the bottom line: Every 10 cents equals $500 million in profit on revenue of $5 billion, about the B of A level.

“The credit problems had masked the fact that the relationship between expenses and revenue had gotten way out of line,” Newman said. “The days of letting expenses grow with the business were fine. But the business was not growing, and expenses had to be controlled.”

This was more distasteful than bringing the loan portfolio under control because it involved firing thousands of workers. Armacost and his management team had recognized the problem with expenses, but had been unable to impose the tough discipline demanded to cut costs.

Toughness Bred In

“People did things that blew the budget, and they didn’t depart feet first,” said a former mid-level executive at the bank. “Ultimately, somebody has to be the tough guy, and it is very difficult to make decisions that you will be hated for.”

Clausen had the thick skin required to demand that expenses be slashed and to bear the burden. So did the new crew from Wells Fargo, where toughness on costs had been bred into them by Chairman Carl E. Reichardt.

The new guys also brought an attribute that Clausen lacked: They had no sacred cows to protect at Bank of America.

Nearly 7,000 jobs were cut in the last quarter of 1986. While most of the cuts came from the sale of major assets, there were hundreds of firings, too, including top executives. In 1987, 10,000 more jobs would be eliminated.

By 1987, costs were coming down and earnings were beginning to rebound. But the road was not smooth. For instance, when Brazil decided to stop paying interest on its foreign loans in February, 1987, it cost B of A $186 million that year.

A bigger blow came in May, when New York’s Citicorp, the nation’s biggest banking company, shook the industry with its decision to set aside $3 billion in reserves to cover potential losses from its Third World loans.

The recognition by the industry leader that loans to developing countries would not be fully repaid forced other big banks to follow suit. Bank of America, which could least afford it, had to set aside $1.1 billion to cover its Third World loans.

As a result, the bank would end 1987 with its biggest loss ever, $955 million. But the loss disguised the real progress of 1987.

Admitted Problem

With the exception of the foreign debt, loan losses had declined steadily and surely. Using the teams of specialists to revive dying loans was paying off, and the early warning system was working, as Coleman realized in spring 1987, when two senior credit officers from his world banking division visited him.

The men admitted that they had failed to spot problems with a $10-million loan and that most of it would have to be written off as a loss immediately. They said they were there to surrender their authority to approve new loans.

“Thank you very much,” Coleman said in accepting the offer.

It meant that the two senior officers would have to get a junior loan official to approve any future loans they wanted to make to customers. It also meant that the culture was changing at Bank of America.

Another milestone was reached in July, 1987.

Its huge branch system in California has always been the heart of Bank of America’s business. But, starting with the widely publicized problems in 1985, jittery customers had been taking their money elsewhere at a rate approaching 1,000 accounts a month.

Finding a new head for the foundering California division was essential to making the recovery work, and Clausen chose another former Wells Fargo executive, Richard M. Rosenberg, who had recently become head of BankAmerica’s subsidiary bank in Seattle.

Rosenberg still refuses to reveal how Clausen lured him to San Francisco, although speculation has centered on a possible promise that he would be in line for Clausen’s job. Whatever the reason, in May, 1987, Rosenberg took over as head of the bank division that would play the biggest role in B of A’s future.

Rosenberg found that the bank’s share of the California market had dropped sharply and employee morale was terrible. “Our own people were embarrassed about working for Bank of America,” he said in an interview recently. “Our customers were embarrassed, too.”

Cleaned Up Quickly

Soon after he came aboard, Rosenberg hired Thomas E. Peterson from Wells Fargo and gave him control of the bank’s branches. According to one bank executive, Rosenberg told colleagues that he simply did not have time to determine whether anyone already on B of A’s staff was capable of carrying out the changes the situation demanded.

Peterson certainly was. On his first visit to a B of A branch, he brusquely asked the manager for the location of the cleaning closet. He walked to the closet, pulled out a cloth and spray bottle, walked outside the branch and began cleaning the automated teller machine. By the end of the day, every B of A branch manager was having his ATMs scrubbed.

The bank’s research found that its customers did not stand in line any longer than those at its competitors. But their perceptions of why they were in line were dramatically different. At a competing bank, delays were usually blamed on problems with service in general. People who stood in line at B of A offices were certain that it was the result of the bank’s widely publicized problems.

The bank was running an advertising campaign on the theme “We want the job.” Rosenberg, whose true genius is as a marketer, found the message negative. The bank still had more customers than any other California bank. Why not stress that?

He launched a new campaign, and its theme was that more Californians bank at B of A than anywhere else. “We wanted to create the impression that you were not strange if you bank with us,” he said.

He also began developing new products for branches to offer customers, partly to bring in customers and also to restore morale.

Exceeded Forecasts

By July, the first fruits began to show: For the first time since 1985, the bank signed up more customers than it lost. The trend has continued, and the California consumer business has emerged as a key source of strong earnings.

The company’s rebound has actually exceeded the forecasts that Clausen, Taylor and Newman provided the regulators in November, 1986. Loan losses are dropping sharply, and record profit in the first quarter of 1989 marked the seventh consecutive period of rising earnings. It’s not 58 straight quarters, but it’s progress.

Clausen and other top executives are cautious about predicting the future, although they are unanimous in their assessment that the bank is healthy enough to weather the inevitable bumps along the road, something that few could have said with confidence in 1986.

Bank of America today is smaller--assets are about $95 billion, compared to a peak of $123 billion in 1983. And it is more sharply focused on California and the West, a reflection of its problems and of a larger trend among U.S. banks.

The bank’s turnaround is particularly gratifying to employees such as James C. Deane, a senior vice president who heads the bank’s main branch in Los Angeles, a post held by his father and grandfather before him.

“When I joined in 1974, the Bank of America business card got you in anyplace,” said Deane. “We lost some of that stature, obviously, but we are well on the road to getting it back again.”