Sunday, October 28, 2007

Bank of America's Over-Reaction

"While we are extremely proud of our strong track record in the wholesale business, we believe our long-term opportunity lies in maximizing our more competitive retail channels by introducing innovative products that meet the needs of Bank of America customers, " says Floyd Robinson, president of Bank of America (BAC) consumer real estate.

Last week, BAC reported third-quarter earnings of 82 cents per share, a 32% decrease from a year ago. They then announced they would cut some 3,000 jobs, representing less than 2% of the company's total employment. The majority of the layoffs will be in global corporate and investment banking. Continued disruptions in the credit market shellacked BAC's global corporate and investment banking unit, where net income fell to $100 million, a 93 percent drop from $1.43 billion a year ago.

Cutting the investment banking jobs does make sense since that sector is slowing in general and cuts are happening industry wide. But, to completely exit the wholesale business is a bit much. It can be a profitable sector is run correctly and with a certain degree of restraint. The problem is not that the business s bad, but that those running it took unnecessary risks and got nailed.

With lenders like Countrywide (CFC) and Thornburg Mortgage (TMA) predicting greener pastures in the near future (next quarter), it looks as though BAC may be exiting this business just as it begins to turn around. Contrast this to recent news out of Wachovia (WB) who witnessed similar results in these areas but vowed to stay the course and heighten risk management to improve results, not give up on the business.

Personally, I have not seen too many examples of financial institutions shrinking their way to improved growth.

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