Sep 26, 2008
“Global Finance: The Road to Recovery”
St. Louis, MO
September 26, 2008
…introduction given by MCs Debbie Monterrey and Doug McElvin - KMOX radio
Thank you for that kind introduction. I appreciate your remarks… the invitation to speak here today… I also thank the members of the World Trade Center St. Louis for what you do to strengthen and grow the economy of this vital region.
For 15 years, W-T-C St. Louis has worked to support growth for the area’s businesses -- most importantly, ensuring St. Louis companies are represented in an increasingly global marketplace. I’m proud to say that Bank of America has been working right alongside your organization to help St. Louis’s business community embrace opportunities for growth, at home and around the world.
Joining me here today are some of the local Bank of America leaders who drive that work every day. I’d like to specifically introduce our President for Bank of America Missouri and Global Commercial Banking Market Executive Pat Mercurio.
I’d also like to recognize Brian Bauer, Business Banking market executive and board member of the W-T-C St. Louis.
And Larry Otto, our leader for U.S. Trust Bank of America Private Wealth Management is here, as well.
These leaders are well aware of how important the St. Louis market is to all of you and our company -- they stand ready to talk to any of you about achieving you and your business’s dreams.
Today, I will address four topics:
--First – the challenge to a great city like St. Louis when it is faced with the loss of an iconic company’s independence.
--Second – insight into what our customers tell us, and what we see and advise them on in terms of growing in a global economy.
--Third – the current financial crisis and our views on the U.S. economy, and…
--Fourth – our view of the shape of the financial services industry.
The St. Louis economy is facing many of the same opportunities and challenges as other metropolitan regions. Of course, this does not preclude the fact that St. Louis has unique opportunities.
And unique challenges.
Economically speaking, the local 800-pound gorilla in the room these days is the purchase of Anheuser-Busch by In Bev.
The ongoing global consolidation in the beverage industry presents real challenges to a headquarters city like St. Louis. In addition to any potential loss of jobs, there is the concern about loss of community leadership and philanthropic support. Obviously, the departure of a marquee corporate headquarters has an impact on a city’s collective psyche and identity. That happens everywhere – even in New York City with our acquisition of Merrill Lynch.
Let me offer a little personal history.
For years, I have been working in the consolidating industry of banking. In many of these consolidations, independent corporate headquarters are lost, including those lost in places like Boston where Bank of America acquired the company I came from, and here in St. Louis when Boatmens’ was acquired.
When the acquisition was announced of my predecessor bank by Bank of America, it represented the departure of the headquarters of a cherished, highly visible, 200-year old institution – and doomsday scenarios were voiced loud and often in the local media and across the tables at business lunches and events.
In the end, though, we at Bank of America actually enhanced the profile of the company locally, in terms of hiring and in maintaining a leadership level of community support.
It is a difficult balance, and something we have gotten better at over the years. I can’t speak for what In Bev will do, of course. But I can say that the ultimate outcome of such deals does not always match the hand-wringing.
My advice is:
1. Be guided by facts in these instances.
2. Work with an eye toward the future, not the past
3. Specifically reassess the strengths of your city and develop these.
Throwing one’s hands in the air and claiming the end of St. Louis as we know it – based on one deal -- betrays a misunderstanding of the diversity of the local economy.
First of all, St. Louis is far from a one-horse town. The headquarters or major offices of Scottrade, Edward Jones Investments – worthy competitors to my company – are joined by industry sector giants such as Energizer, Enterprise Rent-a-Car, Monsanto, Sigma-Aldrich and Peabody Energy.
But even more compelling in my view is the fact that St. Louis remains a fertile environment for new business growth.
You have many great companies here, you have a great educational heritage, with many tremendous universities, including Washington University. Believe me, I see how competitive that school is as I take college tours with my junior in high school. You have a great healthcare system -- a growing and dynamic field.
It would be a huge mistake to discount the economic resilience these and many other diverse companies provide in the face of a specific headquarters departure, or in the overall economic environment.
So on the loss of a great corporate headquarters, my advice is to focus on where the opportunity will be – not where it has been. We are in a globalizing world, and the scene of a corporation being bought by a global competitor will repeat over and over.
This brings me to the second topic – what advice and knowledge we gain from our customers, and in fact give our customers, about competing globally. Three key concepts are the cornerstones:
--Get trusted advice
--Be sure your products are ready, and…
--Pay close attention to your people
So first, let’s discuss trusted advice.
When it comes to building a global business, who you know is important – but so is what they know.
From business partner to lawyer to banker to accountant…Do you have access to advice from people who have first-hand knowledge of both your industry and the global markets you’re seeking to conquer? Do they have a proven track record of success in the international marketplace you’re seeking to enter? Do they have the capacity to customize global growth solutions to your business goals?
This inside knowledge is even more vital as American businesses seek to expand into previously less transparent markets. China and Russia can offer as many barriers – cultural and bureaucratic -- to the importer or exporter as opportunities.
And if your sites are set on doing business in more troubled areas of the world like Pakistan, doing so without a close knowledge of the marketplace can be very dangerous.
Whether your business is small or large, your chances of success will improve exponentially when you bring experts you can trust into your circle.
The second concept is the export readiness of your product. It seems simple, but we see companies every day who have not carefully considered questions like:
- Are my products appropriate to the market I’m seeking to enter?
- Are there cultural barriers to my product gaining acceptance in a targeted market?
- What is the global competitive landscape for my product?
- And finally, can I protect my products from being pirated away as I sell into these markets?
The most successful entrepreneurs I’ve met have effectively answered questions like these. They have learned to balance the proud passion they have for their products with an unbiased eye for simultaneously understanding their limits – then they either make the adjustments needed or they seek their opportunities in other markets.
The final key is people.
You can have an intimate knowledge of the marketplace and the greatest product in the world, but without key people, your global growth will be imperiled.
First of all, do you have the right person – or team of people -- in charge of your global growth? All of us here today would probably agree that without the right people, no business can reach its greatest potential. That’s even more important when growing globally, because of the different cultures and commercial processes that exist around the world.
This is just a brief look at the considerations a global entrepreneur should give to the concepts of trusted advice, export readiness and people. The good news is -- here in St. Louis -- dozens of men and women have successfully harnessed these concepts and created significant business growth.
In fact, St. Louis was among those markets recognized as having recorded 2007 U.S. product sales of $1 billion to global markets. And on the state level, Missouri's 2007 exports to China alone exceeded $1 billion.
This export growth is important not just to the region -- the biggest factor in the U.S. economy’s second-quarter rebound was robust sales of U.S. exports to other countries.
This brings me to my third topic: the current U.S. economic outlook and the financial crisis.
First, the current crisis.
The current crisis’ seeds of destruction were sown over the past couple of decades, as more and more increasingly complex structures of securitized assets, derivative products and other financial instruments arrived on the scene.
Our industry believed these products would forever improve our ability to balance the global economy's need to fund growth with its need to manage risk.
The housing crisis in the U.S. and other developed countries… and the turbulence in the global capital markets that followed, however… has revealed vulnerabilities in the financial systems in which we put so much faith and trust.
The events that have transpired since the bankruptcy of Lehman Brothers on September 13 of this year have truly laid bare the implications of these vulnerabilities.
In the space of that single weekend, and over the days following, the landscape of Wall Street was completely altered. Storied financial service brands disappeared, and others were merged with stronger competitors. Still others have changed to become bank holding companies, giving up the distinguishing factors that have existed for 80-plus years. No one believes we’ll be going back to where we were as recently as last month.
In fact, financial services firms around the world are re-evaluating their business models; investors are re-calibrating their investment strategies; regulators are taking a fresh look at the rules that govern our industry; and consumers and businesses are adjusting to a contraction of available credit and funding mechanisms.
The questions on top of everyone’s mind – understandably – have to do with the immediate future: Who will survive? Who won’t? Have we hit a bottom – and if not, when will we? And, of course, everyone’s favorite: When will things start to get better?
Venturing to answer these questions requires us to answer other uncomfortable questions about why this market disruption came about in the first place… to what degree our system of global finance is responsible… and how we can regain our credibility and the confidence of clients, investors and all those we serve.
I will try to give you my perspective on the direction our industry will take as we make our way through this crisis… how the industry, its players and its methods may change… and why I believe the industry will emerge stronger and more stable than it was before.
But first, a few thoughts on the economy. Our Chairman and CEO Ken Lewis said recently that it’s “not good, but not as bad as you think.”
Of course, that depends on what you think – there’s not a real consensus of opinion out there. These are uncertain times, and I’m taking all economic predictions with a grain of salt.
We see the global economy as having strong fundamentals but short term dislocations that will take a while to fix.
Let me lay out our economist Mickey Levy’s view of the rest of ’08 and into ’09.
The backdrop is driven by a few core themes:
--Oil and energy prices will remain high, burdening the U.S. consumer.
--The U.S. consumer is pulling in dramatically – drawing down consumption and slowing the economy.
--Corporations are facing lower profits, driven by rising input costs, lower revenues due to consumer consumption, and slowing economies around the world that have weakened prospects for exports relative to the recent past – exports which have helped our growth.
That backdrop leads to the following core thoughts by Mickey and his team:
--GDP growth will be modest throughout the rest of 08 and well into 09.
--The Federal Reserve will stand pat on rates through the end of 08 and into 09.
--Housing will continue to suffer, but we see signs of stabilization in early 09. In many markets, you are seeing it now, while markets like Florida and California continue to lag.
--Unemployment will continue to rise to levels as high as 6.8% by mid next year.
As painful as all this sounds, it’s natural. We enjoyed several years of strong economic growth, across both developed and emerging economies around the world. Some of that growth was supported by the fundamentals – resource deployment, innovation, productivity gains, etc.
But some was fed by speculation – centering, obviously, in residential housing markets. It will take some time to restore balance between values supported by the real economy and values driven by market speculation.
It’s also natural that public policy leaders try to do everything they can to prevent a recession. But we should remind ourselves that one way or another, the real economy will always correct itself. It’s why they call it a cycle – and in case anyone is still wondering… no, it wasn’t different this time. It won’t be next time, either.
What is different this time around?
To begin, the crisis is being felt first by the intermediaries in finance. What I mean is the lock up in the capital markets has made the crisis show up on Wall Street first -- before Main Street.
Wall Street through its securitization process got stuck with a lot of mortgage credit and commercial credit in its inventory that they can’t sell. And it has cost billions of dollars.
The Wall Street valuations reflect the market’s view of what will happen over the next several years as the entirety of the over-extension of credit runs through the system. These assets are illiquid and the residuals of them are clogging up the balance sheets of banks – keeping them from starting up the engine again.
Every asset class has been affected, and most recently, the impact reached areas it had not previously. And that is what makes this crisis different.
The illiquidity issues have profoundly impacted the confidence in money market funds and commercial paper markets.
The disruptions in all markets have caused the cost of debt to stay relatively the same, despite the lowering of interest rates by the Federal Reserve.
Simply put, neither consumers through stubborn mortgage rates, nor businesses through widening spreads and higher LIBOR fixes, have received the benefits of the falling rates.
In addition, even at any cost, debt capital may not be achievable. This is what our regulators have seen in the last few weeks.
This is what led to the announcement of the program by Secretary Paulson. We support it. We see that providing any market for the illiquid assets allows us to move forward. We agree that stabilizing money market funds is key to funding corporate America.
We believe that freeing banks to use capital to lend anew, rather than using it to storehouse old will keep your neighbor who is in financial stress to keep their job and their house. It will help us continue to fund your business.
This is a different problem than we had last year or in other past cycles. Until recently, the lockup in the markets could be managed. The activities of the past few weeks require a different program.
While we are “Wall Street” – we have a large investment bank and recently announced our purchase of Merrill Lynch – we are also “Main Street,” banking 1 out of every 2 American households. We have weathered the storm and made money every quarter.
We continue to make credit available and we have purchased Countrywide…we have funded billions to help municipalities…we have bought back billions in auction rate securities…we have stabilized Merrill Lynch…we and others have done a lot, but it’s still not enough.
The announced plan will help us help Main Street – it will help us do more.
So now let’s turn to the condition of the industry…
It is undeniable that there is always a temptation in financial services to carry the theory of the positive economic effects of credit too far… that it is every institution’s great challenge, in good times, to exercise restraint and good judgment… and that as economic bubbles build, all lenders make some mistakes, but some lenders make fewer than others.
Credit is critical to growth; it is what we do in my industry. However, we must acknowledge the dangers of credit overextension… and work together within the industry and with our regulators to exercise appropriate restraint.
As I look at where we are, overextension of credit and overborrowing by customers underpins our current situation. The tremendous value that our modern financial markets contribute to economic growth is clear, and credit is at the center of it. That won’t change. And that then is the paradox, balancing credit so it is wisely granted and wisely used.
Even in the face of the recent economic carnage -- I’d say that rumors of the impending demise of our industry have been greatly exaggerated. A bubble has burst, and we are all watching as the ensuing market turbulence takes down its share of banks and other financial firms. But, so far this year, we’ve had only a dozen or so banks in the U.S. go out of business. Between 1986 and 1991 we had 2,121 bank failures.
Thanks to years of consolidation and better (but obviously not perfect) risk management, I still don’t think we’re going to see that rate of failure this time around.
What we’ll see is less failure, and more of the walking wounded. That poses its own challenges… but there’s no question it’s the lesser evil. It means that more institutions are muddling through, attracting new capital or merging to survive… and fewer will fall into the lap of the taxpayers. I think that’s a good thing – the survivors will be stronger, more diversified, and better prepared to thrive in cycles to come.
So, with that prelude, let me offer three key thoughts on the long-term future of our industry.
First: Capital is king, and will continue to be.
There’s no question that this is a particularly good time to be a well-capitalized, deposit-funded, highly liquid institution. Banks that are not reliant on institutional markets for funding… and that have money to lend… are finding no shortage of demand among small, middle-market and large companies in the many industrial and service sectors that are maintaining strength through the cycle.
Second: Asset securitization and other forms of risk distribution will continue… will reform in necessary and appropriate ways… and will evolve and grow in new ways to help stimulate growth and promote stability across the global economy.
When the securitization market comes back, it will be a much simpler place than it’s been the past few years… at least at the start. If I had to point to one big problem with the market we had, it would be that securities structures got so complex and opaque that neither the ratings agencies nor the purchasers could accurately assess the risks and value the products.
We may very well see regulatory bodies try to step in here and do something to ensure more transparency and disclosure. But frankly, the market will force this issue regardless, without any government help, before investors will come off the sidelines.
Third: The universal bank model will continue to gain strength.
Now, there is a caveat here. The virtue of being a universal bank does not guarantee results. Management still has to think long and hard about the proper business and geographic mix, given the mission of the institution and market conditions. And we know that isolated bad bets, if they’re big enough, can take anybody down. There are universal banks in the U.S. and in Europe that have not done well at all over the past year. And, while I’d argue that Bank of America is still in a position of great strength, we’ve certainly taken our share of hits.
But that’s the point – we have taken our share of hits, and remain strong; we have earned money every quarter.
What I believe is that, all things being equal, a well-thought-out universal bank strategy is inherently stronger than a monoline approach because the diversity of revenue streams will always help cushion a downturn in one business or market… and the ability to offer customers and clients stability and full relationship banking through all stages of the cycle will produce a “flight to quality” when conditions go south.
Therefore, what we may see, once the market starts to stabilize next year, is accelerating consolidation in financial services -- as we experienced with Merrill Lynch -- both within and across industry sectors. The industry as a whole will shrink… but the survivors will grow. And what we’ll be left with is a stronger, more stable, more flexible and responsive financial services industry to help drive global economic growth.
It can be both a frustration… and a source of comfort… to know that bankers, investors, borrowers, speculators and regulators have endured any number of financial crises before. It makes one wonder why the lessons of the business cycle are so quickly forgotten. And it reminds us that, as painful as a downturn can be, there is always a recovery in the future.
Our job is to take urgent steps to ease as much pain for as many people as possible in the short-term… and put in place the policies that will lead to renewed growth and stability in the long-term.
My Bank of America teammates and I look forward to helping to build that future with you. I thank you for giving me the opportunity to share some thoughts with you here today and look forward now to your questions.
Thank you.
