A decade-long push into investment banking by one of America's biggest retail banks came to an abrupt and painful end yesterday, as Bank of America said the credit crisis had destroyed its Wall Street profits.
Ken Lewis, the ambitious chief executive who masterminded the bank's expansion into exotic new businesses, bluntly ruled out any further acquisitions in its investment banking division. "I've had all of the fun I can stand in investment banking at the moment," he told analysts.
And he promised a review of whether Bank of America would stay in the investment banking business at all, refusing to say that he would "stay the course". At the very least, there will be big cuts, he signalled.
Bank of America admitted losses of $527m (£258m) on complex debt products, whose value ultimately rests on mortgages taken out by low-income Americans. In total, trading losses were $1.46bn in the three months to the end of September, much worse than anyone had been predicting, and a stinging reversal from the $731m profit posted in the same period last year.
The value of mortgage-backed debt has collapsed as Americans have begun defaulting on home loans in record numbers. This week, Bank of America said it was taking part in an attempt to resuscitate that market, with a new vehicle that would buy some of the debts held in banks' off-balance-sheet investment vehicles, but it remained unclear yesterday whether the rescue deal would attract wide support.
Instead, Mr Lewis was left to count the cost of his bank's misadventures in credit markets that had been booming until as recently as August, but where Bank of America took on more risk than it could handle in a downturn. With additional write-downs of $247m on loans for private equity buyouts, Bank of America's investment banking profit collapsed from $1.43bn in the third quarter of 2006 to just $100m. Revenues were down 44 per cent.
Adding in the retail bank, where higher provisions to cover bad loans also alarmed analysts, overall group earnings were down 32 per cent. "We should have done better," Mr Lewis said.
During six years at the helm, Mr Lewis has quickly reshaped Bank of America from a regional retail player into a diversified financial powerhouse, through a string of ambitious acquisitions. Most recently, at the height of the crisis in the credit markets in August, he took a $2bn stake in Countrywide Financial, America's largest mortgage lender.
Edward Woods, the senior analyst with Celent, a Boston-based financial research and consulting firm, said the problems uncovered in the bank this quarter could be a serious blow to Mr Lewis's strategy of turning it from a regional retail bank into a global financial powerhouse. "Mr Lewis, as a bull for investment, innovation and diversification, took a big blow this quarter. The diversification he is creating is a long-term bet, but it is fundamentally fuelled by near-term results."
Bank of America said it would scale back its share buy-back plans to conserve cash for investment, becoming the second bank to do so this week, after Citigroup.
Its disappointing results proved that the effects of the credit crisis remain unpredictable and possibly longer-lasting than some had predicted. New data yesterday also showed that the market for asset-backed commercial paper, which is used by banks' off-balance-sheet veh-icles, has contracted for the tenth consecutive week. Meanwhile, weaker-than-expected jobs data heightened fears for the wider US economy.
The result was renewed pressure on the dollar, which hit a new record low against the euro. The dollar index, a measure of the greenback's value against six major currencies, was down 0.6 per cent at 77.620 at lunchtime.Reuse content