CW 645 FBF – Greg Farrell – Crash of the Titans: Greed, Hubris and The Fall of Merrill Lynch and the Near Collapse of Bank of America

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Boy, we've got a great show for you today. Don't have time to talk to you for too long myself, which you may consider a good thing. Who knows? I hope I'm kidding when I say that, but you can decide anyway. Hey, we've got Greg Farrell today. He is the author of a fantastic book entitled Crash of the Titans and it's all about really some interesting stuff, high level Wall street stuff. You know, we kind of try to mix this up for you and make one episode practical real estate advice type stuff and another one will be more on the world Federal Reserve, Wall street, whatever, economics and kind of switch them back and forth. So if you've noticed any kind of pattern in the last 256 episodes, that's one that we very loosely try to follow for you. But yeah, this is a really interesting story. It's all about. Well, I'll just read you the subtitle for the book which by the way on Amazon.com got excellent reviews and it's entitled Crash the Titans, Greed, Hubris and the Fall of Merrill lynch and the Near Collapse of Bank of America. And I know bank of America is that everybody in America practically loves to hate. So you'll like this story because you're going to hear about a lot of the inside stuff. It's pretty darn interesting. So we will have Greg on in just a moment. But before we get to that, I want to thank listener Brian Massey for posting this on my Facebook page today. Actually, he said this will bring you some Monday morning cheer and you know it does. It's a Fox Business article that says US homeownership rate slides to 15 year low. And I tell you, I don't Know, if there's anybody else other than myself in the real estate business who actually thinks that's a wonderful thing, because most people in the real estate industry, and I've been in it a long time, you know that they want to talk about making homeownership rates higher and, you know, all the politicians want to talk about that too. But I actually think that some people just aren't capable of owning a home and the rest of the people just really don't want to own a house. You know, maybe they want to be mobile so they can move where jobs are or where life changes are, etc. And so the appropriate homeownership rate, I don't know what it is, but I'll just take a stab at it personally. For America, I think the appropriate homeownership rate might be around, oh, let's say 50 to 55%. Okay, so what is it at now you ask? Yes. Well, the article says the share of privately owned US homes fell to a 15 year low in the first quarter, government data showed on Monday, suggesting falling house prices are discouraging Americans from being homeowners. Well, hooray, hooray for that. You know, when the homeownership rate falls, that's just more customers for us, for U.S. investors, U.S. landlords. And remember, what's the equation? Well, you know, if you've been listening or if you've been to our Meet the Masters events, about every 1% drop in homeownership rate equals approximately 1 million new renters. So just huge, huge, wonderful benefits for us as landlords. It says the homeownership rate slipped to 65.4%, the lowest level since the first quarter of 1997. The Commerce Department said the rate was 66% in the fourth quarter. So, wow. Homeownership was lowest in the west, while higher rates were reported in the Midwest. And talks about how home prices dropped about 32% from their peak at the end of 2005, leaving millions of Americans with houses worth far less than their mortgages and pushing many into renting. Remember, you're listening to Flashback Friday. Our new episodes are published every Monday and Wednesday. And another thing this article says that's interesting here, it says the residential vacancy rate. And by the way, the statistics on this, I just have to tell you, are not very good. Why are they not very good? Well, they're better for large institutional apartment buildings, but they're not very good for single family homes. Because where do you get the single family home vacancy rate from? Well, you know, there's a few sources I know that any of us as landlords, we're not reporting that rate to any centralized database. Right. So you could try and cobble it together from, well, utility companies. Every 10 years, you've got the census. That's handy, that that's actually a pretty good one. But it's only once a decade. Right. So that doesn't help the post office. You know, you can kind of try and cobble it together from the post office, the MLS systems, which are totally disjointed and very hard to work with. So it's pretty hard to get this data. But these are all estimates anyway. It says it dropped to 8.8% in the first three months of the year from 9.4% in the fourth quarter. It says growing demand for rentals is boosting rents, with the median asking rent for an unoccupied property in the first quarter at $721, the highest since the first quarter of 2009. That compared with $712 in the fourth quarter. So you see, like I've been saying, income property is a multidimensional asset class. Rents are rising. And this is just for so many reasons. Such a wonderful time to be an income property investor, to be a landlord. Phoenix. I've been talking about my new hometown, Phoenix, Arizona. Well, it's not quite a year, so I'm calling it new still. So I've been talking about how prices have been going up here, how this is becoming a very difficult market in which to do business. I've been talking about. And you know, what you're seeing in Phoenix is just really the flagship for what you're seeing in all of our markets happening in all of the markets in which we do business. We're seeing the same trends. We're seeing reduced inventory, we're seeing the quality of inventory go down. We're seeing where we have to adjust our expectations because the deals just, they just ain't as good as they used to be, folks. They're better than they were many years ago, but they're not as good as they were a year or two ago, that's for sure. So this article and I touched on the pretty much the same story last week. This is a different article. So you know, they kind of not last week, but last episode. So they say it differently, right? But it says home prices in Phoenix area up 20% in the past 12 months. Home prices are surging in metro Phoenix, climbing 8% in March alone and 20% in the last 12 months. The median Price of a house in this region climbed to $134,900, according to a report by W.P. carey, School of Business at ASU Arizona State University. The trend is projected to continue throughout the year, although at a slower pace. Now, Mike Orr, who I really need to get on the show, I've been thinking about that. He says that metro Phoenix housing appreciation rate for 2012 for this year will reach 25% by September. So if it continues after September for another three months, finishing out the year, what are we going to hit? 30% appreciation or regression to replacement cost, as it were in Phoenix? Maybe. It says fewer foreclosures means fewer inexpensive homes for buyers. The number of homes taken back by lenders in metro Phoenix is down 60% from March 2011. So foreclosures down 60% in a year. And it also says that frustrated real estate agents have buyers ready to sign contracts but can't find houses for them. So this is true of all the markets we're doing business in, more so in Phoenix. Phoenix is sort of a flagship market. So it's not true of those markets, but it is for Phoenix. Okay, last thing before we get to our guests. Well, you probably know what one of them is. Meet me in St. Louis in just a couple of weeks, okay? I want you to be there on March 18th through the 21st so you can join us for the Creating wealth in Today's Economy Boot Camp. A whole bunch of you have registered so far. We want to have more people there. This is the furthest away event we've ever done. We're usually on the on the western side of the country. So meet us in St. Louis creating Wealth Boot Camp property tour of St. Louis and a bonus property tour of St. Robert. And by the way, those of you who have registered, please touch base with your investment counselor at my company and let them know if you'll be joining us for the St Robert Tour as well on the following Monday. Because we need to get sort of a headcount for that and see how many people are going to that one. Okay. So be there. Register Jason hartman.com now. Got a got a question. A good one by the way. And this really tied in with our last episode as we talked about self directed 401ks and self directed IRAs or I really should have said solo 401ks and the great opportunities there with Self Direction so you can be in control of your investment portfolio. So you're not leaving your financial future to somebody else who does not have your best interest at Heart. So listener Henry emailed one of our investment counselors actually a little while ago about this and it's a great question. So Henry, thank you so much for asking. He says longtime listener to the Creating wealth podcast and a possible investor at some point in the future. Thanks for all of the info you put out there. Sometime recently, I believe you said you were going to do a podcast on self directed IRAs. If you do, may I suggest that you address how to handle RMDs required minimum distributions. That's what that means, RMDs. Okay, I've heard folks talk about self directed IRAs, but no one seems to address how RMDs are handled. With mutual funds, it's easy. You sell however many shares you need in order to satisfy the IRS regulations. However, if your IRA holds property, it's not like you can just sell, quote, part of the property. At best, I can assume you'd have to sell the property and take some of the proceeds to satisfy the RMD for that year. The issue, of course, is that it may or may not be a good time to sell. Thanks again for all the work you do, Henry. Henry, that is a fantastic question. And folks, what Henry's getting out there, and I have no idea how old Henry is, but if you are 59 and a half, you can start taking distributions from your retirement plan, right? Most of us know this. But the other question is, when are you required by the IRS to take distributions from that plan? And I'm pretty sure that is 70 and a half years old. So when you're 70 and a half and you are required to start taking distributions out of your plan, if you have property in your plan, the property is not very divisible, is it? So guess what? That is such a great question. And really nobody has ever asked me that question. So I went to Brian, who we had on the last show, and I asked him that question. I said, you know, this is a great question. What do you do? Here's what you do. You actually deed if you have to. Take for example, if you have to take a. If the property value is $100,000 and you want to take a distribution of, say $10,000, you literally just deed 10% of that property to yourself personally. And the other 90% of the property stays in the plan. And then if the rent is $1,000 per month, $900 of that rent goes to your plan and $100 goes to you personally because you own 10% of the property, then the following year you just take another 10% and you keep doing that. And that's how you take your required minimum distributions. And it's actually quite do that. It is not a complicated thing to just simply do a little deed transaction with your plan and yourself. For more information, you can contact your tax advisor or you can contact Brian, who we had on the last episode about that episode number 256. So with that, that's a great question. Thank you. And listeners, please put in your questions. You can put them@jasonhartman.com on our Facebook page, whatever. We'll try to address those for you, either direct with myself or your investment counselor or here on the show. Let's go to our guest today and let's talk to Greg Farrell about Crash of the Titans. We'll be back with that in just a moment.

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My pleasure to welcome Greg Farrell to the show. He is the author of Crash of the Titans, not Clash of the Titans. Crash of the Titans, Greed, hubris, the fall of Merrill lynch and the near collapse of bank of America. And you're going to learn some interesting stuff from kind of a fly on the wall perspective about what happened here a couple of years ago. And Greg, welcome. It's great to have you on the show.

Hi, Jason. Thanks so much for having me.

My pleasure. Well, you are a correspondent with Bloomberg News So you've certainly got the inside track on things. When I heard, I remember it was over a weekend, right in the midst of the financial crisis. And it was like on a Monday morning or I think a Sunday, even.

Late Sunday night when deals were hatched. But that's right, Monday morning that I.

Heard B of A bought Merrill lynch. And shortly before that they purchased Countrywide or I guess I should say took over Countrywide. And I thought, man, B of A is in trouble. They are. They bought two losers. And what happened? What were sort of the inside dealings here that were going on and this was during bailout mania. And so tell us more.

Okay, well, thanks for setting the stage on that and thanks also for bringing up Countrywide. Let's talk about that. You had, I think the key element here and one of the reasons the financial crisis of 2008, you know, hit so precipitously had such harsh consequences is that a lot of the, you know, the people, the top bankers in the country on Wall street and elsewhere and at the top of bank of America, misjudged, really underestimated the depth of the problems they were facing. And when you look at bank of America, that is a pivotal moment in the history of that bank. Bank of America had taken a couple of decades for this band of aggressive, ambitious bankers in Charlotte, North Carolina to build and construct the largest retail bank in the country. And they had aspirations to move into Wall street in a big way as well. However, what they had lost, the CEO of Bank of America at the time, Ken Lewis, I don't think had a full grasp of the seriousness of the issues his bank was facing. So when he bought Countrywide, it fit in with the long term multi decade strategy of the Charlotte bank of whenever you see an asset where you can expand into a new area of business, it's worth buying it. And even if you're, it seems like you're overpaying now, in time it will look smart. That had been true for more than 20, 25 years. It stopped being true in 2008. And so the two purchases that were made in August is when the Countrywide deal closed and the deal in September to acquire Merrill lynch in an all stock transaction that was valued at 50, 50 billion dollars. I think Ken Lewis was confident that over time these would be great deals. He wasn't aware, if you follow bank of America's internal announcements, it wasn't until October, a few weeks after that, that I think when he looked at his own bank's third quarter earnings, he realized that the credit Crisis was hitting the consumer as well, and this was going to be a particularly bad period. And then he went to the markets to try to raise capital. And of course, you know, the book details the frenzied activity at Merrill lynch and bank of America in the fourth quarter of 2008 and how at a certain point, bank of America tried to get out of this deal only to be virtually forced to by the then Treasury Secretary, Hank Paulson.

Hank Paulson forced him to it. Yeah. So at the time, then, you're saying they overpaid for both of these companies, right?

Yes. But here's a real difference. And in the long term, I think Ken Lewis will be. Ken Lewis legacy at bank of America is a. It's a complex thing, but I think in the long term, despite having overpaid for Merrill lynch, it was an excellent acquisition for bank of America for the following reason. First of all, remember, it was all stock transactions, so they didn't really have to pony up the cash. Secondly, it gave bank of America an excellent asset and the best or best known franchise in terms of the financial advisory business. I guess I would look at it this way in terms of a simple metaphor. Ken Lewis saw this, what to him seemed like a fantastic car, automobile, and agreed to pay top dollar for it. It wasn't really worth the top dollar that he agreed to pay, but it's a vehicle that runs really well and has helped the bank in the last few years. In fact, the earnings from the Merrill lynch portion of the business carried bank of America in 2009 and much of 2010. In contrast, countrywide has been an unmitigated disaster. Countrywide cost only a couple of billion dollars, but the folks at Countrywide should have paid bank of America to take it over. It's cost the bank shareholders tens of billions of dollars. I think in the area of $40 billion in losses associated with the Countrywide acquisition. Just a terrible, horrible deal. A spectacular misjudgment of the underlying problems in the mortgage business in the US at that time.

No question. You know, when we talk about these, these three companies, I mean, the criminality or the complete neglect, whichever, or the complete stupidity. I say it's criminality, but everybody's entitled to their own opinion. That took place in all of these companies is amazing. I mean, think of it. Let's start with Merrill Lynch. I mean, and I'm sure it was happening long before I knew anything about it or became aware of this. But back to the Orange county bankruptcy, because I'm from Orange County, California, 1994, I think it was. Merrill lynch was at the center of that scandal. They were at the center of the conflict of interest with investment bank doing investment banking, pumping, pumping stock to clients. And the research was not impartial at all. It was a total conflict of interest. I mean, it's like countless scandals with Merrill Lynch. And then we'll talk about Countrywide and Anthony Mazzillo and how he got his get out of jail free pass. And then we can go into B of A and how their CEO got a big raise just recently for six times the prior year's package, I guess. And the shareholders lost to half their value. But where do you start?

Yes, where do you start? Well, a couple things. One is in order to. In my book is focused primarily on the bank of America Merrill lynch deal and the fourth quarter of 2008. However, in order to set the stage, I had to do a lot of research on Merrill lynch, the history of Merrill lynch and how Merrill lynch got to the point where it had once been the safest, soundest franchise on Wall street, but where they basically blew themselves up. And your reference to Orange county, the reference to the research scandal. These all grew out of Merrill Lynch's attempts to become more like Goldman Sachs, become a bigger player in the investment banking side of Wall Street. Because.

Charlie Merrill, who created what is known as Merrill lynch and the thundering herd of financial advisors, that was a fantastic growth business, not huge growth, but very solid growth in the second half of the 20th century. And it helped reintroduce a lot of Americans who had been burned in the Great Depression back to the upside of Wall street and investing for the long term.

By the 1990s, the 80s and 90s, Merrill Lynch's leaders had aspirations to become much more like the other Wall street banks and getting into much riskier businesses. And this was just not their sweet spot. So you have what is in the case of Merrill lynch, this huge organization that wants to be in the middle of everything without the expertise that you had at some of the competitors on Wall street, notably Goldman Sachs. And therefore they wind up in a lot of the scandals or implosions that occurred in the 80s and 90s. It's sort of like the. It's sort of the. They were big enough that they ended up getting touched by a lot of these things or winding up in the.

Middle of it, but not when you wanted to be. They were really out of their league, so to speak.

Then definitely, when it came to getting into the complex structured products, fixed income, collateralized debt obligations, they Like Citigroup got in over their heads. They thought, well, this is easy money to make. And instead of focusing a lot on how they could get burned and being very careful about their exposure, they actually got sucked right in. It was easy money. They wanted to increase their earnings every year and they just doubled down. And for a few years, things seemed to go really well until they didn't. And when they didn't, they could burn very, very badly on that and therefore ended up having to lose their independence.

What year did it really all change? I mean, I think in general, Wall street in general, maybe we'll talk about that and then we'll talk about Merrill specifically. But it seems that Wall street in general, and again, I'm glad to say I'm too young to know all this, but from my readings and research and the guests I've had on the show, it seems like Wall street really had a big, significant change in the 80s, where it went from the concept of telling its clients to buy stocks that paid dividends to where it became a speculative frenzy to where the financial services firms started going public. And when they were public, they had different pressures, they started acting differently. There was a real sea change on Wall street at one point, wasn't there?

Yes, you're absolutely right. If you get up to the 50,000 foot level and want to look back over the decades, the 1980s were a big inflection point on Wall Street. And that's a number of reasons. One is computerization. So trades, et cetera, can be done much more quickly and efficiently. The company I work for now, Bloomberg, played a large role in that by basically bringing real time bond prices, you know, into almost to the area where real time equity stock prices were, which had basically revved up the, you know, the business of bond trades and gave buyers and sellers more confidence of bonds, institutional buyers and sellers, that they were getting a good price. But this is all fits under the rubric of computerization and investments in technology. So you've got that, the facility, the ability to trade much more quickly and much more accurately. You have also a profusion of mutual funds and a whole generation of baby boomers now who are starting to approach retirement age with money to invest. So you have this huge influx of money that's going to come in looking for places to invest, a larger group of characters on Wall street who are more than happy to help invest that stuff and look for more exotic, higher return products in which to invest. And layered on top of that, which I think gets overlooked, is a transformation of compensation practices. On Wall street and then beyond this, where the bonus culture really took hold. I think there had always been a bonus culture on Wall street, but there was a change in the federal law.

Actually in the early 90s where any compensation over $1 million in cash, a salary of over $1 million, Congress decided in its wisdom would be taxed at a normal rate rather than, you know, the way it had been, you know, a lack of taxes up until a million dollars. So the idea, Congress's idea in 1993, I think when this was passed and Bill Clinton signed it was to basically limit CEO compensation, which at the time people thought were, was out of control. Like Detroit automakers were making lots of money whereas the products they were producing weren't selling. And the Japanese automakers were selling, you know, not being paid nearly as much, only a fraction of that, but they're producing much better cars. Now. Any well intentioned law had a negative effect.

I'm not sure I'm clear on the compensation issue. I just want to make sure the listeners understand that. Are you saying that the base compensation being under or over a million dollars was the thing Congress was attacking, but what they did to get around it is just created these huge bonuses because Most of these CEOs are paid based on the bonus culture, as you say.

Yes, exactly. Sorry for going back so far in history, but basically it's an obscure law. But what it did was by penalizing any cash salary over a million dollars. What you did was drive. Okay, well, they weren't penalized. There was going to be no tax penalty on incentive compensation. So a way of getting around the limit or the ding that you'd sell.

Sustained.

If you paid a CEO of a company more than a million dollars is to put a significant amount of his or her package, mostly his, in incentive comp, ie, a bonus. And on Wall street this became rampant in massive bonuses so that, you know, bonuses for traders. For many years in the past decade, traders were the best paid guys on Wall street. Better than the CEOs, you know, the top earners at Goldman Sachs or Bear Stearns or any of the big trading firms, Lehman Brothers were the traders. They were making tens of millions getting bonuses in excess of tens of millions of dollars a year. When you put that kind of money in front of someone, and the same with the CEOs, it really encourages an all or nothing bet on the company. Because if you win, you get 50 or $100 million. If you lose, someone else loses. You still got your 50 or 100 million from last year. Year do you know what I mean? They don't suck it out of you.

And the bonus culture encouraged the short term minded risk takers. All or nothing. It's all about my tenure. It's about the next quarter, the next year versus the overall health and strength and welfare of the company and its shareholders.

Exactly. This is not about a long term investment to help the company. This is about a short term investment. Tell me for my bonus at the end of this fiscal year. That's what by 2008, 2007. And by bringing this up, I think you've hit on the point. That's what Wall street had morphed into and still largely is. But it hit its high point or low point if you will. I remember clearly in the fourth quarter of 2006, that was a record setting year for bonuses all across Wall Street. All five of the major Wall street banks reported record earnings. And that's against the, the course of gravity. You can't have all of them having great years at once. But they were all feasting on this combination of elements, including a bubbly real estate market that was just then peaking and their bonuses tied to selling exotic products with no long term upside, only short term upside.

Yeah, it's really too bad. You look at people like John Thain, who was head of Merrill lynch at the time of the sell out to be of a. And he, he spent over a million dollars decorating his personal office. I think his take from the company, from the losing company, okay, was over $70 million in the course of a year or something. It was just ridiculous.

Okay, let me address that because that's an important part in the book as well, the incentive part. And Thain, to be clear, did not get that or anything near that. He signed when Stan o' Neill was pushed out of Merrill lynch at the end of 2007 for creating this massive exposure and not telling his board how bad things were. John Thain was brought in. He had been a top executive at Goldman Sachs where he'd made well over $100 million when Goldman Sachs went public. He had been CEO of the New York Stock Exchange and helped successfully bring that public and made a good amount of money there. He came in and had an agreement and I think he was another blue sky like most of his colleagues on Wall Street. Figured this would be a short dip. Things would get a lot better in 2008. And his package was such that if Merrill's stock bounced back to where it had been before, yes, he would get in the area of $70 million fast. Forward nine months. Things turn out to be much worse than he thinks and bank of America has to offer. This actually helped Merrill in shareholders. He had no. There was no bonus for him to sell the company. He never envisioned that he would fail to save Maryland lynch and as a result he was going to get nothing because all of his stock options were going to be underwater outside of his base salary, which in itself was pretty good. But he wouldn't get near the $70 million. And as a result, yes, he's on the losing end of this. He strikes an agreement to sell to bank of America and then he spends the next few months trying to negotiate a bonus from Merrill lynch of as much as $40 million in a losing year when the company was on its way to losing $28 billion. Eventually the Merrill lynch board stood up to him and realized it would be politically impossible for them to award any kind of bonus to Thain for that. But you should know that Thain did not get a massive bonus out of Merrill Lynch. He ended up with a lot of bank of America stock, but he did not get a big bonus for that. He wanted one anyway. I go into great detail on that in the book.

Right, right. What's he doing now, just out of curiosity?

He heads up a middle market finance company C and I think he's doing a good job at it. CIT Financial, which also ran into problems in the financial crisis caters to they hit a sweet spot in terms of loans to small and medium sized businesses that the big banks overlook. So it's several rungs down from what he was doing as a top executive at Goldman Sachs and as CEO of Merrill Lynch. But he's still in the financial services business and is doing a good job there.

So you're not very critical of Thain then. So maybe people are. You have a chapter called.

Right. I'm not very critical of him because he didn't cause it. His biggest problem, Stan o', Neill, his predecessor, Merrill lynch, is the guy who blew Merrill lynch up. And Stan O' Neill walked away with $160 million.

Fair enough. Fair enough.

That's where the real something was wrong with this picture occurred was prior to Thain's arrival. Thain failed to save it. And yes, he spent a million dollars bucks that poorly advised thinking that the economy was going to come back on rehabbing his office. But that's no crime compared to what went before, if you know what I mean.

Fair enough, fair enough. No, I agree with you. I know that all the reasons for failure were set in Motion before John Thain came on board. I'm only critical of how much money he made as the company was going down, which. You mentioned the bonus culture a few minutes ago. I'm a capitalist. Look, I don't mind bonuses at all. I hope these guys make fortunes. It's just long as it's commensurate with the shareholders and what they were. Not really just the shareholders, but the stakeholders, where they're not burning the government through, you know, with bailout money or the. The vendors of the company by, you know, a lot of these companies, they leave so much devastation in their wake. Their vendors go under. They're. They're just. Their vendors are in bankruptcy because of what these companies do to them. Sometimes, you know, they're just such big octopus, you know, it's incredible.

So one of my favorite parts of the book, and I benefited from the fact that there were so many investigations, both the New York State Attorney General and Congress, into this whole deal, that I got all sorts of great stuff from depositions, board members, et cetera. One of them is this. There's a scene that takes place in the fourth quarter of 2008 after Thain has agreed to sell Merrill lynch for a very good price to bank of America, but he's going to no longer be CEO and his new colleague, not the CEO of Bank of America, but the head of HR from Bank of America. And I can't do the Southern accent properly, but he comes to New York to visit with Thane. They talk about, okay, what bonuses are you going to pay to your subordinates to make sure they're happy and they stay on board? Because that's what we're buying. We're buying the people. And he says, this guy will get X, that guy will get Y. And this fellow who's a Southerner, turns to Thane and says, what about you? What are you going to get? And Thane says, I'm expecting to get $40 million. And this guy from Charlotte, North Carolina, says, you know, that's, you know, warns him that, you know, if you really want to go far in our organization, that's really not going to go down well at all. Because at bank of America, we pay, you know, we don't pay for the deal. We pay when the deal pays off for shareholders. And it's, you know, a lot of the guys in New York on Wall street look down on, you know, the supposed Southern hicks in Charlotte, but those guys. Guys had it absolutely right, you know, that Wall street had just gotten totally out of whack. In terms of bonuses. Now, don't get me wrong, the folks in Charlotte were paid very well, but at Charlotte levels. They were not paid at astronomical Wall street levels. They were allergic to that. And they cut back on a lot of bonuses. And then of course, they had to, because they had to accept money from the government, $45 billion in TARP funds. So that constrained their payment levels. But one of the biggest elements of the culture clash between bank of America in North Carolina and Merrill lynch on Wall street was whose idea of what a good bonus was. And the folks at Merrill lynch, it was just staggeringly off the charts. The idea that you could think in that environment that you'd be worth a $40 million bonus was just totally off the planet Earth.

Well, and I agree with him. I mean, is that who you're calling the Charlotte Mafia?

Well, yes. And this guy, the head of HR Steal, Alphin, was a real interesting character because he basically made a lot of. He was ken Lewis, the CEO's right hand man. And it was his job to help make these deals work, to get everybody together, decide who's going to run which division, et cetera. But he's one of those guys who, if you were in Wall Street, a lot of the Merrill lynch guys sort of chuckled at him behind his back because they thought he was a Southern hick. I'm not phrasing this properly, but they, you know, not at their level. But he absolutely articulated the right, you know, he was absolutely right about this, that it should be about when the shareholders, you know, when the deal pays off for the shareholders. That's when you get your money. Not the Wall street investment banking model, which is as soon as the deal is signed, you get a check. No, it should be, it should pay off. It should make sense for the long term for the company before anybody gets rewarded. That was the real clash of cultures between the two organizations.

Yeah. Wall street just thinks that you, you get your bonus no matter what, regardless of what.

It doesn't matter if the deal's good. We did the deal. I want my money now.

Unbelievable greed. It's just disgusting. So, okay, so we've talked a lot about Merrill. Maybe just to touch quickly on Countrywide. It's kind of old news by now, but I mean, Anthony Mazzillo and they. Angelo.

Angelo.

Sorry. Angelo Mazzolo. Thank you. And the junk loans they were making, I mean, just unbelievable. Unbelievable. He pays a token fine, which to nobody else, it's not token to anybody else, but to him it's token.

And you know, why a 67 million fine is in fact a token fine to him because most of it is paid for by bank of America because the directors and officers insurance, he was indemnified and as a result the DNO covered it. Fine that would be staggering to you and me and most of your listeners. Doesn't hurt that much because the amount of money he took out and how much of his fine was paid for by other people. So Mozilla, when you talk about there's been a lot of criticism of the Justice Department for not being more aggressive about going after the supposed malefactors on Wall street. One is that it's very difficult to build these cases. And the one case that the Fed did try to bring against a couple of Bear Stearns salesmen a couple years ago blew up when you know, lawyers did a very good job I think confusing the jury and the guys were acquitted. So and they're ultimately, you know, embroiled with the SEC in a civil case. In the case of Angelo Mozillo, he was being investigated by the Justice Department. He eventually he was investigated and settled with the SEC in a civil case. His lawyers I think were very good because, you know, they were he sold a lot of stock through an automated, you know, he had altered it a number of times, but through an automated stock sale plan in the run up to the crash. The fact that no prosecution was brought to him meant a that prosecutors didn't see that there was a strong case against him or were convinced by his lawyers that there wasn't. But for a lot of people who weren't very close to it, it looked like that would have been a guy who somebody was have gone after. Do you know what I mean?

Let me take a brief pause. We'll be back in just a minute.

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So now, now moving forward to BofA, which is the conglomeration of the three companies, B of A is arguably the most hated company in America, maybe outside of AT&T, when your iPhone drops a call. But is that a fair? Is it fair or is B of A just. They kind of made two bad deals, two huge bad deals. Or is it fair to hate B of A?

First of all, I think one really bad deal, Countrywide. The other deal ended up putting them in the newspaper in the wrong way for an entire year and in the wrong time. Merrill lynch deal, but it wasn't that bad. Frankly, what I think has generated the antagonism towards bank of America is neither it's the Countrywide deal and trying to collect, it's not the Merrill lynch deal. Aspects of the Countrywide deal, where the foreclosures and the way they've handled the foreclosures has been terrible. The robo signing scandal, debt collection. Also, since they're such a large retail bank, a lot of people who interact with them feel they're getting gouged or nickeled and dimed or a fee for this or fee for that. That's what generates a lot of antipathy towards them. It's not like, oh, they bought Merrill lynch, therefore I hate them. Just the opposite. I think it's how come every time I go to write a check or every time I do this, they ding me for this fee or ding me for that fee. And I think if what they suffer from is most of the big banks do this, they're the biggest, or at least the biggest retail bank. So they end up with the lion's share of the ill will, if you will. Having said that, they haven't helped themselves. There have been a couple of public relations snafus or misfires, the way they've rolled out some of these fees or managed them. And they are the most frequently targeted by these YouTube videos when someone is either getting foreclosed on their house wrongly or some other improper fines that are being imposed by the bank. There have been Several instances of YouTube videos going viral just castigating bank of America for doing that. All this has contributed to the sort of sense that bank of America is really hated. I mean, Goldman Sachs has very few friends as well, but it's not as widely disliked because it's not as largely an institutional player. Exactly. You and I, for the most part. Most. Most Americans don't interact with Goldman Sachs at our local bank. All of us do. Practically with bank of America, you know, it's on every street corner in the country. So that has contributed to the level of dissatisfaction and low opinion of the bank.

I think also with BofA is that you have this like massive level of incompetency and bad customer service. Now granted, they took over Countrywide, you know, a huge, huge loan portfolio. But, but these banks, and it's not just BofA, but of course, like you say, they're the biggest, so they suffer the most ill will. They take the bailout money. They say, okay, look, we're going to use this. We're going to loan to small business, we're going to help distressed homeowners, we're going to do loan modifications. You know, we're going to do short sales and just try getting a loan mod from B of A. I mean, just try it. I own a real estate investment company and I hear the stories constantly and it seems like what they really did it almost. I hate to fall to like a conspiracy theory here, but it seems like they basically said, look, you know, we'll set up these departments to do this. They got the call centers in India. Now granted, they've moved a lot of that or maybe all of it back to the U.S. now, thank God, but you can't get anywhere. I mean, it's just unbelievable the dozens and dozens of hours people have wasted talking to Indian call centers and B of A that are just these do nothing outfits that are like window dressing to get government assistance, if you ask me. I mean, that's kind of on a different side of it than you may be familiar with, but I sure am because I hear it from our clients.

Yes, in your business, if you're absolutely. You have a lot more stories. I don't, but I've heard and read anecdotally about a lot of those issues that do tend to be more with V of A than their competitor banks. I can't give you any good specific insight on that. I can't say that with their 300,000 employees, it's a real, you know, turning like talk about turning an ocean liner around in the middle trying to get everybody. You know, they clearly have had real challenges in folding because bank of America used to be known for very good service. I just think in some ways it's gotten so big that that's a real monster of a job. And obviously they're not doing it very well of getting everybody to row in the same direction or you know, issuing an order, an edict from Charlotte, but it not getting carried out or carried out poorly. And that's trying to be charitable to them, assuming that they are trying to carry it out properly. So like I say, I don't have any good insight at the retail level as to why that is. But I've heard the same stories you have.

Just before you go, a couple chapter titles in your book, Crash of the Titans, that I just find interesting. And I wanted to ask you about Project Panther. What is Project Panther?

Oh, that's actually a relatively small episode in the grand scheme of things. But as I mentioned at the beginning of this conversation, in September of 2008, having just bought Countrywide, Ken Lewis of Bank of America decided to buy Merrill lynch for $50 billion. And thinking that, you know, the economy the worst is over, things will get better soon. A few weeks later, in early October, the earnings for third quarter come in. Now they're much worse than he thought. So he realized it's time to raise some capital. So he tasked, he delegated. He got one of his guys at his own smaller investment bank in New York to put together a fundraising project to go raise some money for bank of America. And this guy, because everybody in Charlotte, North Carolina loved their football team, the Panthers, who were playing that Sunday, you know, came up with basically Project Panther was the plan to raise capital. I focus on it in the book because the folks at Merrill lynch who supposedly had real expertise in raising capital, John Thain and company got involved in this and didn't really contribute much. It was an early sign that this marriage was not going to necessarily work out that well. Where the help from John Bain and some of the folks at Merrill lynch didn't really improve the capital raising initiative that bank of America is buying an investment bank so they can, among other things, help raise capital for the company. And.

The first effort of this, I wouldn't say is a dismal failure, but doesn't come off extremely well.

Sure, sure. Who's the Boston Mafia?

The Boston Mafia, they are, I guess, the people in charge now. Brian Moynihan and a bunch of other executives and board members who came to bank of America came to Charlotte as part of the acquisition of fleet Financial in 2004. So this is actually interesting. The real DNA of the Charlotte bank and before his, bank of America was Nations bank. And they acquired San Francisco based Bank of America and took the better known name. But it was a Charlotte bank and they kept tight control through local board members and executives who'd come up through the organization. And it was an excellent organization.

One of the reasons they got so big was by acquiring other banks. And Ken Lewis acquired the largest bank in New England, fleet Financial in 2004, brought a number of executives in. Most of the top ones won washed out. But a Few survived, including Brian Moynihan and a team around him. And, you know, the whole. The subplot. Basically, the theme of that chapter, the final chapter, is how when Ken Lewis was essentially pushed out or hounded out of his job for all the money that he needed to close Merrill lynch and all the governmental inquiries into this, he became the target of so much media attention that was not healthy for the bank. There was a real scrum to see who could replace him. It's one of the plum jobs, or at least it seemed in banking in the US and one was a middle aged fellow who was his deal guy, and the other one was Brian Moynihan of Fleet Financial. And Moynihan and his team, I think, did a very good job maneuvering, putting him in position for that job. And he was eventually selected to replace King Lewis. So for the first time in the history of the Charlotte bank, you had what you referred to as an outsider running the bank. An outsider only insofar as he'd been with the bank for five years, as opposed to 15 or 20 years. He was not a career guy with the Charlotte bank. So that's a shorthand version of what the Boston Mafia stands for. And they still have a couple of board seats, are still there. You have much less of a presence of the. A lot of the board members who came from the southeastern US who were brought in for geographical ties to that region were pushed out in 2009 and replaced with other folks with banking expertise. But a core of the Boston directors, if you will, are still in place.

Yeah. And you know, in AP news release March 28, so, so recent, I got to just share it. Bank of America gave its CEO a pay package worth $7.5 million last year, which is six times larger than 2010. And the raise came while the company's stock lost more than half its value and the bank lost its claim to the biggest in the country. It's no longer the biggest in the country, at least as a retail bank. I guess maybe Citi now has that spot. I'm not sure. But yeah, it's really amazing. I mean, what does the future look like for BofA with these two companies that it absorbed and all of its challenges?

I think the future of bank of America is closely, very closely correlated to the future of the US Economy. The bank, the acquisition of Merrill lynch and the acquisition of Countrywide is a double down bet on the US Economy. So as the US Economy goes, I think bank of America will go. And so now we get into what's your view of our 2.5% GDP growth per year? Will this continue? Will it grow more if it does? Because bank of America will grow with it. They're very heavily exposed here. I think the bank has suffered because the US Economy has in the last couple of years as well. So there are a lot of things Brian Moynihan, the CEO, can and can't do, can do to help the bank, and he sold off assets, et cetera, which contributed to making it smaller. There's a lot of things he can't do that are just beyond his power. The economy is what it is, is, if you will.

There are much bigger forces, no question about it.

Yeah, exactly. And these, you know, some of them you can get out in front of. Others you just have to take your medicine. And they've been, you know, you know, ingesting medicine from Countrywide now for three, four years, and it's been painful. I think they future them when they get Countrywide behind them and when, you know, if and when they get the.

Workouts, you know, them better to work.

Out down and real estate starts coming back a bit in a meaningful way, then it'll relieve a lot of the pressure.

Sure. No question. I've got to ask you just in closing, Greg, what is your opinion of the future of the stock market and the broader economy in general? When you mention 2.4% growth, that's anemic, obviously. Unemployment is much higher than the government tells us it is. We've got massive debt. Obama is the drunken sailor of spenders of all time. And I mean, inflation.

Its predecessor was good at spending as well.

Well, I agree.

I agree, but Obama's worse. That's all I want. Yeah, but it seems like we've got inflation coming our way in pretty significant doses. What's your outlook on things?

Boy, this is, this is just a quick question.

Yeah, just a quick question.

I think I'm, you know, because I read about companies. I study what happens at companies. I'm not a good macroeconomist, but writing about all these folks on Wall street who are convinced that the early months of 2008 at the dawn of the financial crisis was actually, we were in the seventh inning or the eighth inning and things would get better soon. And these guys are at the top of this game and should know better, they were way wrong. So, you know, this is obviously, and you know this, you're in the real estate business we've all grown up with, up until three years ago, this premise that, yes, there are dips, but things always bounce back. And it's the people who invest during the dips who end up doing best. And what's been really shaking in terms of confidence in the last three years has been, I think this sort of faith that, yeah, it's going to bounce back is no longer there. It's no longer a given. It's eighth inning. Are we still in the second inning? We're in the fifth inning of the rebound of the recovery. We really are in terra incognita in terms of our lifetimes. You have to go back almost a century to a point in time where things drifted in such a strange way. And yes, unemployment, the number keeps looking better each month, but yes, it's got to be far worse than the actual number being put out by the government so much that it doesn't get measured. People just give up looking for it. So I guess the problems in Europe are, you know, no one should take any joy in looking at what's happening in Europe, except it makes this economy seem healthier, you know, seeing how bad the problems could be. I guess I'll leave it at that.

Yeah, yeah. And the fact that we've got the biggest military, the biggest economy and the reserve currency, at least for now.

Yes, the reserve currency, exactly. You can't, you can't overestimate how much we benefit just by that fact. And God help us, if that ever ceases being the case, then we'll lose that vote of confidence.

That's for sure. That's for sure. Greg Farrell, the book is Crash of the Titans, Greed, Hubris and the Fall of Merrill lynch and the Near Collapse of Bank of America. Of course. It's available on Amazon.com with excellent reviews. You have an individual website though, for the book as well?

Yes. And because it's such a popular title, it's crashofthetitansbook.com so crashofthetitansbook.com is the website and yeah, really, I appreciate this. The fact that bank of America continues to be in the news I think has kept my book sort of in the public eye a little longer than I thought. So that's good.

Absolutely. Well, hey, congratulations on a great work and thank you again for joining us today.

Appreciate it, Jason. Thanks so much for having me. I appreciate it.

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