WASHINGTON Bank of America's new chief executive, Brian Moynihan, told the panel investigating the financial crisis Wednesday that his institution failed to protect itself by considering worst-case scenarios. Moynihan also defended his firm's compensation policies, expected to lead to healthy year-end bonuses for many executives despite the economic downturn.
"The mistakes we made and the most losses we've taken have actually been in credit cards and mortgages," he said. B ofA "didn't do the kind of testing you actually do in a trading book, saying 'What if housing goes down 40 percent?'" Moynihan said.
Moynihan kept a low profile during the first hearing of the Financial Crisis Inquiry Commission. He politely answered questions and noted that he was not in his post when the crisis hit, leading to a $45 billion taxpayer bailout of his bank.
Commission member Keith Hennessy asked whether the bankers were discussing with each other the possibility that, "if things get really bad, we can always count on the government to step in."
"I wasn't party to those discussions," Moynihan said. "But... on the darkest days, all of us had to go to bed thinking if this thing doesn't stop, what could happen?"
Moynihan, who previously led Bank of America's consumer business, said in his prepared testimony that the job gave him "a firsthand knowledge and a recognition of the hardships that many hard-working families and small businesses experience across America."
He said that the crisis has taught his bank "some very valuable lessons":
That credit "starts and ends" with sound prudent lending practices, and that rating agencies are no substitute for clear assessments of a borrower's ability to repay the loan.
Banks took way too much risk, and banks must hold more capital to cover potential losses.
Liquidity, the ability to convert assets to cash, is crucial so that banks aren't forced to sell assets at discounts to gin up capital to cover margin calls and or pay off deposits.
It's time to review accounting rules that prompt banks to reduce reserves against loan losses in good times and increase them in bad times.
As for the bank's compensation policies, he said, Bank of America officials "understand the anger felt by many citizens because institutions that received federal investments 15 months ago are now recovering and the pay of their employees reflect this recovery, especially in investment banking and trading areas."
However, he said, the bank has repaid its federal bailout money and "the vast majority of our employees played no role in the economic crisis or losses."
Although some employees were laid off, he said, the remaining 300,000 employees "are a valuable part of our future, and we need to pay them competitively to ensure that we can keep them so they can help our clients."
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