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How the Crisis Fooled BofA CFO Joe Price

In what approaches a mea culpa, he tells the CFO Rising conference that the normal benchmarks failed him in predicting the scope of the financial meltdown.
David M. Katz, CFO.com | US
March 10, 2009

Joe Price's biggest surprise has been seeing the financial crisis "blow through" the predictions of severity suggested by bankers' historical guideposts.

But Bank of America CFO Price — in what seemed a rare mea culpa from a top bank finance executive — acknowledged this morning that he and most other financial services industry officials had failed to foresee the economic meltdown because they relied on backward-looking models.

Responding to a question after a speech at the CFO Rising conference in Orlando, Price, who has been the finance chief of the bank since January 2007, said: "I think we all, including myself, during a lot of this expansion period [used] historical norms, including the worst stress periods that we had seen in the last couple of decades during our lifetimes, as a benchmark to what could happen."

The failure of the applicability of those norms as guideposts came as a shock.  Seeing events "by multitudes blow through those stress events" has been his biggest surprise of the crisis, Price said.

In a sense, Price's acknowledgment echoed the shocking congressional testimony of former Fed chief Alan Greenspan last fall, when Greenspan admitted that the crisis had "turned out to be much broader than anything I could have imagined."

But the Bank of America finance executive also credited government actions during the crisis for keeping things from getting worse than they have. Specifically, he praised the Federal Deposit Insurance Corp.'s guarantee of the liabilities of some senior unsecured debt; the extension of insurance to cover all non-interest-bearing deposits; the establishment of facilities to back commercial paper and money-market funds; and the recently announced Term Asset-Backed Loan Facilities. Aimed at restarting the securitization markets, the TALF program will "further support the extension of credit to corporations and small businesses," he added.

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While it's easy to criticize actions like the government's purchase of preferred stock in struggling banks, the government's liquidity programs "have done a lot to stabilize credit availability," Price told the assembled finance chiefs.

The criticisms of the purchase of preferred stock have been more the stuff of politics than the stuff of rigorous financial analysis, the B of A CFO observed. But because it has provided an "incremental" injection of capital, banks are "better off."

Speaking personally, Price said that he sees government involvement in B of A as "more of a distraction" than a real impediment to running the bank's core businesses.

Indeed, he said in his prepared remarks, the bank is returning to its core business as an "enabler" of commerce. "The days of exotic instruments and low-cost credit are gone."

Price said that, acting as an underwriter of deals, he has often questioned CFOs and treasurers involved in deals involving large amounts of financial engineering aimed at boosting net income rather than at the efficient financing of operations.  "We, the treasury groups, are not profit centers," he said.

What red flags could alert finance executives that their departments are going too far in that direction?  One clear one is if a transaction "has more tax attributes than business-enabling attributes," he said. Another: cases in which a company finances a core asset or property investment "with a view toward appreciation as opposed to contribution to your business as ongoing."

One audience member, pointing to the cultural differences B of A has with its new Merrill Lynch unit, asked what difficulties had been encountered merging the classic giant bank with a one-of-a-kind investment house. Price expressed some touchiness about the question. "This is a day for CFOs, who are usually grilled by analysts, to act like analysts," he noted. He then went on to say that the merger was proceeding fairly normally.




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