Subprime Crisis Work Plan and Report

¶ … real or hypothetical situation? The context of the report is based on the real world implications of the financial crisis on the banking industry and society as a whole. The report details the need for reform within the sector overall. Particular emphasis is placed on Bank of America, as it was a large component of the subprime-lending crisis. Why did you choose this topic, and does it relate to you in any way? I chose this topic because it has impacted both society and the world at large.

Nearly $1 trillion in asset values were erased in 1 year due to the financial crisis. People were foreclosed on and subsequently lost their homes. Taxpayers were forced to pay large sums of money to bailout a corrupt and greedy system. This topic not only resonates with me personally, but with the entire developed world. We nearly were on the brink of financial Armageddon.

The sheer gravity of this event and the consequences of not acting properly, I find very interesting What is going to be a major challenge for you in this report, and are you considering another topic as insurance (in case you're not able to find enough information)? The challenge will be to write about this topic in a succinct and coherent manner given the page constraints of the assignment. There is a litany of information regarding both Bank of America and the financial crisis.

The problem will be to synthesize this information in a manner that is compelling for the reader. Particularly with the financial crisis, there were many moving parts. I will need to account for all these moving parts in a manner that is comprehensive and exhaustive. I will not consider another topic as this topic has plenty of information. Bank of America Work Plan Statement of Opportunity The financial crisis of 2008 has created a litany of economic problems throughout the world.

Nearly 8 years after the initial crisis many firms and economies continue to struggle economically. Bank of America in particular engaged in many nefarious procedures during the crisis. Robo-lending, misplaced incentives and outright fraud contributed to the near demise of the firm. As a result, Bank of America should use past experiences to downsize and eliminate risky operations at the firm. By shrinking the balance sheet of the bank, both society and Bank of America shareholders benefit.

Purpose and Scope The purpose of the upcoming report is to outline the reasons why a corporate downsizing and restructuring is recommended. Analysis of both the pros and cons of this initiative will be analyzed and discussed. Recommendation will be supported by thorough analysis and due diligence. The following report will first document the need for banks with a market economy. Particular emphasis will be placed on their unique role of capital allocation within society. A discussion on the risks embedded within the banking industry will follow.

In this section I will discuss why the elimination of non-core assets will actually help Bank of American become a more viable franchise. The firm must take two steps back to move three steps forward. Sources and Methods of Data Collection My data will come primarily from financial publications and resources. I will rely heavily on corporate filings with the Securities and Exchange Commission (10-K, 10-Q, etc.). I will also use reputable publications such as the Wall Street Journal, Barron's and others.

Background Prior to the financial crisis, Bank of America was considered one of the most profitable companies in America. It had an unrivaled deposit growth franchise, strong free cash flow, and did business with 1 out of 2 Americans. However, aggressive tactics and acquisitions soon led to the cataclysmic share price depreciation. The aggressive acquisition of Countrywide, one of the perpetrators of the financial crisis, left the bank reeling for capital infusion and government assistance. Ill-advised purchases that and hubris led a CEO to disregard shareholder and society demands.

Instead, the CEO was primarily interested in expanding his own domain. As a result, these businesses that once promised profits should instead be discarded from the core franchise of Bank of America. Only then can the bank focus on what is really important .. taking deposits and lending money. Audience My report will be prepared for the Board of Directors of Bank of America. This document will also be prepared for Bank of America shareholders who can vote or initiate corporate operations. Preliminary Outline I. Executive Summary a.

Summary of Report b. Preface of conclusion and recommendations II. Introduction a. The importance of a strong financial system b. The function of capitalism c. Background of Bank of America d. Sources and methods of research e. Scope f. Limitations III. Body (Questions to be covered) a. Why will downsizing and eliminated riskier banking operations benefit Bank of America, society, and shareholders? b. What are the advantages of downsizing and eliminating operations? c. What are the disadvantages of downsizing and eliminating operations? d. Can risk be completely eliminated? e.

Why did the bank have these operations to begin with? i. Short-Term emphasis ii. Greed f. Is Too Big to Fail eliminated or has it gotten worse? g. What is being done to prevent a massive downsizing from occurring again? IV. Conclusion V. Recommendations VI.

References Proposed Schedule of Tasks Data collection and research 6/18- 6/27/15 Work plan due 6/30/15 Rough Draft completed 7/2/15 Interview with Bank of America employees, investors and customers 7/7/15 Conference with class instructor 7/9/15 Writing Center appointment 7/9/15 Final Draft due 7/15/15 Analytical Report Date: October 27, 2015 Prepared For: Bank of America CEO, Board of Directors and Shareholders Report by: Naruto Uzimaki, Independent Consultant Subject: The value added to shareholders and the society by eliminating non-core operations, focusing on core clients, and reducing risk within the business Executive Summary The financial crisis of 2008 was proof of the fallibility of financial models and predictions.

The future, by definition, is unknowable. Financial models or prudent foresight is not enough to predict future events. Not one individual was able for forecast the September 11th terrorist attacks, Pearl Harbor, or even the spread of Ebola. These events are uncertain, but each had implications for the bank, its shareholders and society. Although these events cannot be predicted they should, at the very least, be accounted for. Individuals can do little more than be prepared for the inevitable rare event, whenever it should strike.

This proposal is grounded in the framework that the future economic climate of America and the world at large is unknown. Technology changes, personal consumption habits change, and societies priorities change. One thing that cannot change however is the need to provide capital to market participants. This is the ultimate function of the banking system throughout the developed world. Bank of America is critical to the proper functioning of the America economy.

Therefore, I propose the Bank of America rid itself of many of the risk assets and operations it owns that nearly toppled the America economy. With over $1 trillion in deposits, 5000 locations, and over 200,000 employees, society depends on Bank of America's survival. Participating in risky behavior that does not benefit the banks constituents is a recipe for financial disaster. To better accommodate the needs of society, while reducing risk and enhancing shareholder returns I propose the following.

Bank of America should spin off non-core assets when adequate value can be obtained for them. I define "non-core" assets as operations that are not essential to the bank's core customers or mandate. Operations that include derivative financing for example are not critical to the banks mandate of taking deposits and lending money to individuals. Aspects of the banks trading operations should also be eliminated as they are predicted on greed as oppose to actually helping society.

Further, lending and underwriting standards should be enhanced to better protect the bank from the inevitable downtown that will occur. Through stronger underwriting standards, losses in economic downturns will be less severe than in previous business cycles. The primary reason that Bank of America is in the position it is in now, is due to faulty underwriting standards. The bank lent money to individuals without the appropriate documentation or collateral. The bank also participated heavily in the sub-prime market, lending money to individuals with questionable credit history.

In fact, the bank lent money to individuals with credit scores below 500. It is no secret that the company subsequently, experience heavy financial losses during the crisis and needed government assistance. Finally, I propose that the company have strong liquidity and loan loss reserves in the event that mass defaults do occur. Due to faulty underwriting and lackluster underwriting standards, the bank has paid over $100 Billion in fines to a litany of individuals, governments, and municipalities.

Although these higher loan standards will make the bank less profitable, it will save much more money and reduces reputational risk for the firm. Introduction Statement of Opportunity The financial crisis of 2008 has created a litany of economic problems throughout the world. Nearly 8 years after the initial crisis many firms and economies continue to struggle economically. Bank of America in particular engaged in many nefarious procedures during the crisis. Robo-lending, misplaced incentives and outright fraud contributed to the near demise of the firm.

As a result, Bank of America should use past experiences to downsize and eliminate risky operations at the firm. By shrinking the balance sheet of the bank, both society and Bank of America shareholders benefit (Pitt, 2005). Purpose and Scope The purpose of the upcoming report is to outline the reasons why a corporate downsizing and restructuring is recommended. Analysis of both the pros and cons of this initiative will be analyzed and discussed. Recommendation will be supported by thorough analysis and due diligence.

The following report will first document the need for banks with a market economy. Particular emphasis will be placed on their unique role of capital allocation within society. A discussion on the risks embedded within the banking industry will follow. In this section I will discuss why the elimination of non-core assets will actually help Bank of American become a more viable franchise. The firm must take two steps back to move three steps forward.

Sources and Methods of Data Collection My data will come primarily from financial publications and resources. I will rely heavily on corporate filings with the Securities and Exchange Commission (10-K, 10-Q, etc.). I will also use reputable publications such as the Wall Street Journal, Barron's and others. Report Organization The report will first state the need for eliminated non-core business operations. The report will be sure to emphasize both the pros and the cons to my call to action.

The report will then analyze the qualitative factors that contribute to severe bank losses and how to mitigate there occurrence. Advantages to eliminated risky banking operations and shrinking the company As noted in the introduction Bank of America plays a vital role with the American economy. Bank of American is literally, "America's Bank." It should therefore conduct its operations with a mindful eye to customers first. If the bank can deliver what customers want, then profits will assuredly follow.

As recent history has shown us, when a bank deviates from its core customers, the initial increase in profits gives way to a very server decline in profitability. Why earn profits in good years only to give much more than that back in fines, ill-will and negative publicity? This proposal will attempt to provide compelling evidence as to why the bank should shrink. Chart 1 below, provided by SNL Financial, indicates litigation expenses for Bank of America and its respective peers.

Notice that Bank of America, by far, had the largest settlements of any of its large bank peers. This litigation costs not only hurt profitability, but these costs also damage the overall reputation and standing of the bank. With my proposal to eliminate many of the more risky areas of the bank including derivative trading, and proprietary trading, the bank will be able to better eliminate these costs in future years (Peter, 2007). Chart 1 The reasons for these large costs lie primarily in the risky operations of the bank.

One such area that should be eliminated is that of sub-prime lending. Sub-prime lending is that activity to lending to individuals with very low credit scores or credit ratings (Edward, 2004). Banks lend to these individuals because they are able to charge a much higher interest rate than they could otherwise receive with other, much more viable customers. Sub-prime lending is very profitable, until the individual defaults on the loan. Bank of America, through Countrywide Financial, was one of the largest sub-prime lenders in the nation.

As a result, for a short period, the Bank seemed profitable. However, after a massive wave of defaults, the company was stuck with losses. Not only were customers not paying their loans, the collateral held by the bank (Mortgages, homes, real estate) was falling in value as well (Eichengreen2005). The two forces of massive defaults and falling housing prices nearly sent the bank into bankruptcy. Chart 2 below, provided by the Center for Public Integrity Research, indicates the top 25 subprime lenders.

Notice anyone familiar in the number 1 spot? It should be noted that many of these companies are no longer around or operating in the same manner they were in 2008. Chart 2 Chart 3 below indicates the efficiency ratio of Bank of America and its respective peer group. The efficiency ratio measure how well the bank is controlling expenses within the firm. The lower the ratio the better the firm is at controlling expenses. A ratio of .7 would imply that a dollar of revenue is generated with 70 cents of expenses.

A ratio of .6 relative to a ratio of .7 implies that the latter company is less efficient. Notice, in chart 3 that Bank of America has the largest expense ratio. This is driven primarily through litigation expense that was high due to faulty underwriting standards. Chart 3 Notice the many of the most efficient banks are the ones that did not have as much exposure to sub-prime lending as did Bank of America. In fact, U.S. Bank, and Fifth Third Bancorp don't even appear on the list of the top 25 sub-prime lenders.

However, both banks are some of the most profitable banks in America. They are profitable because the focus on core operations and core customers. They do not attempt to manufacture fake profits through greedy behavior. By now, the argument for getting rid of risky lending standards and operations should be very clear. The bank was very profitable up to the years leading to the financial crisis. Subsequently, much to the dismay of investors and tax payers, the bank gave all those profits back after 2008.

The bank has paid over $100 Billion in fines as of this.