Breaking the Bank
The early years of the Bank of America are fascinating: Founded by A.P. Giannini, an immigrant’s son, the bank survived the 1906 San Francisco earthquake and the Great Depression to become the biggest commercial bank in the United States. Giannini championed the common man, democratizing American banking. His innovations included the statewide branch system and diversification into insurance, investments, and mortgages. Growth was so explosive that most new regulation in the 1930’s and 1950’s was designed to control the Bank of America.
All of this is background to the real point of the book, the bank’s decline in the 1980’s, attributable largely to the course set by Tom Clausen during the 1970’s. The bank had already departed from its populist origins by its ever-increasing concentration on corporate lending and rapid expansion outside the United States. Clausen quadrupled the company’s size and profits, but he emphasized short-term profits at the expense of necessary investments in staff and equipment.
When Samuel Armacost took over in 1981, few realized the precariousness of the bank’s position. At a time of soaring interest rates, fixed-rate loans were still being written at low rates; lending procedures had become lax, resulting in a high number of bad loans; there was danger of a massive Third World default; automated tellers and computerized information systems were urgently needed; and overhead was careening out of control.
More than half the book chronicles Armacost’s tenure in detail. Diversification schemes were tried while basic problems were dealt with too slowly and cautiously. As the bank’s deterioration became public knowledge, takeover attempts were made. Yet despite worsening performance and evidence of dissent among the management team, BankAmerica’s board failed to act. When it finally moved in 1986, it was to replace Armacost with Clausen, the man whose mismanagement had laid the foundations of the bank’s decline.
Hector’s prognosis has BankAmerica acquired by another company in 1991 at worst; at best, it could survive as an independent company, although a small player by world standards. Only the epilogue is sharply critical--otherwise Hector largely allows the people and events to tell the story. The result is a compelling account of an industry in flux, with major corporate officers incapable of keeping pace.