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NEW YORK (
Bank of America(BAC - Get Report)'s plan to lay off some of its highest-paid executives looks like the right response to the current banking environment.
The Wall Street Journalreported Tuesday the bank will cut 2,000 positions in its investment banking, commercial banking and non-U.S. wealth-management units targeting "the high-earning employees whose efforts helped Merrill Lynch account for the bulk of Bank of America's profit since the financial crisis."
Bank of America CEO Brian Moynihan seems to realize that shrinking revenue means shrinking retinue.
Presumably the newspaper was referring to revenue rather than profit, since the bank lost money in 2009 and 2010 and made just a penny per share in 2011. That isn't the fault of the high-paid Merrill Lynch executives however, since the overwhelming majority of the losses are the legacy of shoddy mortgage loans made by Countrywide Financial, which Bank of America bought in 2008.
Still, as the bank's management looks ahead revenue opportunities appear to be shrinking. Bank of America's revenues fell to $94.4 billion in 2011 from $111 billion in 2010. Those numbers are likely to shrink further as the loss of businesses the bank sold in late 2011 is felt more fully.
Meanwhile, the bank's personnel-related costs rose in 2011 to nearly $37 billion from $35.1 billion in 2010. In investment banking, it used to be that keeping compensation to under 50% of revenue was considered satisfactory, but those numbers are expected to fall--not just at Bank of America but across Wall Street. In 2011, for example, compensation at
Goldman Sachs(GS)equaled 42.4% of revenues, though that was actually a higher ratio than Goldman saw in 2010 and 2009.
Still, judging from
Citigroup(C) shareholders' symbolic but historic
rejection of compensation to top executives in 2011, investors are less patient than ever with big Wall Street pay packages. Assuming the cuts are successful in bringing down compensation costs, Bank of America appears to be moving in the right direction to lift the share price.
Written by Dan Freed in New York.
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