Bank of America

See also Banc of America Securities, Banc of America Investment Services, Inc.

Bank of America (BofA) , based in Charlotte, North Carolina, is the largest commercial bank in the United States measured in assets, and the third-largest company in the world by the 2006 Forbes Global 2000. The Bank traces its roots back to the Bank of Massachusetts, founded in 1784, making it the second-oldest bank in the United States.

Corporate History

NationsBank

See NationsBank for a history of that entity before the merger in 1998 with BankAmerica Corporation.

BankAmerica and the BankAmericard

Amadeo Giannini was the founder of the modern day Bank of America NT&SA. After the 1906 San Francisco earthquake his Bank of Italy became a leader of the San Francisco banking community by providing loans to those struck by the disaster.

In the late 1920's, Giannini approached Orra E. Monnette, President and founder of the Los Angeles based Bank of America, Los Angeles about a potential merger between the two entities. The Los Angeles based bank exhibited strong growth throughout the 1920s, due in part to its success in developing an advanced bank branching system. The merger of the two institutions was completed in early 1929 and took the name Bank of America. The combined company was headed by Giannini with Monnette serving as co-Chair.³

While the names of many nationally chartered banks end with the initials 'N.A.' (National Association), Giannini picked a unique ending, National Trust and Savings Association, or 'NT&SA', because he wanted the name to highlight the different functions of the bank. BofA was the only NT&SA in the country. The bank was soon the largest in California.

Giannini also sought to build a national bank, expanding into most of the western states as well as into the insurance industry, under the aegis of his holding company, Transamerica Corporation. Bank of America NT&SA also had banking relationships in international financial markets. With the passage of the Bank Holding Company Act of 1956, banks were prohibited from owning non-banking subsidiaries such as insurance companies, and Bank of America and Transamerica were separated, with the latter company continuing in the insurance business. However, federal banking regulators prohibited Bank of America's interstate banking activity, and Bank of America's domestic banks outside of California were forced into a separate company that eventually became First Interstate Bancorp, which was acquired by Wells Fargo Corp. in 1996. It was not until the 1980s with a change in federal banking legislation and regulation that BankAmerica was again able to expand its domestic consumer banking activity outside of California. California was the nation's fastest growing state during the post-World War II boom, with the highest use of checking accounts (partially driven by many soldiers being paid via bank accounts during WWII), resulting in BankAmerica being swamped by checks. By 1949, the branches had to close at 2:00pm in order to process the bookkeeping by 5:00 p.m. To cope with the transaction volume, the bank invested heavily in information technology and is generally credited, together with GE and SRI, with inventing modern centralized bank operations, along with a number of financial transaction processing technologies such as automatic check processing, account numbers, and Magnetic Ink Character Recognition (MICR). Based upon these technologies, credit cards were able to be linked directly to individual bank accounts. Because of the efficiency of these technologies, the bank had significantly lower administrative costs than other banks and was able to expand until it became the world's largest bank in the early 1970s.

In 1959, it invented the bank credit card, the BankAmericard, which changed its name to VISA in 1977. A consortium of other California banks came up with Master Charge (now MasterCard) in order to compete with BankAmericard.

Expansion outside of California

Following passage of the Bank Holding Company Act of 1967, BankAmerica Corporation was established for the purpose of owning BankAmerica and its subsidiaries.

BankAmerica expanded outside California in 1983 with its acquisition of Seafirst Corporation of Seattle, Washington, and its wholly owned banking subsidiary, Seattle-First National Bank. Seafirst was at risk of seizure by the federal government after becoming insolvent due to a series of bad loans to the oil industry. BankAmerica continued to operate its new subsidiary as Seafirst rather than Bank of America until its 1998 merger with NationsBank.

BankAmerica was dealt huge losses in 1986 and 1987 due to the placement of a series of bad loans in the Third World, particularly in Latin America. The company fired its CEO, Sam Armacost, although Armacost blamed the problems on his predecessor, A.W. (Tom) Clausen, who was then appointed to replace Armacost. The losses resulted in a huge decline of BankAmerica stock, making it vulnerable to a hostile takeover.

First Interstate Bancorp of Los Angeles (which had originated from banks once owned by BofA), launched such a bid in the fall of 1986, although BankAmerica rebuffed it, mostly by selling its FinanceAmerica subsidiary to Chrysler and by selling the brokerage firm Charles Schwab and Co. back to Mr. Schwab. On the day of the 1987 stock market crash, BankAmerica was trading at $8 per share, although by 1992 it had rebounded mightily to become one of the biggest gainers of that half-decade. The selling of the corporate headquarters building in downtown San Francisco to raise capital was a symbolic blow to the bank.

BankAmerica's next big acquisition came in 1992. BankAmerica acquired its California rival, Security Pacific Corporation and its subsidiary Security Pacific National Bank in California and other banks in Arizona, Idaho, Oregon and Washington (which Security Pacific had acquired in a series of acquisitions in the late 1980s). This was, at the time, the biggest bank acquisition in history. Federal regulators nevertheless forced the sale of Security Pacific's Washington subsidiary, Rainier Bank, because the combination of Seafirst and Rainier would have given BankAmerica too large a share of the market in that state. Later that year, BankAmerica expanded into Nevada by acquiring Valley Bank of Nevada.

In 1994, BankAmerica acquired the Continental Illinois National Bank and Trust Co. of Chicago, which had become federally-owned as part of the same oil industry debacle that had brought down Seafirst. At the time, no bank had the resources to bail out Continental; the federal government forced to operate the bank for nearly a decade. Illinois at that time outlawed branch banking, so Bank of America Illinois was a single-unit bank until the 21st century. Bank of America moved its national lending department to Chicago in an effort to establish a financial beachhead in the region.

These mergers helped BankAmerica Corporation once again become the largest U.S. bank holding company in terms of deposits, but the company fell to second place in 1997 behind fast-growing NationsBank Corporation and to third in 1998, also behind North Carolina's First Union Corp. In 1998, Bank Of America and NationsBank executed a merger-of-equal and changed the headquarter to Charlotte, North Carolina.

Merger of NationsBank and BankAmerica

The purchase of BankAmerica Corp. by NationsBank Corporation was the largest bank acquisition in history at that time. While the deal was technically a purchase of BankAmerica Corporation by NationsBank, with the renaming of the former entity to Bank of America Corporation, the deal was structured as a merger, and Bank of America NT&SA, changing its name to Bank of America, N.A. was the remaining legal bank entity. The bank still operates under Federal Charter 13044 which was granted to Giannini's Bank of Italy on March 1, 1927. Despite the mammoth size of the two companies, federal regulators insisted only upon the divestiture of 13 branches in New Mexico, in towns that would be left with only a single bank following the combination. This is because branch divestitures are only required if the combined company will have a larger than 25 percent FDIC deposit market share in a particular state or 10 percent deposit market share overall. Following the $64.8 billion acquisition of BankAmerica by NationsBank, the resulting Bank of America had combined assets of $570 billion, and 4,800 branches in 22 states.

In 2001, Bank of America CEO and chairman Hugh McColl stepped down and named Ken Lewis as his successor. Lewis's greater focus on financial discipline and efficiency contrasted greatly with the expansionary mergers and acquisition strategy of his predecessor.

In 2004, Bank of America purchased Louisville, Kentucky-based National Processing Company for $1.4 billion from National City Corp. The renamed company- BA Merchant Services- processes one in every six VISA and MasterCard transactions. The company also provides financial solutions for travel and healthcare companies. BA Merchant Services is headquartered in Louisville.

In 2004, Bank of America acquired Boston, Massachusetts-based FleetBoston Financial for $47 billion to solidify Bank of America's position as the bank with the largest FDIC-rated deposit market share in the United States with $513 billion in deposits, well ahead of the number two bank holding company, newly-merged JPMorgan Chase-Bank One with $353 billion in deposits and number three Wells Fargo & Co. with $228 billion (As of June 30, 2003).

Bank of America Today

On June 30, 2005 the bank announced it would purchase credit card giant MBNA for $35 billion in cash and stock. The Federal Reserve Board gave final approval to the merger between Bank of America and MBNA on December 15, 2005. The merger closed on 1 January 2006, and the completion of the deal solidifies the Bank's position as the largest issuer of credit cards in the U.S., surpassing rival J.P. Morgan Chase. The assimilated former MBNA entity will be called Bank of America Card Services, and will also incorporate Bank of America's existing credit card operations. The combined Bank of America Card Services organization will have more than 40 million active U.S. accounts and nearly $140 billion in managed outstanding balances. Bank of America is already the world's leader in active debit cards.

Bank of America is currently constructing a massive new headquarters for its New York City operations. The skyscaper will be located on 42nd Street and Avenue of the Americas, at Bryant Park, and will feature state-of-the-art "green" - environmentally friendly - technology throughout its 1.2 million square feet (200,000 m²) of office space. After its completion, the building will be the headquarter for the company's investment banking division, and will also host most of Bank of America's New York based staff.

Divisions

Bank of America today is comprised of three main divisions. Global Consumer and Small Business Banking is the largest division in the company, and deals primarily with consumer banking and credit card issuance. The recent acquisition of FleetBoston and MBNA significantly expanded its size and range of services. It brought in about 51% of the company's total revenue in 2005. It competes directly with the retail banking divisions of Citigroup and JPMorganChase. Global Corporate and Investment Banking (GCIB), also known as Banc of America Securities, provides mergers and acquisitions advisory, underwriting, as well as trading in fixed income and equities markets. Its strongest groups include Leveraged Finance, Syndicated Loans, and Mortgage Backed Securities. It also has one of the largest research teams on Wall Street. Global Wealth and Investment Management manages assets of institutions and affluent individuals. It is among the 10 largest U.S. wealth managers (ranked by private banking assets under management in accounts of $1 million or more as of June 30, 2005).

Controversy

Enron scandal

Bank of America was one of several banks linked to the fraudulent activities committed by Enron. In 2004, they settled a class action lawsuit brought on by Enron investors, for $69m. The suit specifically claimed that Bank of America had "actively engaged and participated in the fraudulent scheme" and "furthered Enron's fraudulent course of conduct and business in several ways".

Under the settlement, the bank denies that it violated any law and explains that it settled the matter solely to eliminate the uncertainties, expense and distraction of further protracted litigation.

Raiding Social Security

In 2004, a California jury decided that Bank of America had illegally raided the Social Security benefits of a million customers. The jury awarded damages that could exceed $1 billion. Bank of America had been accused of withholding customers' direct deposit social security benefit payments to cover debts in cases where a debt is owed to the bank by the customer (e.g.: due to an overdrawn account, various service fees, etc.), this is in direct violation of California state law. The suit claims that Bank of America knew about the law, and concealed the facts of this law from their customers. Bank of America counters that it only followed standard industry practice of using monthly pre-authorized direct deposits to cover overdrafts and the like. --

Excessive overdraft fees

In 1999, a class action lawsuit was filed against Bank of America for engaging in the practice of "Biggest Check First" check clearing. Put simply, the bank clears checks in order from biggest to smallest for transactions presented on the same business day, with less regard to what time they come in during that business day. Customers allege that this is purposely done, to cause more checks to bounce, triggering more overdraft fees for the bank to collect.

Here's an example: A customer has $1,000 in his checking account. Check numbers 101 through 104 come in for processing for $60, $10, $30 and $950, in that order. If the checks are processed by the check number or in ascending order (smallest to largest), the first three checks will clear and the fourth will bounce, meaning the customer will be charged one fee for insufficient funds. NationsBank (now Bank of America) charged $29 for each bounced check. If the checks are processed largest to smallest, however, the $950 check will clear first, and the checks for $60, $30 and $10 will bounce, resulting in $87 in fees.

The bank employs the same practice for ATM and debit card transactions. Another example: A customer has $100 in her account. On Saturday she withdraws $80 from an ATM. On Sunday she buys a coffee using her debit card for $3 and puchases a small amount of gas for $15. As of Sunday night, she still has $2 remaining in her account. On Monday, her recurring monthly cable bill is auto-debited from her account, for $150. The bank clears this transaction even though the customer is now in the negative. This is standard grounds for an overdraft fee, so the customer expects to find one on her next statement.

However, when the customer checks her statement, she finds four overdraft charges. One for the cable bill, plus one for each of the debits over the weekend. The customer is naturally confused, as she had not overdrawn her account for any of the weekend transactions. Yet, the bank counts those charges as overdrafts because they do not post until the next business day (Monday), even though the transactions were all authorized over the weekend. Since the bank employs "biggest check first", the smaller weekend transactions clear after the cable bill that came in later in the business day. The customer get four overdraft charges total, instead of one.

BOA paid a $9M settlement and the lawsuit was dismissed without an admission of fault. Bank of America continues to process transactions from highest to lowest amounts. New York, California, and Nevada are currently fighting the practice.

When asked about the practice, bank representatives claim that it insulates the Bank from undue risk. By paying the largest items first, the Bank ensures that no loss is incurred on the largest items, by withdrawing the appropriate funds from the customer's account and honoring the largest, and most risky items. Smaller items, which may or may not be honored against a negative balance, depending on the account officer's decision, pose less liability to the Bank, and are therefore paid last. Also, regardless of when checks are written, their negotiation can happen in a number of ways, including direct presentment at the drawee bank, at which time funds are immediately reserved out of the customer's account to pay cash to the payee who cashes the item. Such policies are designed to reduce the risk of loss to the bank.

Furthermore, bank representatives also state that larger transactions typically represent more important items on a customer's account such as a mortgage or rent payment, car payment, insurance payment, utility payments, etc. By paying these items first, it is ensured that the customer's most important items are not affected, although smaller less important items may be affected.

Bank of America customers also claim that the bank's ATM and Online Banking systems can be confusing, and cause a false impression of the available balance. Customers claim that this increases the likelihood of incurring overdraft fees. Customers claim that when using their Bank of America debit card for purchases or ATM withdrawals, the amount of the charge is immediately deducted, then made available several days later, then deducted once again. This is as a result of the authorization hold process. If charges were made during the period when the money was temporarily back in the account, those charges go through - and incur an overdraft fee. BOA's response is that their Online Banking and ATM systems should be used in conjunction with a written account register so that customers are aware of all pending transactions on their accounts.

In fairness, the "Biggest Check First" policy is not unique to Bank of America, and is common among other large U.S. banks, such as JP Morgan Chase, Citibank, and Wachovia.

Finally, in February 2006 Bank of America changed their online bill pay policy to send customers' automated bill payments without debiting the payments from their account until the day after they are processed by the payees' bank. Bank of America has also increased the length of time debit card authorizations are listed as pending in Online Banking from 1 business day to 3 business days to reduce confusion over the actual available balance.

Online banking security

Website redirection weakness

In April 2005, Bank of America was the target of a phishing scheme that exploited a flaw in the Bank of America online banking website. Normally, a phishing link that accesses an illegitimate website can be detected by carefully reading the URL in the web browser. One URL for the Bank of America website allowed a second URL to be passed to the Bank of America website for redirection. This allowed the phishing link to access an illegitimate website through the Bank of America website and thereby display a "real" Bank of America URL while accessing the illegitimate site. ^*

SiteKey

Announced in May of 2005, SiteKey, provided by Passmark Security, is an additional login step added to the Bank of America online banking website. If the Bank of America system recognizes the user's computer it displays a small image and a text token previously selected by the user. If the user does not recognize the image the user is instructed to not log in and call a phone number for "Electronic Banking Services." If the Bank of America system does not recognize the user's computer the user is asked one of three security questions that had previously been selected and answered by the user. The bank claims this as an added security measure to help reduce the likelihood of phishing attacks by allowing users to easily verify the authenticity of the server to which they are connected.

While this process appears to be a valid step in the right direction, SiteKey is essentially a cookie, and does not serve to create an further security measure. The method for creating the secure cookie, ala the SiteKey, is to ask several other questions, such as your mother's maiden name. Once you properly answer these questions, you are allowed to login, and the site key is created.

The problem is that the SiteKey simply saves you the extra step of logging-in the next time you come to the site. The use of an image is already being hacked as man-in-the-middle attacks and bots are screen scraping on a regular basis.

International Operations

In 2005, Bank of America acquired a 9% stake in China Construction Bank, China's second largest bank, for $3 billion. It represented the company's largest foray into China's growing banking sector. Bank of America currently has offices in Hong Kong, Shanghai, and Guangzhou and is looking to greatly expand its Chinese business as a result of this deal. Bank of America has also invested in opening new branches in India, particularly Mumbai.

Bank of America operates under the name Bank Boston in many other countries, including Brazil. In Mexico, it operates under the name Bank of America.

Diversity

Bank of America was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine. Furthermore, Amy Woods Brinkley, the Bank's Global Risk Executive, and Barbara Desoer, the Bank's Global Technology and Service Fulfillment Executive, were named two of the most powerful women in Banking by US Banker magazine, and were among the "top 50 most powerful women in business," as ranked by Fortune.

Major sponsorships

Bank of America owns the naming rights of the Carolina Panthers football stadium in Charlotte, Bank of America Stadium. It will also sponsor the October NASCAR race at Lowe's Motor Speedway in Concord, North Carolina beginning in 2006, and that race will be known as the Bank of America 500. It is also the official bank of Major League Baseball (a title it gained after merging with Fleet, the former holder of the sponsorship), Minor League Baseball, and Little League: ad campaigns that run during the Little League World Series and the World Series use the slogan "The Official Bank of Baseball", and the major sponsor of the Bank of America Colonial, a PGA Tour golf tournament.

Footnotes

1 See Above
2 See Above
3 BankAmerica, Los Angeles, was created in 1923 following a series of Los Angeles financial institution mergers and acquisitions beginning in 1910. The mergers and acquisitions were conducted by Orra E. Monnette and his father Mervin J. Monnette. Following the merger of the Bank of Italy (San Francisco) with Bank of America, Los Angeles, Orra E. Monnette was named co-chair of resulting Bank of America corporation, a seat that he held until his death in Los Angeles in 1936. Orra Monnette also served as the chairman of the Los Angeles (California) Public Library from the mid 1920s until his death. (Sources: Los Angeles Public Library; Los Angeles Times Obituary February 24, 1936).

References

Bonadio, Felice A. A.P. Giannini: Banker of America. Berkeley, Calif.: University of California Press, 1994.
Hector, Gary. Breaking the Bank: The Decline of BankAmerica. Boston: Little, Brown, 1988.
James, Marquie and Bessie. Biography of a Bank: The Story of Bank of America N.T.&S.A. New York: Harper and Brothers, 1954.
Johnston, Moira. Roller Coaster: The Bank of America and the Future of American Banking. New York: Ticknor & Fields, 1990.
Lampert, Hope. Behind Closed Doors: Wheeling and Dealing in the Banking World. New York: Atheneum, 1986.
Monnette, Orra Eugene. Personal Papers Collection. Los Angeles Public Library (Main), Los Angeles California.
Nash, Gerald G. A.P. Giannini and the Bank of America. Norman, Okla.: University of Oklahoma Press, 1992.
Yockey, Ross. McColl: The Man with America's Money. Atlanta: Longstreet Press, 1999.

External links

Bank of America homepage
For more information about bank market share, see the FDIC's web site, which includes historical data
^* - Bank of America invests in China
^* - Nov. 10, 1999 - NationsBank settles check-cashing policy lawsuit
^* - July 3, 2004 - Bank Of America settles Enron lawsuit for $69m
^* - February 26, 2004 - Jury awards Bank of America customers up to $1 billion for illegally raiding Social Security benefits of one million customers

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