Inside Financial Services

The Sorry Legacy of Hugh McColl

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I’m at a loss to understand why reporters continue to view Hugh McColl as a banking-industry genius. He’s anything but: as a result of the enormous bank-buying binge he embarked then-NCNB on starting in the mid-1980s, McColl is arguably responsible for perhaps more value destruction than any executive in stock market history. I just don’t see why reporters keep on printing the nonsense that McColl spouts.

But it’s hopeless. McColl was popping up in the papers again last week following the death of his predecessor at NCNB, Tom Storrs, who ran the bank from 1974 to 1983 and hand-picked McColl to succeed him.

Sure enough, the McCollian blather was on full display. “The truth is I really continued a strategy developed by [former CEOs] Addison Reese and Tom Storrs,” he said last week. “We realized that if we didn’t leave North Carolina we would never amount to anything, that we would not be important. The reason was North Carolina was the 11th largest state in the Union so, ergo, you’ll never be better off than the state’s growth would be.”

Expensive words! There you have as revealing an instance of Hugh McColl’s monumental egomania and contempt for shareholders as you are likely to find. The whole point of running a bank, McColl now says, has nothing to do with generating an adequate return for the people who actually own the business. Of course not! All McColl cared about was making NCNB-and by extension himself- “important.” I’m a little shocked that he even has the nerve to say that in public.

Not only is McColl’s comment deeply misguided, it’s also plain wrong. In fact, banks all over this country have, do, and will grow at rates considerably in excess of the growth rate of the state in which they operate. And when that happens, their shareholders–the owners of the company–are rightly rewarded.

But it appears to me that McColl never cared about shareholders. He famously noted on a number of occasions that big-bank CEOs make more money than small-bank CEOs, and that he preferred to be the CEO of a big bank. But he never said anything (and I doubt it ever occurred to him) about the returns that shareholders of big banks earn relative to shareholders of small banks. He seemed to be oblivious to the interests of shareholders.

The kindest view of McColl’s strategy for running BofA was that he believed there was some advantage in getting big fast. In a consolidating industry, he might have thought, the winners would be the companies that were the first to be able to exploit economies of scale and pricing power. So do deals as fast as you can, then hammer out the operating details later on.

We now know this was a recipe for disaster. The mirror image of BofA’s strategy was the one that Dick Kovacevich followed when he ran Wells Fargo. Kovacevich’s plan: build a constantly improving organic growth machine, then apply operating skills to improve operations of acquired companies.

Shall we compare how the two approaches panned out? It’s not even close:

One hundred thousand dollars invested in Wells Fargo at year-end 1994 is now worth $500,000. If that shareholder had invested in the S&P 500, it would be worth just over $200,000–so Wells’ strategy and execution caused its stock to outperform the market by 80%.

At BofA, meanwhile, the results of the McColl-Lewis approach were pathetic. If that same shareholder had invested $100,000 in BofA at the start of 1995, he’d have only $60,000 left. So let’s see: the Wells Fargo strategy led to a return of 400% over 17 years while Bank of America strategy led to a decline of 40% over the same period.

I scarcely need to add, by the way, that over the course of this disgraceful stock performance, McColl and Lewis ladled themselves out hundreds of millions in compensation.

You would think that, having seen the market decisively repudiate his life’s work, McColl in retirement might have some second thoughts. But of course, he doesn’t. Not from this egomaniac. When asked in 2010, McColl said, “No regrets, I have no regrets about building it large.”

Rather, sources tell me that McColl blames BofA’s unravelling on Ken Lewis. But if he does blame Lewis, McColl is only conning himself. Not so long ago, he couldn’t gush enough. “Ken always was a better businessman than I am,” McColl told Business North Carolina in late 2006. “He’s better at making money than I am.”

The McColl-Lewis, acquire-every-bank-you-can-and-to-hell-with-what-it-costs strategy was fatally flawed. When it reached its logical conclusion, BofA had become a patched-together, unmanageable hodgepodge where no one knew exactly what was going on. At Wells Fargo, meanwhile, Dick Kovacevich’s and John Stumpf’s emphasis on organic growth through smart operations and management has been totally vindicated. Kovacevich and Stumpf created a great company and great value for its owners. McColl and Lewis burned down their shareholders’ house.

Meanwhile, McColl’s original premise all those years ago, that NCNB could never succeed because North Carolina wasn’t big enough, has been shown to be fantastically wrong. Here’s one piece of evidence. There is a bank headquartered in Warsaw, Indiana that was founded in 1872. Today it has assets of $3 billion. It has never made a large acquisition and has never left the state (even though Indiana is only the 15th-largest state in the nation and is growing more slowly than the country overall), yet its shareholders have seen a 608% increase in the value of their stock.

Hugh McColl and Ken Lewis leave a disgraceful legacy in my view. They never worked for their shareholders and only cared about lining their own pockets. Their strategy was fundamentally flawed. Their execution was epically inept. The company they ran turned into a basket case. And they took hundreds of millions. In a fair world, shareholders would be able to claw back some of those millions from these buffoons.

What do you think? Let me know!

37 Responses to “The Sorry Legacy of Hugh McColl”

  1. Bank Investor

    What I think is that opinions are like noses, i.e. everbody has one. You’ve expressed yours regarding Hugh McColl and you have your own “bully pulpit” from which to do it. Thanks for your input (not!).

    As a bank investor who is trying to get some actionable information from your web site, I’m at a loss to understand why I should be interested in your personal feelings about the long ago CEO of B of A. Why not provide us with some more pertinent and current analysis that will help an investor make some informed decisions. Obviously, you are a fan of Wells Fargo and are shilling for the bank in Warsaw, Indiana (Second Curve own some shares in that one too?), but your rant about Hugh McColl tells me nothing about your current feelings, pro or con, regarding B of A as an investment opportunity.

  2. DLB

    I watched this clown crew up close as an employee of Nationsbank in the mid to late 90′s. They are exactly what’s wrong with corporate america in the modern age. Asset growth through aquisition for the purpose of increasing their own compensation and to hell with the shareholders, employees and customers. Once you jump onto the crack cocaine of aquisition based growth there’s no going back. Every couple of years you need another fix when the illusion of EPS growth is exposed as a lie.

  3. mlp

    bank investor,

    i think tom writes about things related to the banking industry whether you like it or not. i wouldn’t mind to know the history of what’s happened. if you don’t like it you are free to leave. or may i suggest you start your own site and enjoy yourself.

  4. Hightide

    Tom’s analysis has a strong ring of logic to it, but the legacy Wachovia Bank, known for strong performance, adopted a prudent growth strategy and ended up being purchased by then First Union Bank at no premium. I doubt BAC would be in such dire straits had Ken Lewis not made such horrific acquisitions while the economy was imploding.

  5. Hightide

    Tom’s analysis has a strong ring of logic to it, but the legacy Wachovia Bank, known for strong performance, adopted a prudent growth strategy and ended up being purchased by then First Union Bank at no premium. I doubt BAC would be in such dire straits had Ken Lewis not made such horrific acquisitions while the economy was imploding.

  6. Ex NCNBer

    I was the bank analyst in the Trust Dept at NCNB during the back half of the 80′s – the early days of McColl’s acquisition binge. We employed a strategy of investing in takeover targets. I got to know McColl and we occasionally discussed stocks. I was just a young analyst but he was nice and approachable so I enjoyed our discussions. I looked up to him at the time but I was a bit shocked by the lack of financial sophistication he exhibited. I was writing up recommendations to buy up many takeover candidates and avoid the acquirers which he seemed to agree with during our meetings. The fact that he was pursuing the losing strategy for his own shareholders never seemed to occur to him.

  7. Blindspot

    Around 2000, Fast Eddie of FU purchased the Money Store for about $2B. About 1 year later they closed it and wrote off almost the whole thing. ((Where is good ole Phil Rozzuto (ap) when you need him. It seems Ken Thompson wanted to match Fast Eddies acquisition appetite and did not do the due diligence on Golden West and all of the sub-prime loans GW had been making over the last 3 to 4 years. Fast Eddie purchase Signet Bank (HDQT – Richmond, Va.) and when asked by the American Banker how he did it when other banks were highly interested, he replied, he kept stacking bundles of Billions on the table unit they could not say no. The bank analysts (maybe Tom B. too) took Fast Eddies to the woodshed for that remark — obvioulsy not in the shareholders interest. But, he survived that scare. However, all the bank analysts ate Fast Eddie alive when he purchased CoreStates and expenses and revenues both went the opposite directions than had been stated they would. Approximately 13% of CoreState deposits fled the bank within 6 months of the acquisition. But, then again who really beleived that “Future Bank” would work with the elder population at that time in older urban areas like Philly (lead by David Carrol still with Wells Fargo and one of the few if only top execs. to survive.). The Board finally gave fast Eddie the shove off the FU plain with his golden parachute of $1MM a year for life, use of the corporate plan and office space.

  8. Bank Investor

    Mea culpa. I had no idea that my commenting on opinions of Hugh McColl offered by one of the self-described “thought leaders of the banking industry” would result in the feedback I received from other posters. Maybe I’m the only person in the universe who thinks Mr. Brown sometimes gets a little “snarky” in his descriptions of industry CEOs (past and present), regulators, and other bank analysts whom he holds in less than high regard. I guess that right comes with being a “thought leader of the banking industry” and, not knowing who conferred that designation on Mr. Brown, I am unable to refute it.

  9. Elephant12

    Well said. Unfortunately, McColl, and the complicit Board he duped, are not unique. Does Ken Thompson of First Union / Wachovia come to mind? The Money Store? Golden West!?! In general, Boards are not sufficiently accountable to shareholders in my mind.

  10. Southern Citizen

    I remember when NCNB acquired C&S and McColl announced that all leadership roles would be filled by the best person available, regardless of their origin. Imagine our collective surprise when 98% of the best turned out to be NCNBers. Well, guess it just wasn’t so- maybe just a bit too much corporate inbreeding.

    As to Lewis, one post-fall memoir quotes John Mack as saying that Lewis is an A**hole; The Big Short quotes its protagonists as observing that Lewis is “dumb”. Someone I know who worked closely with him notes his ” need to have the biggest wienie” complex. The Countrywide deal would seem to verify all three perspectives given its status as the WORST corporate acquisition in history, with BAC $53 to $2. Such is life as we now know it.

  11. Dick Bove's fan

    This sounds like a personal vendetta with Bank of America and Hugh McColl. The acquisitions in the 80′s and 90′s were largely accretive. The First Republic Texas acquisition in 1989 was brilliant. Contrast this to the expensive acquisitions of the 2000′s like MBNA and US Trust, followed by paying huge premiums for Country Wide and Merrill Lynch during the middle of the financial crisis. The latter did not happen when Hugh McColl led Bank of America. Let’s get objective!

  12. Former Bank Examiner

    Bank Investor, Tom’s chart clearly show you the “investment” opportunity with BAC – not worth your money.

    As a former employee for many years during Ken Lewis’ charge, working thru the Fleet and LaSalle acquisition was a joke. Due diligence concerning an acqusition was all about the math and making the numbers work to “impress” the duped analysts NOTHING about credit quality. They never invested enough in MIS so what they really have on their books is an unknown. Their nationwide banking is a sham since the Legacy BofA California was never merged with the east cost operations from a depost system standpoint. Ask a California customer about trying to make a deposit in North Carolina. If you serious about investing in a large bank consider BB&T Corporation, headquartered in Winston-Salem, N.C., its among the nation’s top financial-holding companies with $174.6 billion in assets and market capitalization of $17.5 billion, as of Dec. 31, 2011. Its also made a lot of acquisitions, but check their numbers. They make it work…

  13. Ole

    Yes, McColl was a disgrace and it is possible that Ken Lewis was even worse. But they are happily among the 1/10th of 1%, rolling in riches.

  14. jsc173

    McColl never really proved he could truly build anything. All he was ever able to do was run the place like a military operation, so he did achieve cost efficiencies that always showed an increase in profits in any bank he acquired. So long as the acquisition machine could find inefficient banks to acquire, life was good, and there were very many inefficient banks to acquire. However, once the acquisitions stopped and growth had to become organic, his and his team’s weaknesses surfaced.

  15. NixDebt

    They didn’t care about their employees, either; and while they made millions, employees’ 401-k plans were decimated. Add to that the fact that t older employees who were laid off at the depths of the financial crisis will never be able to recover. How can these guys sleep at night?

  16. Former NCNB Slave

    Amen. I worked for this organization when the entered Texas and acquired the FirstRepublic franchise. McColl was then, and is now, centered on his well being rather than others. Lewis is his protege and thus of the same mindset: Pay myself well and to hell with the shareholder. I left when the Countrywide fiasco was announced because I knew it would not work. No real due diligence, and even a zoo monkey would know about the fraud taking place in the Countrywide organization. Instead, ego blinded the eyes of Lewis and thus we can thank these two maniacs for the record low stock price. Good jojb of exposing the ineptness of these two.

  17. Big Red

    Thank you TKB for the NCNB/NB/BAC history lesson.

    Putting aside your feelings for Hugh and Ken, for investors, I think that there is a lot to be learned from their missteps and the landmines they planted.

    Shrewd investors will use this information in evaluating future bank investment opportunities.

    Once again, hyper growth, expanding outside a banks’s natural geographic footprint, and extending the bank’s business into new/unknown products are the tell-tale signs of a future problem.

    I worked for a bank was eventually acquired by BAC and I am thankful that I am in a much better place now than I would have been if I stayed.

    As for ‘Bank Investor’, TKB has been very vocal since early 2012 about his current investment thesis for BAC.

  18. oy

    I joined Nationsbank shortly after their Barnett acquisition and was there for 11 years. I would have to second Former Bank Examiner’s observation that they never invested enough in MIS. It was a nightmare trying to find out what our credit exposures were.

  19. Cobrapilot6869

    Once again, my friend, you lay out a picture of Hugh McColl that is consistent and true. You have never attacked him as a person….you have always attacked his pathetic record. Bank Investor should be appreciative of your efforts. It would allow him (or her) a backdrop to measure future investments they uncover. If their investment target contains a similar CEO…..then use your template to find a more worthy investment. I have used your service many times. Very rarely do I incur a loss. A shill would lose large sums for their adherents. You supply well-conceived ideas constantly. Your “opinions” are appreciated in this quarter. Keep the information flowing, Tom.

  20. Mchael

    Execellent! Couldn’t agree more. Bank stock investors know you are right. I viewed him as the highest bid for whatever I was selling. McColl had the reputation of buying excellent franchises and turning them mediocre or worse. Remember Barnett Banks?

  21. Bill

    When I worked at WFC, I remember meeting scores of old Bank of America folks in S.F.. We kinda had a friendly rivalry going on, but when they announced that they were moving all management out to Charlotte, they were clamoring for jobs over at Wells like Grant took Vicksburg. The other smart move Kovacevich made was keeping Wells HQ’ed in its largest market. Hugh alienated the entire California banking market, what a poltroon.

  22. Blindspot

    Very insightful and cogent in all respects in regard to B of A. At least this was not another attempt to defend the current big banks and what they wrought on the overall economy and that they should not be held complicit even after getting all that bailout money from the Treasury and constant trips to the Fed (without public disclosure of who, when, how much, how often, and under what terms).

  23. JohnM

    Thanks Tom…..I agree totally with your comments. CEOs like McColl and Lewis tarnish the good intentions of capitalism. Legacies should be measured by shareholder nominal and relative returns.

  24. grover13

    I agree with your assessment Tom of BOA….but the analysis of Wells is a little bit off. The truth is, Wells also grew mostly via acquisitions, just like BOA. The difference is in how they acquired. While BOA seemed to go simply for size and scale, Wells had a more methodical approach of finding smaller banks that more closely aligned with their business model, that could be easily integrated. So, instead of buying up the larger regionals of the world and pounding their chests at their newly reached assets , they bought literally hundreds of smaller local banks that they identified as being similar in scope, so that they could retain virtually all of the customers. Through all of that experience, they learned how to make the integration process a true science….so when they did grab a big fish (Wachovia), the integration was entirely seamless. This is what separates Wells from the other Big Five banks.

  25. Banker

    Could the same thing be said about Thompson and Crutchfield at First Union?

  26. Mike Kubacki

    Thanks for the plug, Tom! See you next week, I think…

  27. PBTide

    This is as absurb a commentary as you have ever written, and that is certainly saying something. The value of Hugh McColl’s leadership does not date from 1994, when he was well into and on the way out of his tenure, but 1984. There are hundreds to thousands of former National Bank of North Carolina shareholders who are today millionaires. This is due to Hugh McColl. There are also hundreds to thousands of shareholders of banks in North Carolina (amd elsewhere) who today still hold stock in smaller banks which have little trading liquidity and lots o’ TARP to repay.

  28. Unconvinced

    Tom, in way of re-introduction, I first met you in your office in the early 90’s when I traveled with our bank president. I was managing the large investment portfolio at the bank, and we were there to speak with you about a number of subjects related to our bank, the industry, etc. One of the first topics was the size, purpose, risk, etc. of our derivatives portfolio; at this time derivatives were a relatively new instrument. You made a statement that made me think we might not be starting at the same knowledge point, so I asked if I could run through the construct of a swap, its use on our balance sheet, etc. You indignantly replied in a very loud voice, “I know what swaps are; I have an MBA!” I realized I would not prevail in any such discussion and so we talked a bit more about swaps and move to other topics, such as your view of our bank being a serial diluter [with which I agree]. I left with the distinct impression that your knowledge of swaps was dangerously superficial.

    As then you shot a noisy, large bullet but missed the target, I feel the same about this article. Having retired in 2000, I never worked for McColl and have only spent some time last year with him in Cuba. So I do not know him well at all.

    You are so critical of him for wishing to grow large and you use as the basis of that view a comparison of BAC stock versus WFC. [Choosing a different timespan to compare BAC and WFC leads to a very different conclusion.] Hugh did not buy Countrywide. He did not buy Merrill. You might criticize him for designating Lewis as his successor, but the basis of your criticism of him as a CEO is simply misplaced. I think a counterview of the industry is that large banks and small banks can survive; those in the middle will have a tough time. I suspect Hugh didn’t know how long the window for acquisition might be open, and it was his nature to move briskly ahead when he felt he had the risk covered. The risk you mention did not arise on his wa

  29. Ex NCNBer

    To PBTide – IF “There are hundreds to thousands of former National Bank of North Carolina shareholders who are today millionaires”, they must have sold their stock when I did back in 1989. When I left the company in ’89 I sold all of my stock in the low 50′s. There have been no stock splits.

  30. Dick Bove's fan

    To Ex-NCNB’er: You indicate there have been no stock splits for Bank of America / NationsBank / NCNB since 1989. Unfortunately, that is not factual, as there were 2/1 splits in 1997 and again in 2004. The actual seeds for wealth destruction were sown in the early 2000′s and were capped off with the blunders of 2008.

  31. ExBofAer

    Yeah the combination of two guys who should never have been put in a position to run large banks destroyed the BofA legacy and ruined many employees and shareholders. In the old days, these two would have been pulled out of their homes, thrown in jail, and their wealth confiscated, thus serving notice to other bank CEOs to watch what decisions they make. AP Giannini would have fired these two bufoons, along with other bank leaders promoted well beyond their skills, like Chan Martin, Bill Vandaveer, and many others. This clearly shows how Boards of Directors are in the pockets of CEOs and should be replaced by employees voted upon by all the employees of the company. Then really link their compensation into company performance, but also tied it into a multiple of their average worker salary so everyone benefits and not just those at the top.

  32. Unconvinced

    Here is the remainder of my previous post:

    The risk you mention did not arise on his watch, which you acknowledge.

    I have searched without luck finding some article from you presciently forecasting the crushing implosion of the entire financial services industry, the housing market, the auto industry and sovereign funds in the 00’s. Ditto for nine eleven. Your article gives no indication that such forces played a major role in the meltdown of banks like BAC, but rather that the plight of BAC is due to McColl’s ego. Had he seen the future events, undoubtedly he would have steered the bank differently. He sure has an ego, but find me ten CEO’s in the top 100 companies that don’t. Your attack is so unsupported by fact that a reader can’t help but think you have something personal against McColl.

    An analyst, even one with an MBA, should know that it is more effective to support one’s position with light rather than heat. This article is the equivalent of a Sarah Palin analysis. You can decide if that’s a compliment or something else.

  33. Tom brown

    To unconvinced, you may be confusing me with someone else. I proudly don’t have a MBA so you story about “our” meeting just can’t be true. McColl did not care about shareholders, he cared about getting big. That was his strategy, just read his letters to shareholders or the book he paid to have written about himself titled, “McColl”. He picked his board and his successor and they agreed with the strategy of bigness he established. The man built the road to the cliff and Lewis drove the shareholders over it.

  34. Anonymous

    You were one of the only ones to warn of the faults BAC management had..
    Here’s hoping that a $8 it is worth holding for a number of years.

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