Friday, May 24, 2024

Beyond the bank; Hugh McColl Jr.’s second chapter

Retired from Bank of America since 2001, Hugh McColl Jr., 85, has enjoyed great success with his McColl Partners and Falfurrias Capital investment firms, while serving as a leading philanthropist and Charlotte’s elder statesman. But it hasn’t been an easy second act, as veteran N.C. author Howard Covington Jr. writes in his new book on McColl’s post-retirement life, Beyond the Bank, published by Lorimer Press of Davidson. This excerpt describes how BofA’s near-collapse shook McColl emotionally and financially.

Nearly a decade passed after Hugh McColl’s retirement before he again enjoyed the view from the top floor of the Bank of America Corporate Center. Even with access to the executive dining room on the 58th floor, he chose to lunch with McColl Partners analysts at blue-collar cafés. If he was looking for something a little more upscale, he often chose to eat at 300 East, a casual restaurant in the Dilworth neighborhood.

McColl had afforded his successor, Kenneth D. Lewis, the same crisp, military respect extended him twenty-plus years earlier when Thomas I. Storrs stepped down from what was then NCNB. “The simplest way to put it,” McColl said, “is that I walked away from the bank, and walked away mentally and physically.” He was tired of the job’s unrelenting claim on his time, on his life. Even with all the power that came with his job, it had never brought him true freedom.

The past, however, could not be entirely out of mind. His stock portfolio was narrow and deep, with more than 2 million Bank of America shares. He entered retirement invested in only three companies: his bank — it was always “his bank”; Sonoco Corp., a South Carolina firm where he had a long-standing personal relationship; and CSX, the railroad company, where he had a seat on the board that he inherited in 1992 through family connections dating to the 19th century. In both the latter instances, he held only the requisite shares to qualify as a director. McColl was agnostic about investors’ faith in diversity. He ignored it out of caution over conflicts of interest or the appearance of the same. Simple as his one-stock strategy was, it had produced results. As he left for retirement, he was anticipating annual dividends of $5 million or more that he planned to use to underwrite his Chapter Two. He had no doubt his financial future was secure.

McColl comfortably eased into the role of Charlotte’s corporate elder statesman, a role he came by honestly. Building on the foundation laid by his predecessors, whom he credited fulsomely and often, McColl had turned an up-and-coming regional bank into an international powerhouse. Along the way he became one of the best-known businessmen in the nation.
Looking back on it all some years later, McColl attributed much of his success to timing. In 1959, when he arrived in Charlotte, it wasn’t clear that it was the right place or the right time. He and Jane were newly married and so strapped for cash that they counted on Jane’s father for a washing machine and a hand-me-down car.

At the time, banking was a dull business presided over by gray-headed men wounded by the Great Depression. Minimizing risk was paramount. … Bankers of that day had come of age enjoying modest wealth and slow but steady growth. “They were all afraid of their shadow,” McColl said. “The people running institutions were very, very conservative and didn’t like to make decisions. I came out of a background where I’d always been the person making decisions. That coupled with having been a Marine officer, where you are trained to make decisions, sent me to the top fast.”

Fortunately for McColl, his father had arranged for him to join an outfit that was under the command of Addison H. Reese, a charismatic leader and the founding CEO of North Carolina National Bank. For Reese, banking was a zero-sum business when he set out to unseat Wachovia Bank and Trust Co., based in Winston-Salem, as the state’s leading financial institution. He was looking for ambitious young warriors to help him use North Carolina’s liberal laws regarding bank branching to expand NCNB west to Asheville and east to Raleigh through a succession of strategic acquisitions.

McColl acknowledges that his career succeeded for many reasons over which he had no control. In addition to his timely arrival in Charlotte, he was a white male with a good college education. In that day and time, as far as banking was concerned, no others need apply. Women worked at the teller windows but not on the loan platforms or in the executive offices, except to meet clerical needs. The only African Americans on the payroll were maintenance workers or janitors.

“So we came with a lot of things going for us,” McColl said. “Education, confidence, a feeling that Americans can do anything because we had won World War II. We came with the opposite of what the people who were there had. It allowed us early on to take charge of things. I was very irreverent [about the competition], because they were people to be irreverent about. They weren’t very aggressive, and they were timid. They were unwilling to change.”

In 2001, when McColl left for retirement, it appeared that perhaps the years of consolidation were at an end. The way he saw it as he prepared to depart, the time had come for a leader who would iron out the kinks and make the mergers effected during his watch as profitable as they had been advertised. It was time for a CEO like Ken Lewis, the man he had dispatched again and again to pull the pieces together, first in Texas, then in Georgia, and later in Florida.

Lewis followed that story line for a couple of years before he rekindled the bank’s expansionist fires and set out on a series of mergers of his own. The results were unsettling to McColl, but he withheld public criticism. Especially troubling were the changes Lewis made to Bank of America’s board of directors in order to close the Fleet Boston Financial Corp. merger in 2003. That deal, a stock swap valued at $47 billion, installed Bank of America in New England and opened up New York City as a new market. It looked great on paper, but when a Charlotte Observer reporter stopped McColl at a civic fundraising event, he gave only faint praise. “I’m a large shareholder, and I think it’s a good acquisition, so I think that answers that question.”

McColl did not give voice to his deep concern that in gaining New England, Lewis had lessened the bank’s ties to Charlotte. McColl took great pride in having turned his hometown into the nation’s No. 2 financial center after enduring years of disdain from those who considered Southerners dumb rubes with funny accents. McColl and his tribe had changed the face of American banking, and everyone was reminded of that each time they dialed the 704 area code to do business.

But the Fleet Boston deal loosened Bank of America’s southern anchor. Two of the casualties in a reshuffling of the board of directors were Charlotteans John R. Belk, whom McColl had added to the board in 2001, and Frank Dowd IV. A member of the Belk and Dowd families had filled board seats since NCNB was founded in 1960. In making the changes, Lewis mollified the Boston crowd as well as critics who held that the bank’s board was too heavily weighted with Southerners. It was a shift in power that would later come back to haunt Lewis.

After the 2003 Fleet deal, Lewis acquired MBNA of Delaware, the leading credit card outfit in the country, then headed west to acquire LaSalle Bank in 2007. That acquisition gave Bank of America the right to include Chicago on the letterhead.

In the fall of 2007, as McColl’s [private equity company] Falfurrias Capital was gathering money to purchase a controlling interest in Bojangles’, Lewis was taking the first steps to acquire a home mortgage machine called Countrywide Financial. A California company, Countrywide had roared out of the 1990s and into the aughts marketing billions of dollars of easy-to-write loans that didn’t fit the typical model of a responsible down payment and a repayment schedule over 15, 20 or 30 years. By the fall of 2007, Countrywide’s lax standards and shoddy vetting of its customers, plus a softening in the housing market, sent it into the arms of Bank of America for an infusion of cash. In January 2008 Bank of America announced it was buying Countrywide.

This deal so outraged McColl that he did something he had avoided since leaving the chairman’s office. He called a former lieutenant in the bank’s corporate suite. “I sent for Greg Curl [who had put the deal together]. He came to my office, and I asked him, ‘What the hell are you doing?’ He said, ‘Don’t worry about anything. We are paying $2 billion for it, and they have a net worth of $10 billion, so we are getting $8 billion worth of negative goodwill, which will be enough to cover any of the losses.’ My reaction was I was disgusted with the line of reasoning. But I did not do anything else or try to stop it.”

The Countrywide deal closed in mid-2008 after what insiders later said was only cursory due diligence by the buyer. Afterwards, Lewis declared that Bank of America would no longer market the risky loans, whose default rates were climbing into the double digits. He tried to convince investors that the home mortgage business could drive a wave of new customers seeking other bank services.

In September 2008, the world plummeted into the worst financial crisis since the Great Depression. In early October 2008, McColl watched the largest and most venerable financial institutions fall. For years, Hugh and his wife, Jane, set aside the first half of
October to celebrate their wedding anniversary. In 2008 they were celebrating in the Pacific Northwest at a delightful resort on the coast, but Hugh couldn’t keep his eyes (and mind) off the reports on CNN. “It was a terrible period in my life,” he said years later. “I guess at some point I became convinced that I could survive. I really went into a deep depression for a while.”

It was embarrassing that many of the bank’s troubles were connected to a company whose toxic mortgages destroyed neighborhoods. The bank had honored McColl by donating millions to Habitat for Humanity, an organization founded on simple notions of sweat equity and careful vetting of prospective homeowners to build strong neighborhoods. In the 1990s, McColl’s bank had invested billions in building up neighborhoods with loans at fair and reasonable terms that built homeownership. Lewis had not only continued this investment but enlarged it even more.

McColl was featured as Mover and Shaker of the Year in Business North Carolina’s January 1989 issue.

Lewis headed into 2009 fending off complaints over Bank of America’s distress purchase of the securities firm Merrill Lynch, a transaction concluded just as the markets were failing. The liabilities from Countrywide and loan losses from credit card debt continued to climb as the value of Bank of America stock steadily fell. It finally hit a low of three dollars and change. On the day President Barack Obama was inaugurated in January 2009, it had inched up to just a little more than five dollars per share.

Like other high-wealth investors with intertwined and leveraged financial arrangements, McColl had no choice but to ride his Bank of America stock all the way to the bottom. Quickly restructuring a large portfolio is a challenge in good times; it is virtually impossible in bad. The Great Recession punctured the spirit of a man who lived a life fueled by optimism. In the fall of 2008, he really wasn’t sure what lay ahead. “I thought I was going to be fixed for life,” he said, “and I wasn’t. Falfurrias was only about a year old, and I didn’t know I was going to make any money there. I had a couple of bad years.”
Years later, McColl calculated his total losses at between $120 and $150 million. Even 10 years on, McColl’s Bank of America stock was worth about half what it had been before the calamity. In the intervening years, dividends that he had counted on to produce as much as $5 million a year disappeared, dropping from a high of 64 cents a share to a penny, where they remained for nearly five years before beginning to rebound.

The strong, robust company that McColl and his team created had been brought to the very brink of destruction. In the end, Bank of America survived, unlike seven of its Tryon Street banking neighbors.

While it was still standing when Lewis departed as CEO at the end of 2009, Bank of America had become a “Charlotte” bank largely in name only. Lewis’ replacement, Brian T. Moynihan, was a Boston lawyer whose career had been spent not only north of the Mason-Dixon Line but in the lee of Cape Cod. … Six of the seven Fleet directors elected in 2003 still occupied their seats on the board. Only five of the 12 from the Charlotte crowd remained. Charlotte still housed the corporation’s headquarters, but largely because there was no good reason to put everyone through the cost and upheaval of relocation. In reality the bank’s hub was wherever Moynihan’s big Gulfstream happened to be parked. More often than not, that was Boston, where he maintained his residence, or New York City.

McColl took satisfaction that Bank of America was strong enough to sustain an estimated hit of $200 billion. The Great Recession left its resources drained. Imposition of penalties and fees rose to the tens of billions, and regulators called a lot of the shots for a period of time.

Those who had been through the wars with McColl felt betrayed as their own stock holdings were diminished to pennies on the dollar. John Cleghorn had written speeches for McColl in the 1990s and had stayed on to manage other projects until 2008 when he left for the ministry. As the financial crisis drained his former coworkers’ savings in 2009, Cleghorn opened the sanctuary at Caldwell Presbyterian for a session of what amounted to grief counseling. McColl attended and delivered a pep talk, reminding his former coworkers that they had soldiered through tough times before. “We worked on things together,” he said, the memory of the moment drifting back in place. “It was a remarkable company in that way. We liked each other, and we were. … It was something.” For him, the bond remained as strong as ever.

The new hard times actually worked in Charlotte’s favor. Interest rates fell to their lowest in years. The low cost of money, coupled with the hunger for construction projects, allowed the city to build and pay for projects much more cheaply than had been anticipated. In addition, when defaulted loans were taken over by lenders, the rate of tax collections improved. Banks left holding the property proved to be more reliable in their payments than the original owners. Wells Fargo would actually increase its local payroll in the years ahead.

From McColl’s view, the road to the greatest financial upheaval in 70 years was relatively straight. He attributed the problems to the greed of investment bankers who pushed the mortgage industry to produce more and more bad loans that fed into a market chasing higher and higher returns. “They came up with an idea of dicing [packages of loans] so we’re only going to have 10% losses, so we’ll have 90% of this paper is A paper, and 10% of it’s F paper. The problem was they didn’t know that there was no way to know which was which. And they got that all wrong.”

Falfurrias cashed out of Bojangles’ in 2011 with what McColl calls a “big, big win.” Most would agree that an investment of $50 million that turned into $300 million in three years would so qualify. McColl’s share of $15 million didn’t come close to filling the hole created by the devaluation of his Bank of America stock, but it helped. More important, it was a confidence builder. The clouds were beginning to lift.

In 2013 McColl Partners was sold to Deloitte for an undisclosed sum. “We really became quite successful. That business lasted 13 years. We sold it in 2013 because it had the disease that every investment bank gets, which is that the big producers think they should be paid more money, a lot more money, no matter how much you pay them, and they’re jealous of each other. It’s a sad treatise on the business.

“The six men that came in with me probably averaged making a million dollars a year during their entire time there with me. When it first started, they were only being paid $48,000, but within a few years, they were making a half a million dollars a year and then started making a million, a million-five. So we made good money. We took a business, built it from nothing, and made $50 million a year.”

“So I’m over it,” he allowed in the late fall of 2019. “When you are older you think you need more money than you need. The only money I need today, or I should say the money I miss having, is the additional money that I could give away. I think I’ve told you I’ve never given away a dollar I missed or paid a dollar in taxes that I missed.” ■

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