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Brian Moynihan On NYC Housing “We’re in uncharted territory here because the home mortgage interest deduction”

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CNBC Transcript: CNBC’s Becky Quick Speaks With Bank Of America Chairman And CEO Brian Moynihan At CNBC’s Net/Net Event

WHERE: CNBC’s Net/Net event in New York City

Following is the unofficial transcript of a CNBC interview with CNBC’s Becky Quick and Bank of America Chairman and CEO Brian Moynihan at CNBC’s Net/Net event in New York City.

Q3 hedge fund letters, conference, scoops etc

All references must be sourced to CNBC’s Net/Net.

BECKY QUICK: Before we start on what he calls the fourth industrial revolution and how he’s handling that though, I’d like to talk a little bit about what he’s seeing in the economy. Because Brian is the head of the nation’s largest bank when you’re talking about deposits. Bank of America has a banking relationship with one out of every two American households. And so as a result, he has a really good idea of what’s been happening in the economy. And I thought he could shed a little light on some of those things, kind of share that with us first. So Brian, the relationship that you have tells you what about the overall economy right now when it comes to consumers and when it comes to businesses?

BRIAN MOYNIHAN: Oh. What it tells you is the American consumers what they’re good at. They’re spending. And so in the third quarter, U.S. consumers at Bank of America spent 700 billion of cash, you know, cash at the ATMs – and the economy, checks written, et cetera. That was up about 8%, 8.5% over last year. And to give you a sense– ’17 to ’16 would have been about 5%. So the consumers are spending and it’s accelerating. And it has been accelerating pretty consistently. And so that’s good news. Because at the end of the day, the U.S. economy is X size. The Chinese economy is, you know, two thirds, 70%. But the U.S. consumer economy is as big as the Chinese economy. And so if the U.S. consumers are spending all your companies are going to get incremental receipts somehow. And that’s good. On the business side, and if you’re all CFOs, you know, it’s good. Everybody keeps saying like, “We’re making money.” We’re trying to figure out what all this stuff that we read about in the paper means to us every day. We’re having a hard time getting people, but we’re very confident. And we’re deploying capital and capital investment went up. And so our team has the U.S. economy going at about 2.9% this year. 2.7% next year. And it went from maybe 1.5% to 2.2% to 2.9% down to 2.7%. So the theory is that we’ll start growing more slowly. But it’s still higher than it was for a lot of years before that. So that’s all good. And so what’s the sturm and durm about? It’s the uncertainty of what could happen. And you’ve seen– you can go through the parade of things that happen. And it’s about oil prices rising which, you know, takes a chunk out of the economy. And those things are real. But as long as we’re all employing more people and we’re paying them more and they’re spending more, it’s going to be okay. And so we feel pretty good.

BECKY QUICK: There have been some concerns recently about particular sectors of the economy. When it comes to housing, things have been weaker than anticipated. When it comes to construction recently it’s been a little weaker. How do you explain that?

BRIAN MOYNIHAN: All things you got to keep in perspective. I was just looking at something – I think car sales annualized, $17 million again this quarter. In the last month or something. I remember Sergio Marchionne – may he rest in peace – I remember sitting with him right after the crisis. He said, “We’re building this company for $11 million or $12.” He said, “There’ll never be that many again.” I think this is the fifth year in a row we’ve had 17 or six years, something like that. So there’s great energy about whether it’s 16.5, or 17. But it’s so far beyond what it was when it fell. Housing is a little bit the same thing. At the end of the day, without population growth that we had in the mid-2000s at, you know, 1.5%. It’s fallen to a half a percent, maybe three quarters. The demand for housing is going to sort of ebb and flow a little differently. And then you have locational problems. So it’s really tight in cities like in Charlotte. We’re trying to build tens of thousands of units for workers because we’re short. In other places there’s an excess. Some cities that haven’t recovered. So I think housing is at tails. So the prices are up. The rates are rising. None of that’s great. But we still did, I don’t know, 10.5 billion of mortgage loans this quarter. Last year we probably did 13. So it’s not a major change. But again the prices are up. The inventories are, you know, solid and down. But we got to watch it because it’ll be a leading indicator of people’s belief in their wealth if you see housing prices tip over. But they’re still fine.

BECKY QUICK: Larry Fink was on “Squawk Box” this morning. And he said he’s a little concerned about housing. There’s something that people aren’t talking about. And that’s the change in the tax law that now means that a cap of what you can write off, $10,000. With interest rates up 100 basis points, he said the affordability factor is certainly a big deal. It’s a big deal in blue states. It’s a big deal in coastal cities. But also in places like Dallas. What do you say to that?

BRIAN MOYNIHAN: You know, we’re in uncharted territory here because the home mortgage interest deduction that was so jealously protected for so many years. And, you know, 10,000 is a pretty healthy amount of interest. So the question, how will it play out. But anytime – you’re going to have a group of people that are going to move below that level to over that level. And that will change their view. Again, I come at it the other way. Which is if you have a $250,000 mortgage or $200,000 mortgage, easier to do the math in your head. You add a percent to that, that’s $2,000. You divide it by 12. It’s not going to change the course of history. To qualify that mortgage, a household’s probably got to have a $100,000 to $125,000 of income, a little bit more. So a couple hundred dollars a month isn’t going to make the decision different. If they’ve got an extra kid in the house and they want a room for him, you build – we all know the feeling. So it’s not going to change. It may slow it down. It may make it a little harder. And so there’ll all be some incremental hits. But I think we’ve got to be careful about over-estimating across the 60 million households that have debt out of 130 million households in America. So just noodle on that question. Half the people we’re having a discussion it isn’t relevant to them. And so it’ll affect them. But it’ll affect the chunk, maybe five or something like that. And that’ll have an effect that may make them cause a behavior. But as long as people are employed, that’s going to be the drill. And right now the numbers are staggering. And I bet you if I surveyed the crowd here and said, “What’s the number one thing you face?” Getting people. Getting qualified people.

BECKY QUICK: Let’s see a show of hands. How many people is that the biggest issue for here? Just finding qualified candidates in your work place?

BRIAN MOYNIHAN: And it’s a different question. It could be a technology coder, if you’re one business. It could be welders if you’re another business. And we just were with a group of CEOs in Charlotte this morning. And, you know, they’re all, “We’re just trying to figure out ways to re-skill people. You know, 20 year old people to become welders.” They can make 100,000 bucks working in the Charlotte area which is a heck of a trade relative to house values and things you can do.

BECKY QUICK: I feel pretty good listening to you and thinking about the economy and what that’s going to mean. But President Trump just came out and just said this a little bit ago today. He said, “The Fed is his biggest threat,” in quotes, “because it’s raising rates too fast.” What do you think about that?

BRIAN MOYNIHAN: People always ask me to grade the Fed. And I always say to them, “Now, think about that.” The largest regulative bank. You got any better ideas than? Not that you might not want to, but it’s not a wise thing. But at the end of the day the worry is, will the Fed get it right. They’re taking accommodation out of the economy. And they’re pulling’ it out brick by brick. And the rates are going up slowly. They’re telling exactly what they’re going to do. There’s no mystery to it. They’ve told you since really around 2011, Bernanke in Jackson Hole or whatever said, “I’m going to keep them low here for a long time.” They’ve been very transparent. They adopted the dot plots. We all try to micro-inspect them. We all try to say that must be so-and-so. And that must be so-and-so. And all this crazy stuff that goes on. But if you look at them, yeah, they are basically saying rates are going to normalize to what they consider a neutral rate. And the great debate is where that neutral rate is. Is it around 3-ish? Most people would say yes. Therefore they’ve got some room to go before they choke off the economy too much. But if you were sitting here saying anything that doesn’t fuel the economy adds risk, I could see why somebody might say that. But that’s not the way the Fed operations. Full employment, price stability, inflation, those things would lead you that they’re going to keep raising. And so I don’t think you need to over read it. You just go look at what they say. And they basically have done what they’ve said slowly but surely. The minute they think the economy doesn’t have the growth in it, they’ll stop. The size of the balance sheet is a product of the fact the economy’s growing and cash and circulation is growing and reserves are growing. If it has to be bigger they’ll do what they need to do to make sure the economy doesn’t, you know, stay in balance as best as they can. And so yeah, they’re working on it. And it’s a tricky execution. Because we’ve never had this low rate environment. And all of these employed people. And it’s going to be interesting. Because we have – if you think about people from 2009 til now you’ve hired, they don’t know what interest rates really are like. They just don’t know.

BECKY QUICK: Really? Interest rates, you mean 5%, 6% or beyond?

BRIAN MOYNIHAN: Yeah, 3% on the front end. 5% on the back end. You just don’t know. So it’s interesting talk to our teammates at price deposits and things like that. They just don’t know. So if you – zero through nine out of college is a pretty good career path. 30 year per person in debt. They have no idea. You know, and so you got to go back to 2004 or ’05 to actually think about a rate structure that was more normal.

BECKY QUICK: I remember. My parents had a mortgage that was 16% at one point.

BRIAN MOYNIHAN: That’s extreme the other way. The ten year below 3% is outside the time now has only happened, like, 1% of the time. And so we’re just in a different environment. So the danger of raising rates, there is a little bit of improbability – a lack of understanding because it, you know, from 4% to 5.5% is different from 3% to 3.5% in terms of percentage change. And that’s the question. And so we’ll see. But I think I don’t have any great insight that you can’t just go look at the thing. It’ll tell you.

BECKY QUICK: Folks, we’re going to try and get at the end of conversation a chance for some of you to ask a question if you’d like to, too. Forgot to tell you that at the beginning. But if you do have a question at some point, go ahead and raise your hand. And we’ll try and get a microphone over to you. Brian, I want to talk with you today about the rate of change in business. Because in every industry it seems to me the rate of change is stepping up almost on an annualized basis. It’s a fast paced thing. It’s not just technology. It affects every single industry. It’s something you’ve dealt with very well in terms of looking at digitization. It seems to me that Bank of America almost has to be Amazon and Walmart at the same time. You’ve got to have branches for the old line customers. You’ve got to have online banking and apps for the younger customers, millennials coming in. How did you first start thinking about that? And how did you ramp things up and get your management team and your board onboard?

BRIAN MOYNIHAN: Well, we started thinking about this, you know, in the 2008, ’09 and area and in the middle of the crisis. And at first it was a little borne out of, “We got to change the cost structure and things like that.” But what we really started to do was following the behavior. So the idea of online banking goes back into the early ’90s and dial-up and all that stuff. So it’s not a new concept. But what really changed all of this was the smart phone. And so if you go back and look at Steve Jobs putting up the first Apple iPhone and look at the apps on it, you’ll see one app that is our brand. This and that’s because we were the only internet enabled banking application. And that just took off. And so that changed the game. And that really was ’07. And so it– by the time we really figured out how much of it was changing game it was ’08, and ’09, and ’10. And so what we did is we looked at it. And but the simple straightforward way to get people to feel it is we had 280,000 people when I became CEO on January 1st. And we had 203,000 at the end of the last quarter, 204,000. And just step back and think about that question. And by the way, we also went from 280,000 up to 305,000 and down. Just think about moving that many people in and out. That’s I think more employees than Delta has, if I remember the statistics right or something like that. All caused by the ability of applied technology to process and capabilities and customer behavior change. That’s the other part. You got to remember, if the customers don’t change their behavior, nothing changes. And so when you start to think about the next cycle here, it actually gets more unbelievable. Because people would say, well, you’re the best in the division and all. Yeah, that’s all right. But none of that’s happened in the last four or five years. This is just literally taking out process over and over again. I was telling Becky three or four years ago, I said, “We’re taking out too much production.” You know, a producer so to speak and not enough managers. And we had 30,000 managers. Today we have 21,000. Three years. And it was just by putting people, a spotlight on it saying, “Wait a second, why are people managing less people at the time when technology allows them to manage more people?” And so, you know, it’s technology. But it’s human behavior change. It’s the ability to use information in the company. Peter Drucker wrote an article in the mid ’90s I think. It said, “With the information technology revolution, there’s no reason to have middle managers.” Now, Peter Drucker was always a little bit pushy. But his point was, what does a middle manager do? They translate messages and information from the top of the house to the bottom of the house. If it can move, what are they there for? I don’t think that’s right. But on the other hand, the principles are right. And so the fellow that runs our branches, Tom, he brought of piece of paper. It’ll tell you the wait time at every branch at any moment of the day. He doesn’t need somebody to report in two decades ago, done. And so it’s not only on the work side, on it’s on the customer behavior side. And it’s really been interesting to see it play out. And we had to go through a couple different sets of management to get them to agree. So we have 6,100 branches. We have 4,300 now I think. You know 16,000 ATMs, you know, 18,000 ATMs. The size of the consumer business has basically doubled in that time frame in terms of core accounts. Even though the number of accounts has stayed relatively flat, the core checking accounts has almost doubled. And, you know, you start to think about it. It was all enabled by that interplay between what we could do, what the customer wanted to do, and then teammates making it all happen. And they’ve done a great job. But it was interesting. And that’s not, like, two decades. That is January 2010 to today.

BECKY QUICK: Your goal isn’t to get to zero middle managers is it?

BRIAN MOYNIHAN: No. It’s impossible. But, you know, we don’t know. Everyone wants to be given, you know, when you manage a large company, they say, “Please just tell us the answer. Is it ten in that span of control? Is it nine? Give us an answer.” And so we went out and benchmarked. I said, “I don’t know the answer because I don’t know. But you should actually figure out what the job description of every manager is and make sure that you have it. And as a manager leaves, try to distribute their work to other managers on a theory they get more responsibility and pay them more.” And so the idea is you want to pay everybody more every day. Because that’s how you’re going to keep the talent in a world where we’re going to grow. When you’re as big as we are and the U.S. economy’s even going to grow at 3%. That’s growing at more than 4% revenues which we just said the last quarter is hard to do. And so you can’t presume you’re going to grow at 8% or 9% when you’re this big. And so the question is how do I turn 4% into 7%, 8% pre-tax, and 10% to 12% after tax or EPS? The answer is, only getting a couple percent expense growth. And your two thirds people, you give people salaries and wage increases at 3%, you guys are all mathematically inclined I hope in your jobs. That’s 2% growth and expense. And I haven’t even opened the doors and added one piece of technology, one piece of physical plant and redone one branch. And I’m already at 2%. So we get our people to understand that dynamic. So I don’t tell them how many middle managers to have. I said but if you have less of them, you can pay the rest more. That’s a pretty easy trade. And they say, “Okay, let me figure it out.” And they’re not trying to do it fast. Just a little work.

BECKY QUICK: You talk about reducing head count like that. And it takes me back to stories of Chainsaw Al Dunlap or Neutron Jack.

BRIAN MOYNIHAN: Is that a compliment or?

BECKY QUICK: No, but my point is how do you do this in a humane way? How do you do it and make people feel pretty good about it?

BRIAN MOYNIHAN: The worst time I ever felt as a manager in the 25 or so years I’ve been managing people was in the Fall of 2007 when we realized we were screwed up totally. And we laid off 10,000 people, like, instantaneously. I said, “We should be better than this. We should never have this have to happen.” And the way to do it is to – so the way to try to handle this is 1) is your benefits and severance and all this stuff has to be great. The second is you have to have a very aggressive job posting to get people re-employed within the company and move around. The third is you’ve got to plan ahead. And let attrition be your friend as I say. And so each quarter with 200,000 plus people and a 10% attrition rate, it’s very different. It’s, like, 2% with the highly paid people and higher on the production side. So you got to be careful about just using great statistics. But think about it. We get 5,000 shots not to hire somebody. So we can adjust our company and its 500 managers there. So we can adjust our company just by being ahead of it. So the irresponsible thing is to let yourself run along and say, “Boom.” The responsible thing is saying, “What can I do in 2018 in the fourth quarter that will pay me back in ’21 that I can invest in now and then let the head count drift into it?” And then make sure that we apply the ability for people to move from areas into the retail side or whatever, or from, you know, wealth management, investment bank and wealth management, whatever we need. And then, you know, you let retirements and attrition help. And you sit there and plan it out. The longer the lead time you give it, the more you’re going to be able to adjust the human component. The faster you have to do it, it’s just severance. And we give a year and a half severance for people who have worked 25 years. So it’s a very generous severance. But that’s still not good. You know, you want people to find in this kind of employee level, it’s easy to adjust. Because you’re going to have attrition rate that’s going to beat the competition. And people will find jobs. So plan ahead. Don’t be in denial that it’s going to happen. The technology impact and change is going to be great. You know, use aggressive movement of people within the company. Let attrition be your friend. And then ultimately just really, you know, count them. Count the noses. It’s amazing how sloppy companies are about this. And, you know, and it gets away. We’re also hard on hiring. Not because we’re not going to hire people. We got 2,000 or 3,000 sales relation management people in the last year. But our head count went down 3,000 or 4,000 people. So we’re investing in the front end all the time. We have more technology coders and stuff. But you say you got to create that investment. So you’re going to be hiring people all the time. But you got to make sure that not hiring that are going to become a problem in six months or 12 months or a year.

BECKY QUICK: Right. You mentioned that you pay the people you keep more, which is obviously a great incentive. But you also have some benefit packages that are quite a bit more competitive and–


BECKY QUICK: –more lucrative.

BRIAN MOYNIHAN: That’s away from the issue about head count. But, you know, the real value is you know, we say in our company we have to drive responsible growth. We got to grow, no excuses. Got to do it on a customer focus base. We got to do it with the right risk. And it’s got to be sustainable. Sustainability has three elements too, best place for teammates to work, drive operational excellence, and share our success with communities. Those three interplay to give you the money to invest, right. You drive operational excellence, you can invest in your people. You can invest in your communities, you can invest in the business, et cetera. And so, you know, so to be the best place for people to work, our view is we have to be just a talent magnet across all levels. And you know, so we had $15 an hour in early ’17, 16 weeks for family leave. Interesting, 40% of people take family and recovery are male. And when you’re my generation, you know, I don’t think my spouse probably thinks that she says, “Would you have taken it?” I said, “Yes, if it was allowed.” You know, but it wasn’t. I would have lost my job back then. So, you know, so it’s a fair question. So we get that. And then we have, you know bereavement policies. Health care, we cut in half the health care costs for everybody under $50,000 and never raised it since 2010. Again, that operational excellence allows me to do it. That’s effectively, you know, 7%, 8% trend across eight, nine years. Think about the benefit to those teammates who pay basically $250 a month for family coverage. Same – $25,000 a year benefit the company costs to invest in it. And they’ve never had a cost increase since 2010. And think about that competitively in the market. And so we did it drive down attrition. And that’s what pays for it. And so you use these benefits, you know, really to drive talent accumulation. And then we have sabbatical for our investment bankers which a lot of people have taken advantage of. One of our teammates is a very good amateur, senior amateur golfer. And she uses sabbatical year get herself ready for the senior amateur woman’s tournament. And was low medalist. So people use it different ways. But– and so that’s become popular. So we’re trying to figure out different ways to do it. But it all comes down to being a great place for work, and therefore we get the best talent and they stick with you.

BECKY QUICK: Are there issues of backlash that you’ve had to deal with where parts of your team have pushed back and said, “I don’t want to do this anymore. It’s too tough.” And I think of Merrill Lynch where you do a lot of cross selling. And maybe those guys don’t want to be responsible for the problems that a customer has with a credit card or anything along the way. What do you do?

BRIAN MOYNIHAN: That’s different issues. But the real issue we have $72 billion in operating expenses. And we brought that down to $53 and a half in the last trailing four quarters. And people are saying, “It can’t be stopped. Do we have to be this precise?” And you say, “Well, if we become unprecise for a moment it’s going to eat us up.” Increases in leases, increases in, you know, if you want to pay people more. We want to have better benefits. We want to invest $3 billion a year in technology code, not in our technology platform. That has a $13 billion operating expense. It’s just in the technology code. And so you can say, “We can give up that. You’re going to hate it in two years when we start cutting investment budget and stuff like that.” So I took a bunch of a people in a room four or five years ago. And I just said to them, “We got to figure this out.” And so we started this thing called org health. We just kept thinking about this and playing with it. And this is people probably managing 80% of the people that reported in my direct reports. And I said, “You know, you guys got to help us figure this out. “You know, we come through this thing. And we’re still not where we want to go. And I can even see that we’re going to get there. But how are we going to plan all ahead?” And so you just got to bust through it and show them the upside. And then I think you got to be true to your promise which is you got to increase the investment. Once we got down to this level, you know, we can now take all the money we saved and plow it back into more and more investment. So, you know, you got to be true to your promise and provide some carrots of out this. But it is tough. Because, you know, being this – trying to grow in a competitive market and being this tough internally is usually an “and” that’s hard for people to manage. You know, they either are a grower. And you’ve seen these teammates and they’re a grower or they’re, you know, a tough internal manager. There’s very few people can do both. Or they are a revenue producer or they understand the cost structure and operational process. The manager, or they understand, you know, customers and relationships. Or they understand technology and operational process cut. The manager of today has to understand all that. And if they don’t, it’s hard to manage right now. Because at the end of the day, technology’s affecting the front end. So there’s 150 million workers in America today. There were 75 million 50 years ago. 18 million in manufacturing workers, now there’s 12. So all the technology we’re going to apply in the rest of our careers is going to be against the service economy. And that means the front has to manage it. This isn’t about back office or operations. This is about how do I manage the front office better. And so if you can’t manage both these, you can’t manage our company. But so you got to get them to understand that is what it is to be a manager. That’s tough. Because, you know, they’re like, “God, 20 billion. Aren’t we done? Can’t we stop?” And you say, “No. What’s going to happen in ’21?” That happens today. What’s going to happen in ’22? That happens today. You can’t get to ’21 and say what’s going to happen in ’22. The wall will bury you at that point.

BECKY QUICK: Very quickly, does anybody have a question they’d like to ask? Good, because I have more I want to ask. You just talked about your plans for 2020, 2021 and looking ahead. At Goldman Sachs, Lloyd Blankfein has stepped down. Jamie’s made some noise. People have thought he was running for president. Jim Gorman, people are wondering what he’s going to do. What are your plans? Because I think you’re now in your ninth year. And you said you’ve just done your 36th conference call, quarterly conference call.

BRIAN MOYNIHAN: 36th quarterly conference call.

BECKY QUICK: But who’s counting?

BRIAN MOYNIHAN: Yeah, who’s counting? My plan is to go as long as, you know, I can do it. And I think, you know, I became CEO, I was 50. And I told people I can go another decade easily and stuff. I always laugh when people ask me, “How long do you want to go?” I say, “Hey, you want to get rid of me?” But then I go to our friend Warren Buffett. And I say, “He’s 80 plus years old. He’s having the time of his life.”



BECKY QUICK: You’ve got awhile.

BRIAN MOYNIHAN: Yeah, and so my point is, I serve at the pleasure of the board. They could throw me out tomorrow if I wasn’t doing what we should do. But the goal I think across – the goal of a CEO and I think all the C suite staffs so to speak is to maintain fresh. And to be thinking ahead and working. And that is hard. Because you know, when you start to make, you know, $7 billion after tax and we just $7.2 billion after tax reported yesterday. So, you know, I’m like, “Hey, this is pretty good.” And the answer is we had Jim Collins come and he talked to the group. And say he was a little bigger than this. And he’s going through everything. And he gets to the end. He goes, “I just want to leave you with one thought.” And everybody’s like, “Some pearl of wisdom is going to come.” “Nice start.” And I got to just say, “If you don’t come in tomorrow–” so I’ll do this as long as I feel like tomorrow is, you know, it’s a nice start today. And we’re going to start again tomorrow. And that’ll be a long time.

BECKY QUICK: Brian I want to thank you very much for your time today.


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