The head of the nation's largest consumer bank said Wednesday there is an "even chance" the nation's economy is in a mild recession, comparing last year's credit crunch and ongoing turmoil in the nation's mortgage market to the Internet bubble of 2001.
But Bank of America Corp. chief executive Ken Lewis said that's not a reason to give up entirely on the complex securities that led to the crunch, helped precipitated the current economic slowdown and cost his bank and other financial services companies more than $145 billion in losses.
"The basic idea that banks can better manage and distribute risk by securitizing financial assets has created extraordinary growth and stability over the past 20 years, for the financial sector and for the global economy," Lewis said. "The forms this activity takes will be simpler, but it will continue."
When announcing the bank's fourth-quarter earnings in late January, Lewis said the bank's projections forecast an economic slowdown, but not a recession. Economists generally are mixed on whether the U.S. is in a recession, commonly defined as two consecutive quarterly declines in the nation's gross domestic product.
A survey of economists released Wednesday by the Federal Reserve Bank of Philadelphia predicted GDP will rise slightly in the first half of 2008. Speaking to business students at North Carolina State University in Raleigh, Lewis reiterated the bank's belief that GDP growth will accelerate in the second half of the year and return to "trendline growth" in 2009.
"We have to be smarter about managing our risks and we have to get paid for the risks we take," Lewis said. "But we do have to keep taking risk. It's the business we're in and it's what drives economic growth."
Lewis said his bank, and many others, were unable to properly price the innovative products created by investment bankers when money to lend to prospective homebuyers was cheap and widely available. Those products included collateralized debt obligations, a complex security often backed by subprime mortgage loans — or those given to customers with poor credit histories.
Banks and others fell into a "follow-the-leader" exercise, Lewis said, in which the prices and risks of such assets were based on those that had come before. As the housing-market slump led to delinquencies, defaults and bankruptcies at mortgage lenders nationwide, the credit market seized up. Trading came to a halt because no one really knew how much the investments were worth, he said.
At Bank of America, the cost of mortgage related write-downs topped $5 billion in the fourth quarter, nearly wiping out earnings.
Lewis said Wednesday putting the nation's credit markets back on stable ground will require increased transparency in both the accounting of such assets and the firms that investment in them, and "a return to simpler, more traditional structures that are easier to value."
In the meantime, Lewis said, the nation's financial service companies can work on their own and with the federal government to keep homeowners in their homes. On Tuesday, Bank of America — which Lewis has said does business with nearly one out of every two American households — joined five other lenders in granting some customers threatened with foreclosure a 30-day reprieve under an initiative announced by the Bush administration.
But the banks themselves, he said, need to be "willing to deal with our own challenges."
"Central bankers will step in when possible to protect the markets from the most severe consequences," Lewis said. "But companies on the hook for past decisions need to find solutions in the private sector, and not look to governments for help."