JUDY WOODRUFF: The troubles of the financial world, here in the U.S. and abroad, played out anew today with more disturbing news.
Bank of America, the nation's largest lender, announced plans to shrink the company and its work force by 30,000 people over the next two years. It comes as the bank's value has plunged this year by 48 percent, to just about $7 a share.
Meanwhile, on overseas markets, fears about the growing impact of the European debt crisis jumped again overnight. Stocks tumbled as word spread of a possible Greek debt default, and reports suggested that Moody's would lower the credit ratings of French banks exposed to that debt.
We look at Bank of America's troubles and the growing tremors over global financial problems with Bert Ely, an expert on banking and financial services. And Simon Johnson, a former IMF chief economist, a professor at MIT Sloan School of Management, and fellow at the Peterson Institute for International Economics.
We thank you both. And it's good to have you both back with us again.
SIMON JOHNSON, Peter G. Peterson Institute for International Economics: It's good to be here.
JUDY WOODRUFF: So, Bert Ely, to you first.
So, Bank of America, they're eliminating 30,000 jobs over the next few years. They say they're going to cut expenses $5 billion a year. And they're talking about cutting off so-called non-core businesses and assets. How much of a downsizing is this for them?
BERT ELY, banking consultant: Well, it's a fairly significant downsizing, roughly 10 percent of their work force.
And, yet, they still have been a little sketchy about many of the details of this downsizing, particularly in what we call their non-retail businesses, their capital markets business, investment banking and so forth.
So, while they have announced in broad terms that downsizings could take place, there are still many details that have not yet been released. They may not even know this entirely themselves. But it is going to spread out over a period of time. It is not as if 30,000 people are going to lose their jobs tomorrow. Many of these positions...
JUDY WOODRUFF: They're saying it's a combination of attrition and layoffs.
BERT ELY: Well, and also I suspect that some of those employees will be -- go with businesses that are sold to someone else. Like, they may sell some of their branches, and the employees in those branches would go with them. So it's not like there are going to be 30,000 people or anywhere near that number actually laid off.
JUDY WOODRUFF: Simon Johnson, right now, Bank of America is the biggest bank in the country, biggest lender. This leaves them smaller. Does it leave them healthier?
SIMON JOHNSON: No, I don't think so. I think this is rearranging the deck chairs on the Titanic, actually.
Our biggest bank has got itself into terrible trouble. It needs to be broken up much more dramatically. Remember, they bought Countrywide at a crazy price. They bought Merrill Lynch at an even more crazy price. They need to unravel this mega-bank. It's too big to manage at this point.
JUDY WOODRUFF: And today the head of Bank of America sort of left it open about what they're going to do about Countrywide, the big mortgage lender they took on. What does that say?
SIMON JOHNSON: I don't think they have a plan. And as Bert said, they are fishing for something. Warren Buffett has come in to provide some assistance. That has bought them a little bit of time, but not much in this market, with this kind of pressure on confidence, particularly coming from the developments in Europe.
JUDY WOODRUFF: So, what do they need to do, Bert Ely, to get themselves healthy? Simon Johnson is saying it's like the Titanic.
BERT ELY: Well, the problems that B-of-A has are similar -- really much the same problem throughout the banking industry. And that is that revenues have been shrinking as interest rates have declined and stayed down. They have lost a lot of fee income.
And so they face the same problems that all banks do of dealing with a -- much less revenue and they have to cut expenses. The big uncertainty for Bank of America is how much is -- are all their other mortgage problems going to cost them? They're facing lawsuits in the billions, maybe several tens of billions of dollars.
There's this issue with Countrywide and how much that is going to cost them. So they have the profitability problems that all the banking companies have, but they have those problems in spade -- in spades. And then on top of that, they these continuing mortgage problems that could run out for another three or five years, at least.
JUDY WOODRUFF: So, do you sound -- do you believe they can fix it?
BERT ELY: It's going to be a long, hard slog for them to do so.
I think eventually they can, but the stock price is going to be depressed for a long time. They may -- as Simon said, they will have to do some further downsizing. One of the problems is that Merrill Lynch has now been sufficiently integrated into the rest of the bank that it's really hard to spin Merrill Lynch off.
So, one of the questions if they're going to downsize, it's going to be what divisions, what markets do they pull out of. And on that, we have no guidance whatsoever.
JUDY WOODRUFF: Well, whatever happens to Bank of America, Simon Johnson, what does that mean for the broader American banking industry?
SIMON JOHNSON: It means we're short of capital. There's not enough equity in these banks to buffer against potential losses, for example, from litigation or from problems that come to them from Europe, for example.
The banks were put back on their feet in 2008-2009 by the Bush administration and the Obama administration, but not with enough capital behind them. They're very high-leveraged, a lot of debt, not much equity. This is increasingly going to hold them back. And what holds them back is most likely going to slow job creation as we try to keep that going.
JUDY WOODRUFF: So, is there anything to give us hope in all this? It sounds pretty bleak, what the two of you are describing.
SIMON JOHNSON: I think we need a shift in policy. I think you need to have stronger, more effective stress tests. The last stress tests that were done the end of last year really were too weak to be effective.
They're letting the banks pay out too much in dividends, too much in bonuses. They should be rebuilding their capital. They need much stronger equity bases for these businesses in order to have a strong banking system going forward.
JUDY WOODRUFF: Well, meanwhile, while we're talking about the health of banks in this country, Bert Ely, banks in Europe are giving everybody a headache. There were jitters today, not just about the banking system, but much more broad than that, whether Greece is going to default on its debt and questions even about the French banking system.
What's your sense of -- first of all, of Greece?
BERT ELY: Well, increasingly, the speculation is that Greece will default. And Simon can speak to that, certainly.
And, of course, the other question is, will Greece be able to stay in the euro or is it eventually going to have to bail out? And, of course, these same questions can be raised about some of the other, particularly southern European economies, Italy, Spain, Portugal.
And so, in many ways, the problems in Europe are much broader and much more basic and, in my opinion, more troubling. Much as -- as bad as they may be here, I think they're worse in Europe overall.
JUDY WOODRUFF: Do you agree with that?
SIMON JOHNSON: Yes. Our banking policy has not been good.
JUDY WOODRUFF: Not that that should make us feel much better.
SIMON JOHNSON: It shouldn't make us feel better at all because we're all interconnected in various ways that we understand, in some ways that are not transparent we don't understand. And the fear factor is what keeps coming back and hurting markets.
JUDY WOODRUFF: Simon Johnson, we keep asking this, it seems to me, this question over and over again. And that is, are these countries going to default on their debt? And people keep looking at Greece. They have looked at other European countries. Why is it -- why are they not able to resolve it one way or another? Why has it been so drawn out, particularly when it comes to Greece?
SIMON JOHNSON: Well, it's -- Europe is -- the eurozone, the euro area is this curious combination of great weakness and some serious strength.
The great weakness is obviously governments like Greece that can't get their fiscal house in order, although I must say that they have tried. If they were to default, which is what's happened in other countries, what people call emerging markets, weaker countries, you would have a collapse of the currency and a lot of problems, but maybe also a recovery.
That can't happen in the euro area, because it's a reserve currency. It's a currency that everybody wants to hold their rainy day money in some degree. So that strength of the euro keeps the Greeks from falling to pieces completely, but it also prevents a decisive resolution of the solution.
JUDY WOODRUFF: So, looking at it from this side of the Atlantic, Bert Ely, do you see -- how much difference does it make to the overall, the global economic picture how Europe resolves this?
BERT ELY: Well, again picking up on something that Simon said, the global financial system is much more integrated than it was before. Trade is also.
And so we cannot be indifferent to what has happened in Europe. And if there are serious problems there, they are going to have spillover effects, not just into the U.S., but into the rest of the world, particularly if there's an economic slowdown in Europe. That's going to feed back into the U.S., for instance, in lower exports to Europe.
So we have to be concerned about what's happening there. And the thing in Europe is a lot of these problems are deep structural problems. They resolve around government policies, unionized work rules and a whole range of issues. And so in the countries like Greece particularly are not adjusting.
And this gets back to a basic question that was raised years ago. And that's, should Greece have even come into the euro in the first place or would it have been better off today had it kept its own currency?
JUDY WOODRUFF: And without resolving that, Simon Johnson, one analyst I was reading today said there's still a fair amount of hype involved in all of this, that expectations around debt in these countries that really is -- has just gotten out of control, but the countries are really not as unhealthy as some have written them off to be.
SIMON JOHNSON: Well, I wouldn't write off Europe. There are some very strong countries there. And there's some very productive people.
But the question -- the question is, to what extent they are hanging together. Are they going to work together with the European Central Bank, with the backing of the Germans and the other strong nations, or to what extent are the Germans in a game of chicken, if you like, with the Greeks, where the Greeks say, we're not going to pay, and the Germans say, well, in that case, we're not going to help you.
And they're driving their cars towards each other very fast with that very scary look in both sets of eyes. We absolutely do not need this at this stage in the global economic recovery.
JUDY WOODRUFF: And they're driving their cars toward each other. And we're watching this, but we still wait to find out.
SIMON JOHNSON: We're standing -- I think the American government is standing on the side lines and saying rather quietly, don't do this. This is bad.
But that's not particularly helpful.
JUDY WOODRUFF: Well, on that note, we will leave it. And I know we're going to come back to both of these questions again.
Simon Johnson, Bert Ely, we thank you both.
BERT ELY: Thank you.
SIMON JOHNSON: Thank you.