The American Dream - part 2

What you are trying to do is not unique - localizing and expanding the product suite, providing solutions not money to clients - every bank is trying to do that. Is there a danger that this model might become too competitive as well?

McCarthy: Where we differ from many of our competitors is that we can still lend and underwrite because we have so much capital. The trick is to use the power of relationship and the power of capital to maximize the returns of the transaction and the relationship. Many of our competitors do not have the capital to do the underwriting, or the skills to get in to have the open dialogue or the relationships.

Goldie-Morrison: The strategy is the easy bit - it's staring everyone in the face. The key is having the disciplined execution. The fact that we have actually said that we are not doing such and such a business in such and such a country has stopped the drift.

So what deals have you done?

McCarthy: The most interesting deals are the ones not in the league tables. We learned our lesson in Australia in 2000, when we were number one, two or three in virtually every Aussie dollar league table. But we made no money. So now we do not care if there is a lot of publicity surrounding a deal. It has to make money for us and make sense to our clients.

Goldie-Morrison: The money is not in the public deal any more. It is in the private deal or in the services you can provide surrounding the deal.

McCarthy: We are probably now the largest arranger of aircraft leases in Asia. You are probably regularly flying around in some of our aircraft. We also do a lot of real estate financing in Hong Kong and Singapore with the private arms of public companies. But we are just not interested in flag waving for every single deal we complete.

Goldie-Morrison: We are also one of the biggest clearers of US dollars for Asian banks. And they do that business with us because they do a lot of foreign exchange business with us. It makes life easy doing FX with the same bank as that which does your clearing. In league table businesses such as domestic bonds, loan syndications or project finance, the volumes have gone right down.

McCarthy: A clear example is with the loan market. We always used to be high on the league tables in traditional, jumbo dollar loan syndications. This quarter we would not appear high on the table, but it has been one of our most successful quarters ever. The reason is because this has been the best quarter in years in terms of percentage final holds of what the bank has actually underwritten. That is much more important to us than the headline amount that was underwritten. The fact is that we have been able to get into single digits in every mandate we've undertaken, whether they were public or private deals.

Is it all about hard profits? Isn't that a dangerous game to play?

Goldie-Morrison: It is more than that. We are looking for revenue and revenue growth, net income and efficiency, and then return on capital. It is an optimization model. We do not want to shrink down to become the most profitable bank on earth, as it does not get you anywhere. We want to look for growth opportunities. And I think the Asian local fixed income activity is going to be an area of big growth. It is the placements, the structuring to the issuer and the investor, and then the secondary trading around it all that is going to become a very attractive business.

Even with all the liquidity in the local banking systems and the low, low interest rates?

Goldie-Morrison: Clients do not just want to go and get money from the bank these days. They want longer maturities and they want it fixed rate. They may want it with non-traditional coupons; they may want it in different hierarchies in their capital structures. They may want to do or receive asset-backed deals.

So has straight fixed income become a loss leader?

Goldie-Morrison: You do not make a huge amount of money on just a straight fixed income deal. The fees from new issuance basically pay to keep the machine going. The juice is in the secondary market and the structuring through interest rate derivatives, credit derivatives or collateralized debt obligations.

Are these the areas you are looking to build out?

McCarthy: Phase two is all about more products. We are building up in commodities. We are rebuilding some of the derivatives and fixed income products. We are spending a lot of money in Korea and India on the interfaces with the electronic trading systems. We are putting capital into the stand-alone subsidiaries we need for some of the local securities markets. But, again, it is all heavily driven by what our clients want.

Goldie-Morrison: And our clients now are not just companies. They are also the institutional investors.

So the growth in your business will depend on the rate of development of the local markets.

Goldie-Morrison: To a large degree, yes. It will also be linked to the resilience of those markets and the economies they serve.

What is the view on Asia from the good 'ole boys in North Carolina? There is a perception among your Asian staff that head office does not really value Asia.

Goldie-Morrison: We are not Bank in America, although we are Bank of America. We have such a demand for money to fix the businesses we like and which will give us a good return that we have had to get out of some businesses that do not meet our internal return hurdle, such as offshore retail banking in some markets. However, we continue to operate our retail banking presence in a couple of overseas markets - Hong Kong and Macau.

McCarthy: The majority of the machinery that interacts with Asia sits in New York, not Charlotte. Duncan and most of his army are in New York.

Goldie-Morrison: Our consumer and commercial businesses - which are only available in the US - make $5 billion a year after tax. That's 60% of our profits. So, it is understandable that 60% of management time is spent on those businesses. Yet the growth of our international business has been huge. Last year alone our global corporate and investment banking business made a net profit of $1.9 billion on revenues of $9.2 billion, which was a return on equity of 16%.

With hindsight how do you look on the decision to shut down your Asian equities, M&A and corporate advisory business last summer?

Goldie-Morrison: Looking back I think it was a logical decision. If you look at what we were making out of investment banking in Asia and the leverage we were creating, it was marginal. The other side was that we had a bifurcated coverage model with relationship managers from that group on top of existing client managers. So, now that we have a single coverage model, which makes the client understand us better and makes us more efficient.

McCarthy: The only product we lost was only a little bit of M&A. We are still bringing our Asian clients into the US equity markets through direct linkage with our execution folks in the US.