Thanks to double-digit inflation, a debt crisis throughout Latin America, and general mismanagement, Bank of America recorded three successive annual losses in the span from 1985 to 1987. Things got so bad for the nation's biggest bank by assets at the time that analysts and commentators began predicting its imminent demise.
But all of this changed as abruptly as it began. After clearing its books of bad loans, auctioning off real estate and non-core operating divisions, laying off thousands of employees, and replacing both its chairman and CEO, Bank of America's profits soared.
It earned more money in 1988 than it had since its founding 84 years earlier. And things got better from there, with annual net income by the mid-1990s that was four times larger than the bank's peak pre-crisis performance.
The lesson I learned from this experience, and from the following chart in particular, is that, despite Warren Buffett's dictum that "turnarounds seldom turn," banks can in fact emerge from a potentially existential crisis in bigger and better shape than ever before.
Of course, as bad as the 1980s were for banks, the financial crisis of 2008-2009 was worse. But while this may lead one to conclude that Bank of America's experience three decades ago shouldn't be used to assess its prospects today, I disagree.
Even though the latest crisis was the worst economic cataclysm since the Great Depression, Bank of America arguably fared better through it than it did in the mid-1980s. It reported only a single annual loss over the past decade compared to three successive annual losses in the prior period.
Additionally, while it's true that Bank of America barely survived the seizure of credit markets after the housing bubble burst, not to mention the onerous legal costs that followed, it has emerged as a bigger and more diversified bank than ever before thanks to its shotgun marriage to Merrill Lynch in 2008.
Lastly, now that Bank of America's outstanding legal liabilities are tapering off and the lions' share of its credit losses are also in the rearview mirror, its bottom line is finally set to soar. We saw this in the latest quarter when the bank earned a 0.99% return on assets, which is just below the 1% threshold that has long been associated with the nation's most profitable banks.
The net result is that Bank of America's profit, and thus its share price, may finally be set to recover as radically as it did in the late-1980s and early-1990s.