The Bank of New York Mellon Corp. announced a $280 million lawsuit payment related to the financial crisis. While the stock has performed better in the year to date as the New York financial services firm puts some problems behind it, investors who seek to accurately value the shares must still take numerous uncertainties into account.
The workers’ compensation insurance provider CompSource Oklahoma had brought a class action lawsuit against BNY Mellon in the state’s federal court, seeking money back in connection with investments in the collateralized debt vehicle Sigma Finance Inc. BNY Mellon said in a regulatory filing Thursday that it took an after-tax charge of around $210 million in the second quarter 2012 related to the claims.
“The Sigma settlement agreement reflects the meaningful progress we are making in navigating the litigation environment that affects our company and the industry overall,” said Gerald L. Hassell, chairman, president and CEO of BNY Mellon, in a press release Friday. “We are putting this litigation behind us, with no significant impact on our capital position, while continuing to make headway on other matters.”
Certainly the BNY Mellon has made some positive steps toward recovery in recent months. The stock gained 7.7% more value in the year to date, slightly outperforming the S&P 500’s 7.4% improvement during the same time period. This contrasts with the past year, when the Bank of New York shed around 16.7% of its value and the U.S. stock market index rose nearly 0.5%. The BNY Mellon’s stock was trading at around $21.38 per share near closing time on Monday.
Investors who feel more confident about the BNY Mellon are playing a guessing game. In the first place, the company has gone through events in recent years that bring change — and uncertainty — into its financial statements. For example, in July 2011 BNY Mellon said it completed its acquisition of Talon Asset Management for an undisclosed amount. Then on August 10, 2011 the bank announced a plan to cut 1,500 positions, or around 3% of its workforce. About a month later BNY Mellon said it agreed to sell a majority of its equity stake in the investment technology services company ConvergEx Group while remaining a minority shareholder. Only months later on Nov. 30, 2011, BNY Mellon acquired the Australian clearing firm Penson Financial Services Australia Pty Ltd. in a $33 million share purchase transaction. And on December 31, 2011 BNY Mellon sold its Shareowner Services business at a sales price of $550 million in a deal involving the financial services provider Computershare Limited.
In the first place, selling assets to raise money isn’t a particularly sustainable business strategy. Meanwhile, the turmoil involved makes it harder to see how much BNY Mellon has actually lost or earned. For example, when companies announce plans to lay off staff they typically estimate the amount that they will have to spend on related costs such as severance packages. But in its August 2011 regulatory filing, BNY Mellon said only that it would take a hit related to its actions “expected to be more than offset by a gain on the previously-announced sale of the company’s interest in ConvergEx.” The press release about the ConvergEx deal doesn’t value it with any simple, obvious number; that deal, part of an agreement for funds advised by the private equity firm CVC Capital Partners to acquire ConvergEx in an all cash transaction expected to close in the early fall 2011, was supposed to add around 15 basis points to BNY Mellon’s Basel III Tier 1 Common Equity. Basel III is a revised global regulatory standard that basically requires banks to have less debt and more money on the ready to back up their promises to clients, but the criteria for what constitutes Basel III Tier 1 Common Equity are complex enough that the Basel Committee on Banking Supervision in July 2011 had to publish a list of frequently asked questions about it ranging from how to treat one’s investments to what a bank should do if it’s “unsure” whether a governing jurisdiction has certain laws in place. In a nutshell, it seems that selling a stake in ConvergeEx provided BNY Mellon with more money but precisely how much is difficult to answer. Then finally on December 23, 2011, BNY Mellon announced that it agreed to terminate its planned deal with ConvergEx, making it all seem a wash.
So what happened to the costs associated with the layoffs in August? The bank ended up reporting them in an unusually complicated way. In February 28 BNY Mellon said it had to pay $107 million in costs related to “global efficiency initiatives” in 2011, around half of which went toward investment management and services and around half toward other business segments including those involving partners. In a separate line on the bank’s income statement, it reported an “aggregate restructuring charge” comprised of $78 million of severance costs and $29 million primarily for operating lease-related items and consulting costs in 2011.
Some of the managers coping with all this confusion and transition are new. To name only a couple recent changes in BNY Mellon’s senior ranks, the bank said on April 27 that it named Suresh Kumar its CIO and on June 7 Edward Watson to the newly created position of executive vice president and COO.
Meanwhile, the company has had enough run-ins with regulators to raise the possibility that it doesn’t clean up its act after getting caught. For example, the New York Attorney General’s office in May 2010 filed suit against a BNY Mellon subsidiary for allegedly misleading clients about investments tied to the famed Ponzi schemer Bernard L. Madoff.
In part due to the doubt brought on by such developments, GMI gives BNY Mellon an F on its corporate governance. The bank’s financial statements reflect an AGR score of 1, indicating more accounting and governance risk than 99% of comparable companies.