By Christina Rexrode And Peter Rudegeair
Thomas Montag rose to second in command at Bank of America Corp. in large part by making his investment-banking units consistently among the firm's most profitable.
Now, as Mr. Montag's group struggles through its toughest patch in years, it gets a new mandate: Do more with less.
Bank of America on Tuesday announced plans to lay off about 200 employees--all in Mr. Montag's trading and investment-banking units--as Chief Executive Brian Moynihan makes good on his pledge from earlier this month that he would further reduce costs if results didn't improve.
The moves highlight the pressure on Mr. Montag, a former Stanford University baseball player and Goldman Sachs Group Inc. trader who faces the difficult task of maintaining morale and competitiveness at the investment bank while enforcing the conservative and increasingly cost-conscious mandates of his boss.
Bank of America's investment-banking and trading units in recent years routinely generated as much as 40% of revenue with less than 10% of the bank's staff.
But it is the only large U.S. bank to post a decline in revenue from trading and investment banking for the first half of this year. The bank has lost ground in areas it has identified for expansion, such as mergers and acquisitions. Recently, more managing directors in the investment bank have departed than at rivals J.P. Morgan Chase & Co. and Citigroup Inc. combined, according to a confidential report from recruiting firm Sheffield Haworth that was reviewed by The Wall Street Journal. The report examined departures from the start of 2014 through the first half of this year.
The tension within the investment bank is in many ways a legacy of the awkward 2009 marriage between Bank of America--long a large consumer-focused bank--and Merrill Lynch, the historic Wall Street firm that overloaded on risky securities in the years before the financial crisis.
Many Merrill bankers, used to operating in regional fiefdoms, have long been annoyed at Bank of America's stricter oversight of their business decisions like hiring and compensation, said people familiar with the matter. A few years ago, Mr. Montag supported an idea to call his units "Merrill Lynch" rather than their current title, "Bank of America Merrill Lynch," people close to the situation said. Some bankers thought the Merrill Lynch brand would be more appealing to some clients.
Mr. Moynihan, who disagreed, won out.
Bank of America's more regimented culture has manifested itself in various ways. Senior bankers have chafed at a requirement that they fill out time sheets documenting how they spend each hour, current and former employees said. The bank has also cut back on leveraged loans due to tougher regulatory scrutiny, even while some rivals pressed ahead.
The bank said its caution is appropriate. In a memo earlier this year, Mr. Moynihan said Mr. Montag's global banking and global markets groups had "struck the risk-reward balance that is the new standard for our industry."
Mr. Moynihan has said he wants Mr. Montag's trading business to take less risk than it might have in the past and to produce less volatile earnings. He has said Mr. Montag's banking business, which helps corporate clients with transactions, can grow along with customers.
In an interview Tuesday, Mr. Montag said new regulations mean the bank is no longer going to engage in some of the products and activities that it may have even just a few years ago. "The rules have changed," Mr. Montag said.
Mr. Moynihan won a proxy battle this month enabling him to keep the title of chairman as well as CEO. But the firm has lagged behind peers on measures like stock performance and profits, and some analysts believe Mr. Moynihan's expense-cutting strategy is starting to run out of steam.
Mr. Montag, 58 years old, joined Bank of America when it bought Merrill, though he had been at Merrill only briefly at the time. People at the firm said he presents a personality contrast to Mr. Moynihan, a detail-oriented workhorse who isn't known to be gregarious. Mr. Montag spent much of his Goldman career in Japan, has been known to sing karaoke at work functions and frequently walks the trading floor to chat up employees, people who have worked with him said.
The two executives aren't personally close, people familiar with the matter said.
In July, when Mr. Moynihan shook up his management team, Mr. Montag was the first executive named in the memo, leading many investors and analysts to assume that he is the leading candidate if Mr. Moynihan were to step down in the near term. Mr. Moynihan praised Mr. Montag's "energetic record of accomplishment," as well as his "expertise and steady hand."
Bank of America has depended heavily on the investment bank since buying Merrill Lynch on the cusp of the financial crisis, as low interest rates have challenged the consumer bank. Mr. Montag's units also often carried the bank through its long years of high legal costs, many of which stemmed from the consumer unit.
But Mr. Montag's group is now slipping in some key areas.
This year, the bank dropped to No. 12 in health-care deals from No. 2 last year, according to Dealogic. Overall, the bank's track record this year puts it at risk of losing its place among the top three investment banks as measured by fees for the first time since the Merrill Lynch acquisition.
One area where Mr. Montag appears to be gaining traction is in his push to get his investment bank to work with the consumer bank and wealth- management unit. The strategy, known as cross-selling, is meant to encourage investment bankers to entice corporate clients to do other business with the bank, such as 401(k)s for its employees or a mortgage for its CEO.
At one company function, Mr. Montag wore a hat and T-shirt emblazoned with the words "Cross Sell." The bank said earlier this year that referral volume had increased to 4.2 million in 2014 from 300,000 in 2010, with a success rate of 20%.
Part of Bank of America's problem is the business mix. Bank of America's trading unit tends to focus on credit products and mortgage-backed securities, which have fared poorly this year across the industry. Asked earlier this year if the bank needed to change its trading makeup, Mr. Moynihan replied that the current setup created lower risk and would perform better when credit products pick up.
"It's not an existential question at all," Mr. Moynihan said at the time.The bank said it has hired other employees this year in banking and trading, including more than 650 recent graduates as analysts and associates.