Adizes, a Yugoslavian-born management consultant from Santa Monica, California, to coax top managers to contribute ideas for restructuring the bank. Adizes, who has helped restructure other companies but no large banks, was an unusual choice. But outside help of some sort seemed imperative. "The painful part of the process," says Armacost, "is that the existing culture would have preferred to sit back and let me make all those decisions: 'Tell us what to do and we'll do it.' That was fine, but you're not going to develop people that way, you're not going to develop any innovative entrepreneurial approach, and you're not going to develop feedback."

Adizes spent two years in the hard slog of building a consensus about how best to redesign the company. It proved frustrating and time-consuming, with Adizes bringing together almost 2,000 executives and other employees for what amounted to a series of corporate encounter groups.

In the past two months, the company has begun revealing to the public the first fruits of this process. In February the bank unveiled its biggest change: a new organization called Global Consumer Markets, under Vice Chairman Wiesler, which realigns consumer banking into four specialized lines - the mass market, affluent consumers, not-so-affluent customers who want personalized service, and small business. A revamping of the World banking group, which serves large corporations and overseas customers, will come later.

Many outsiders scoff at these changes. "It took them two years, and they're just playing musical chairs," snorts a former Bank of America executive. "That won't solve their problems." But along with the reshufflings have come striking changes in the company's ways of doing things, starting with pay. In the past Bank of America employees were graded much like civil servants, with narrow pay bands for those within the same grade. Now the bank pays top performers in a grade up to 60% more than poor performers.

The California branch system, meanwhile, is in the midst of a serious shakeup. In the past, Bank of America's branch basis on manager's size: the bigger rewarded the I branch in assets and employees, the higher the pay. But in a deregulated world, size is less important than bringing in profitable business, and the branch managers have been told to get more.
"We started telling them that they are salespeople," says Wiesler, and the compensation formula now encourages salesmanship as well as cost control. Armacost has wrung big savings out of the branch system, closing 132 branches in the U.S. last year and trimming the size of 42. Some 8,000 jobs have been eliminated in the California network alone.

But Armacost has yet to launch a companywide assault on costs. Stark figures on assets per employee show the magnitude of the job that still lies largely ahead. BankAmerica ranks dead last among the top ten banks, with $1.4 million of assets per employee to Citicorp's $2.1 million. Richard Fredericks, a partner with the San Francisco brokerage firm Montgomery Securities, says, "Costs are much too high for BankAmerica's base of business."

Armacost's heavy spending on technology virtually dictates that he offset the costs with savings elsewhere. BankAmerica has spent $105 million on ATMs. And it's getting ready to spend as much as $1 billion a year, in-eluding salaries, equipment, and overhead, building one of the most sophisticated worldwide electronic networks in banking.

BANKAMERICA's overhead expenses-including rent and headquarters staff salaries zoomed 19% in 1984 alone. To suggestions that he's too timid to. sail into the problem, Armacost counters: "I could lay off 10,000 people. But who would deliver the services? Why should I be frantic to make a change that would destroy a lot of the inherently good parts of the cultural values of the company? To drive away most of my customers?"
The other stain on Armacost's record is the bank's bumper crop of snafus. Some stem from poor decisions, others from the failure of internal controls. Among the dreadful decisions: the company bought an Argentine plunged bank in 1981 unusual just before swiftness. The 6i peso It also bought a skyscraper in Hong Kong just before the bubble burst in the colony's real estate market.

Then there's the computer snarl in BankArnerica's securities trading operations in New York, which the bank has never discussed publicly. In the second quarter of last year, BankAmerica installed new computer software, failing to follow the usual procedure of keeping the old system around for a while as a backup. The new system collapsed, snarling paperwork and forcing BankAmerica to send in dozens of internal auditors to sort out some $10 billion of transactions. In the fourth quarter, the bank quietly set up a $ 20 million reserve against possible losses.

The biggest bumble by far involves those mortgages. Bank-America alleges that a couple of convicted felons used unwitting employees of its Inglewood, California, branch in a scheme to sell overvalued mortgages. The bank charges that National Mortgage Equity Corp., a Southern California mortgage banking firm, wrote mortgages on properties in Texas and California at grossly inflated prices. National Mortgage sold them to thrift institutions, allegedly skimming cash for itself and some of the borrowers.

The bank acted as escrow agent and trustee for the mortgages, collecting cash from potential buyers and then holding the mortgages in trust. But branch officers also agreed to make sure the mortgages were properly document-ed-thereby putting Bank of America on the line. The bank discovered irregularities in the fourth quarter, following a tip from Sea-men's Bank for Savings of New York, which bought $19 million of the mortgages and got burned. Worried about its potential liability and possible damage to its name, Bank of America paid $133 million to buy back mortgages owned by 19 thrift institutions. It then took the $95-million charge against fourth-quarter profits the difference between what it shelled out and the $38 million it figures it could recover by selling the mortgaged real estate.

The bank is trying to recoup some of that cash. On March 1, it filed suit against National Mortgage, its principals, and other firms and individuals that allegedly had dealings with it, charging them with fraud and demanding damages of $385 million. The bank charged none of its own employees with fraud. But it dismissed five and demoted a sixth, filing suit against all six for gross negligence. BankAmerica's employee liability insurance could cover some of the losses. Of the bank's embarrassment, an insider wryly observes: "I guess it's better to be dumb than crooked."

As news of the mortgage losses broke, rumors flew that the board's impatience with Armacost was reaching the flash point. A nasty confrontation never occurred, and it seems unlikely that the unwieldy 27-member board could easily coalesce to oppose the boss. But sources close to the company say that several directions have been disgruntled for some time. They mention Robert McNamara, former president of the World Bank who became a director shortly before Clausen left to take McNamara's job.

Charles Schwab who became the bank's largest stockholder (with 0.3% of the shares) when he sold it his brokerage house; and Claire Giannini Hoffman, daughter of the lat, founder A. P. Giannini and a reputed critic of management.

The mortgage news dribbled out in a manner that annoyed the directors. Not until a meeting in Febn ary-after details had already appeared in the press-did company officers discuss the alleged mortgage scam with the full board. l that point, the bank had set aside $ 37 million reserve for possible losses. Only in response to questions did executives acknowledge that the exposure might be great. Just three days later the news can out that BankAmerica had boost1 the reserve by $58 million.

The possibility of a confrontation has receded for now. Armacost h convinced some board members that behind the bad numbers tl bank is making progress. He h also vowed to sever some of Bar America's marginal businesses. the December board meeting promised to apply tough criteria all operations. "If they cannot share viable rates of return," says Armacost, "we'll have to flow the sources elsewhere." He probably has no alternative. Cost-cutting windfalls will be hard to come by the years ahead. "They're all tot years, man," Armacost says with a shrug. "Nothing's easy."

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