BANK OF AMERICA’S MASTERNET SYSTEM: A CASE STUDY IN RISK ASSESSMENT By Jeffery G. Szilagyi Abstract In 1982, Bank of America initiated the development of the Master Net trust accounting system. After $78 million in losses on the project, the bank announced in 1988 that its trust business was being given to a subsidiary because it could no longer handle the operational requirements. MasterNet quickly became known within the information system industry as a classic case of a system that had fallen far short of expectations. The failure was particularly difficult for Bank of America with its rich history of technological successes. While information system successes have received substantial trade press and academic coverage, system failures have drawn significantly less attention. Only recently has academia started examining the causes of information system development failure. Clemons has developed a five risk framework for assessing the total risk of a project in an attempt to understand the possible sources of failure. This thesis will examine the MasterNet project using Clemons' five risk framework as a basis of analysis. This analysis will demonstrate that Bank of America did very little to manage the total project risk spanning the five dimensions. Consequently, the project was a likely candidate for failure. Bank of America’s Master Net Story This section will provide brief coverage of Bank of America’s 1970s history and then proceed through the 1980s with a closer examination of the MasterNet story. A. Tom Clausen's Reign of Neglect On January 1, 1970, Tom Clausen took the reins as Bank of America's president. At the time, Bank of America- tended a stable and profitable retail business that served two and a half million customers. 18 The decentralized retail business proved very easy to -run for the bank's corporate management because an effective set of controls had been established. Thus Clausen's two predecessors -- S. Clark Beise and Rudolph Peterson -- both looked to diversify and nurture new business. As a result, BofA’s corporate finance and international 'lending grew during these years to become significant enterprises. The move toward making large loans to large corporations worked against A.P Giannini's philosophy that emphasized the "common man," but the new business seemed appropriate for a company that had been successful in traditional commercial banking areas. Clausen took what Beise and Peterson started and pushed the expansion of large corporate and international lending. This policy fostered several negative effects. First, the overseas operation grew so quickly that the resultant organization was disorganized and lacked the necessary controls for prudent lending. BofA sent inexperienced managers into new countries who, without an
understanding of Io- cal conditions, made poor credit decisions. Second, Clausen, in his push for a consistent 10% yearly growth in profits, pressured credit officers into extending lower quality loans. These two conditions significantly weakened BofA’s loan portfolio. Third, the retail operation was ignored and neglected. While other banks expanded and modernized their retail operations, BofA spent few resources on the retail side-, instead choosing to commit to the new corporate and international lending efforts. The economic downturn of the late 1970s and early 1980s strained BofA’s weak loan portfolio enough to slice into profits. The first quarter of 1981 brought BofA’s announcement of the first decrease in profits in fourteen years. Clausen had taken steps to ensure steady and predict- able profit increases through the 1980s, quite often using accounting manipulations to adjust earnings. These manipulations were stockpiled as weapons against poor quarters, but by the early 1980s, the stockpile was exhausted. In 1981, Sam Armacost took over as president of Bank of America while Clausen moved on to become head of the World Bank. At the time, BofA’s loan portfolio...
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