Ken Lewis got tired of looking over his shoulder.
Everywhere he went, there were assassins lurking in the shadows. At football games, when the players went into a huddle, he knew they were talking about him.
He’s chief exec of Bank of America, the nation’s largest bank by assets, and the heat was too much. He had to get out of the kitchen.
Since taking the helm as CEO in 2001, BofA has tripled in size by becoming the biggest U.S. bank by assets and deposits. Lewis spent more than $130 billion on acquisitions.
Lewis is one of the last remaining members of the “Old Guard” to cash in his chips. Apparently he could no longer hack mounting scrutiny relating to BofA’s acquisition of Merrill Lynch for $29 billion.
Other CEOs who have left under pressure include James Cayne of Bear Stearns Cos., Charles Prince of Citigroup Inc., Stanley O’Neal of Merrill, Kennedy Thompson of Wachovia and Dick Fuld of Lehman Brothers Holdings Inc. Morgan Stanley head John Mack said he plans to step down in January. Many analysts believe that the next head on a platter will belong to Vikram Pandit, Citigroup’s current embattled CEO.
Under Lewis’ regime, BofA engineered several mega-mergers. Acquisitions during his tenure included FleetBoston Financial Corp. for $48 billion in 2004, MBNA Corp for $35 billion in 2006, LaSalle Bank of Chicago for $21 billion in 2007 and troubled California lender Countrywide for $2.5 billion in 2008.
Despite evidence that the Merrill Lynch merger has started to pay dividends, the internal drumbeat for his resignation, especially by shareholders has been growing.
While the retail side of the bank has struggled to curb rising defaults on credit cards, consumer loans and commercial real estate, the brokerage side of the bank anchored by the Merrill Lynch was responsible for 24 percent of the company’s first half profits. Lewis’ Merrill bet has paid-off as an improving stock market and soaring demand for debt issues boosted trading and investment banking revenues.
Apparently the rub with shareholders has been the precipitous drop in dividends and stock value. Quarterly dividends have dropped to 1 cent from 64 cents a share in 2008, and shares prices remain more than one third lower than they were in 2001 when Lewis took the reins.
Even though the Merrill merger seems to be paying off, Lewis has been dogged by questions surrounding the acquisition. After inking the deal in September, he tried to unwind it in December as fourth quarter losses at Merrill spiraled past $15 billion.
This change of heart triggered a clash with regulators, and drew the ire of then Treasury Secretary Hank Paulson. BofA’s attempt to renege also led to probes of the transaction by Congress, the Securities and Exchange Commission and New York’s attorney general on whether Lewis had misled investors about Merrill’s losses and bonuses.
Lewis predecessor Hugh McColl, Jr. was known as the master dealmaker. He had taken a sleepy regional bank – North Carolina National Bank – and through acquisitions transformed it into the country’s second largest financial institution. When Lewis stepped in, he vowed to investors that the era of big takeovers had passed and that he would expand the bank’s fortunes by mining more growth out of its 30 million households.
Lewis’ attempt to cross-sell more products to BofA’s existing customer base fell flat. He quickly discovered that despite their loyalty, customers didn’t trust their bank to do much more than to handle a checking account or car loan.
Within a couple of years, Lewis found out what McColl already knew. He started arranging mergers that made even McColl blush.
Paradoxically, Lewis was done in by doing what the bank under McColl had done so well. The problem was the way it was done and the lingering perception that he may have misused taxpayer monies to fund the billions in controversial bonuses paid to Merrill execs including its former CEO John Thain.
In its darkest hour, as BofA allegedly teetered on the brink, the government kicked in $45 billion cash and an additional $100+ guarantees for trash-assets to keep the bank from imploding. Instead of using all of this taxpayer money to bolster its cash position, regulators, lawmakers and investors charge that approximately $5 billion was earmarked for bonuses paid to Merrill’s executives.
Although Lewis has contended that the bank now is in a position to start repaying the government, he has been unable to escape the charges that he misled BofA shareholders and misused taxpayer funds.
Lewis’s resignation has become a symbolic anthem for those that are calling for more transparency and accountability on Wall Street. His departure may also signal the start of a new era of greater hands-on regulatory scrutiny over mega institutions like Bank of America.
While it may be easy to portray Lewis as a victim of his blind ambition and hubris in pursuing the Countrywide and Merrill deals at the worst times; in retrospect, he was guilty of misreading the political tea leaves.
At any other time, and under nearly any other circumstances, these mergers would have been hailed. But with the country looking for answers to its economic downfall in the wake of the worst recession in 70 years, it’s not surprising that CEO’s like Lewis have been forced to face the hangman.
In the coming months, as the economy regains its footing, and regulators continue their search for culprits, Lewis will not be the last executive to lose his head.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
