If I’m reading Bank of America’s (BAC) version of events right, the crackup of the company’s acquisition of Merrill Lynch is totally and completely Merrill’s fault. First, losses in Merrill’s mortgage portfolio ballooned in the fourth quarter without warning. Next, Merrill took way too long to tell BofA about the problems. Then, to make matters worse, Merrill’s John Thain doled out big bonuses to Merrill executives before the deal closed, and before the new losses came to light. Ken Lewis heroically went through with transaction anyway as a public service, with the help of the federal government. Lucky us.
That sounds plausible enough. But I don’t buy it; it simply doesn’t fit the facts as we know them.
More likely, the Merrill deal was merely the latest instance of Ken-Lewis-style empire-building at BofA--complete with an inflated transaction price and slapdash due diligence. The deal was unique only in that Lewis was able to stick up the federal government in the course of getting it done. It all blew up in Ken’s face because, well, if you do these sorts of acquisitions often enough, one of them sooner or later will. That’s what happened to Hugh McColl. That’s what happened to Ed Crutchfield. And now it’s happened to Ken Lewis. Such a surprise.
Think this is another one of my standard-issue anti-Ken Lewis rants? Suit yourself. Still, it will be hard to deny that facts as we know them don’t square with BofA’s official line. Let’s look at what happened, when:
December 5, 2008: American Banker names Ken Lewis “Banker of the Year” for steering BofA clear of the problems in mortgage lending that have brought virtually every other major financial institution low.
December 6: Merrill Lynch and BofA shareholders approve Bank of America’s acquisition of Merrill Lynch.
December 8: Merrill Lynch holds its last board meeting. CEO John Thain tells the board that losses are in line with prior forecasts, and recommends bonuses for Merrill’s top management. The board later declines to approve the bonuses Thain recommended.
December 16: Ken Lewis tells Hank Paulson and Ben Bernanke that Merrill Lynch’s losses are suddenly so large BofA is considering not closing on the transaction. Paulson and Bernanke presumably have serious palpitations.
December 17: Bernanke and Paulson encourage Lewis to close as scheduled on January 1 to avoid another huge market disruption. They promise BofA additional government assistance.
December 31: Merrill Lynch pays bonuses to employees (other than top management) earlier than expected.
January 1, 2009: BofA completes deal.
January 12: The Daily Beast’s Charles Gasparino reports that Thain told a meeting of Merrill’s top producers that, in the words of one participant, he’s “in the line of succession” to become BofA’s next CEO.
January 16: BofA announces its huge fourth-quarter loss, as well as Merrill’s loss and the additional capital assistance and loss-sharing agreement with government. At this point, the Merrill-BofA relationship is still copacetic. On the conference call Lewis states flatly that “we are happy that John Thain has assumed a major role at Bank of America.”
January 20: The first major public murmuring Lewis’s job might be at risk. The Wall Street Journal reports “a group of Bank of America shareholders approached former [BofA] Chief Financial Officer James Hance last week and asked if he would be interested in return to the Charlotte, N.C., company as Chief Executive Officer.”
January 22: The trashing of Thain begins. CNBC reports Thain spent $1.2 million to redecorate his office when he became CEO the year before (well before any BofA merger discussion). Miraculously, CNBC even has photos.
January 22: Lewis flies to New York, meets with Thain for less than 15 minutes at Lewis’ office, and cans him. As if by coincidence, a photographer is in the lobby to catch Lewis leaving the building.
January 23: The Charlotte Observer, citing unnamed BofA executives, provides an expanded laundry list of reasons why Lewis decided Thain had to go. They ranged from “concerns about [Thain’s] leadership,” to his plans to attend the World Economic Forum in Davos, to those December bonuses to Merrill employees. BofA also isn’t said to have been happy that Thain has just taken a ski vacation in Vail, Colorado.
How odd. Sometime in January, Ken Lewis’s attitude toward John Thain underwent a complete, mysterious reversal. On January 16, knowing about Merrill’s fourth quarter loss, the December bonuses, and the Davos plans, Lewis was still a big Thain fan. Six days later, with nothing changed except that Lewis’s job is suddenly said to be at risk, an anonymous anti-Thain barrage emerges from BofA and Thain is suddenly out the door.
There is only one common theme to this whole pathetic story: Ken Lewis’s vanity and instinct to look out for himself first. It was Lewis’ hubris that let him to agree to pay such a fat price for Merrill Lynch in the first place—even in the midst of a financial meltdown and (naturally) with essentially no due diligence. Then Lewis’s ego drove him to unceremoniously push Thain out of the way—and trash him in the process—as a way to protect his own job.
I simply can’t believe that in the eight days in between Merrill’s December 8 board meeting and the December 16 call between Lewis and Paulson and Bernanke, that Merrill’s estimate of its fourth quarter loss quadrupled. (And even if it did, Lewis wasn’t so troubled by the loss, or the manner of its disclosure to BofA, that he was ready to dump Thain when he first learned if it.) What I do believe is Ken Lewis decided to play chicken with the Paulson and Bernanke. Lewis knew that, given the financial markets’ instability, the feds wouldn’t let BofA walk away from the deal. So he and his financial “experts” trumped up the expected losses in order to wheedle guarantees from the federal government.
Nor do I believe Lewis was troubled by the early payment of the Merrill bonuses. This isn’t the first time the guy’s done a deal. Of course he would want Merrill to front-load as many expenses as it could into December, when they’d be on Merrill’s books and not BofA’s.
But when the whispers started that Lewis himself might soon be out of a job because of the Merrill mess, he went nuclear on Thain. Suddenly we began reading about Thain’s decorating habits, and those supposedly clandestine bonuses (which Merrill now admits it knew all about, by the way), and the skiing vacations. To cap things off, Lewis makes a dramatic trip to New York to seek Thain’s resignation at midday. To complete the drama, he buys stock in the open market the following day.
The whole fiasco had nothing to do with Thain’s integrity or competence—and everything to do with Ken Lewis’s greed and ego.
Ken Lewis and Hugh McColl are egomaniacs that should never, I repeat never, have been chosen to run publicly held companies. The market never caught on to Hugh McColl’s scam, even though the stock prices of “smaller” banks significantly outperformed the behemoth he created.
Ken Lewis may not be as big an egomaniac as Hugh McColl. But he learned the same bad practices from the master, and has put them to use in a nasty bear market and credit contraction—with calamitous results.
At Bank of America’s annual meeting in 2006, I went to the microphone and asked Ken Lewis if he would resign. In the interim, he’s gone from high-level BofA lifer to, briefly, industry visionary, to the latest Charlotte egomaniac to become undone by his own ambition. I thought Lewis should resign then, and I think he should resign now. Somebody please explain to me, given this latest train wreck, why I’m wrong.