The Real Source of BofA's Troubles: Ken Lewis

It’s been awhile since I’ve had a chance to engage in an extended squawk about what a train wreck Bank of America (BAC) has become under Ken Lewis. I’ve been busy! But the company’s management changes of the past few weeks (and years) show yet again the depth of the problems the company faces. The moves may seem dramatic, but they won’t do much to fix what ails BofA. Nothing short of the ouster of Lewis—and the sooner, the better—can do that.

Meanwhile, the management shuffles are just window dressing. In the latest round, Liam McGee, head of retail and a 20-year veteran of the company, has been given the heave-ho. The move comes just weeks after Lewis’s old pal Amy Brinkley, BofA’s incompetent chief risk officer, was shown the door. Meanwhile, the company has been through four CFOs in the past five years, and has conspicuously failed to retain key Merrill Lynch executives.

Not too encouraging! By all appearances, BofA can’t hold on to able executives, and seems to have finally realized that the people who have stuck around aren’t up to the job. But, as I say, the changes are all beside the point. Ken Lewis can point the finger at McGee, Brinkley, and others all he wants for the fix BofA is in, but if he’s honest with himself, he’ll know who’s really to blame: the man in the mirror. Lewis (along with his crony, chief administrative officer Steele Alphin) is the one who put these people in their jobs in the first place, after all. And he’s the one that’s created a management environment so toxic that everyone but BofA lifers can’t leave the company fast enough.

The credit problems at BofA are well known, of course. But these latest personnel moves indicate the company has some severe operating issues, as well. Take, for instance, McGee’s ouster. He was canned because he steered BofA’s consumer business toward a heavy reliance on fees, and pushed branches to market credit cards aggressively.

The strategy was doomed from the start. It’s no secret, first, that branch-originated card accounts bring huge adverse selection. Those are the people issuers know not to mail solicitations to! Sure enough, chargeoffs in BofA’s credit card master trust have ballooned by nearly 500 basis points, or 50%, over the past six months, compared to a 15% rise at other large issuers. My sources tell me that the credit quality of branch-originated accounts has been a disaster, and is a key reason for the zooming in chargeoffs.

The story’s not so different with BofA’s plans to goose its fee income. Regulators have been targeting bank fees for years, most recently with the cardholders’ “bill of rights” just passed by Congress. Even Citigroup (C) knew enough to not go down that road. How could BofA not realize that sooner or later it was going to get squeezed?

McGee’s successor running retail, Brian Moynihan, will almost certainly come up with a better plan. How could he not? In the near-term, though, look for BofA to roll back some fees, and look, too, for the credit metrics at its card unit to continue to lag competitors'. That’s going to reduce the company’s normalized earnings level.

Beyond retail, the new faces on BofA’s org chart don’t figure to be much of an improvement over the old faces. Brinkley’s successor as chief risk officer for instance, is none other than Greg Curl, who used to be the company’s point man on deals. Deals! How in the world did the board let that happen?

Nor (now that I find myself in full-gripe mode) am I especially encouraged by the arrival of Sallie Krawcheck to head Global Wealth and Investment Management. To begin with, the old Merrill Lynch franchise has already been seriously damaged following the early departure of so many senior Merrill managers. It will be a huge job for Krawcheck to fix it. Yes, she is supposed to be Wall Street’s Golden Girl and, yes, she was popular with brokers at Smith Barney when she ran the wealth management operation at Citigroup. But the unit never really boomed under her, and she was clearly in over her head as CFO.

More ominously, Krawcheck has never spent time working in a commercial-bank culture, let alone the morale-sapping one Ken Lewis has created at BofA. Her challenge is huge, whether she knows it or not.

I’ve of course been taking whacks at Ken Lewis for years now, and even went to the company’s annual meeting a few years ago to ask him directly whether he would resign if the company’s performance didn’t improve. But who knew that things would get this bad? Yes, the credit crunch took everyone by surprise. But even as the crisis recedes, BofA finds itself having to fix real problems—problems it created—in its core retail banking business, its credit card business, and its newly acquired wealth management unit. BofA should be ready to go on offense right now, and instead it’s putting out big fires at its key businesses.

Ken Lewis needs to go. And so, by the way, does his personal Rasputin, Steele Alphin. Based on my conversations with former top executives at BofA, Alphin has a near mystical ability to alienate talented executives and drive them away. Other than Lewis, he is the one most responsible for the massive turnover of senior management that has occurred at BofA since 2005. As long as those two are around, I expect BofA will continue to flail.

As the recession ends and the credit markets return to normal, Bank of America will, along with the other large banks, experience a strong earnings recovery. But it has huge challenges longer term. The current management isn’t up to them. The sooner Lewis is gone, the better for BofA shareholders.

Comments

[Angry and d...:]

Captures the spirit of the place perfectly! My main memory of Steele Alphin was his observing presence on the sidelines of a supposedly "spontaneous" volleyball game during a mid-level management training retreat, assessing people on their volleyball competitiveness - I date the end of my own career rise to that afternoon (not good at volleyball? an indicator of banking prowess?). The absolute terror and anguish felt by the banking center tellers and platform staff while I rolled out Ken's "model banking" staffing and work hour reductions shortly after the original NationsBank merger was the darkest time in my rural regional leadership. People who had given their lives to the bank were trashed and discarded...

Aug 19 05:22 AM

[Johnc222:]

Ken Lewis is a visionary and like most creative people never understood completely.

People, that have the gripe pipe in their mouths are the ones ,..who were asked to pick the ball up and kept dropping it. To bench these people was the right decesion.

America aleady has to many Belly achers and complainers.-johnc222

Aug 19 06:56 AM

[Oldbobg:]

These articles prove to me that a lot of people think that the corporation is driven by just a few people. BAC is loaded with talent that is hard at work to make a profit. This is a huge corporation where daily business and business conditions dictate what happens. Granted governmental thugism hurt BAC, which in turn turned personal. It is still a good company to rise from the ashes of the personal shots. Your remarks (to me) are right on target.


On Aug 19 06:56 AM Johnc222 wrote:

> Ken Lewis is a visionary and like most creative people never understood
> completely.
>
> People, that have the gripe pipe in their mouths are the ones ,..who
> were asked to pick the ball up and kept dropping it. To bench these
> people was the right decesion.
>
> America aleady has to many Belly achers and complainers.-johnc222

Aug 19 08:18 AM

[doc tari:]

Uh.....nice piece of journalism..you contradicted yourself more than once in your own article.
The takeaway is. BAC is a great investment (what are you going to do buy stock in the true black hole Citigroup)...the high risk taking idiots are gone. Including some people at Merrill. BAC is going back to what it was...a leaner money machine.
Some of Lay's aquisitions in past seemed boneheaded and crazy risky but...yup they are going to pay off very nicely....already are.
Still not sure what your point is. You must have had a deadline to meat.

Aug 19 08:35 AM

[doc tari:]

Whoop's meant Lewis's acquisition.
Freudian slip as I was reading an old article on Bush, Ken Lay and Enron....ah the good old days of honest business!

Aug 19 08:36 AM

[BAC Retiree:]

Lewis must bear responsibility for placing McGee and Brinkley in their roles. They are now paying the price for poor performance, but should have probably been terminated much sooner. Lewis also hand picked his Board and many have been forced to resign. Lewis has been the leader during this debacle and has harmed employees, shareholders and the reputation of the Bank. It is time for a fresh beginning and time for new leadership. Ken Lewis should gracefully resign or the new Board should terminate his employment............

Aug 19 09:34 AM

[Big Jack58:]

Oh, brother! First, this company was insolvent. Then it was going to be nationalized. Then it was going to be quasi-nationalized with a preferred share conversion from the government ala Citi. Then it was going to linger like a zombi because all of the great folks who helped run Merrill into the dirt left ... o.k. some good guys left because they weren't going to get nice bonus checks, which in some parts of the financial industry represents a majority of their pay ... thank you nanny government. I feel bad for those investors who sold when the stock price was less than $5. Some of us jumped hard at $3 and have been laughing at these articles ever since. So keep believing what the morons in our government say about this guy, his team, the board and the company. Afterall, only government officials such as Bernanke and Paulson can point to Lewis and say he and his company did a terrible thing like purchase Merrill, then turn around and tell everyone how they, themselves were heros for ensuring the BAC ML deal went through ... saving the US economy. As this article proves, people actually believe that crap. UUUGGGHH!

Aug 19 10:50 AM

[Darius:]

Whether or not the Merrill acquisition proves to be accretive in the long run, the point is that Ken Lewis is a public relations nightmare. The way he handled the negotiations and communications throughout the saga cleary demonstrate that he is not CEO material. He simply does not inspre confidence and his judgment is inconsistent at best. Ken was much better as a soldier carrying out orders from Hugh McColl than he has ever been as a leader or a visionary or a team builder. As for acquisitions, Ken has negotiated ones in the past that were much worse than Merrill, such as Lasalle which cost close to same as Merril and was closed with virtually no due diligence and has been a total disaster.

Aug 19 11:13 AM