Time to End the Ken Lewis Horror Show

Ken Lewis’ stewardship over his big bank of horrors needs to end now.

If there was any doubt that Bank of America (BAC) would be better off with an interim chief executive instead of letting Lewis keep the seat warm for another few months, the bank’s dismal third-quarter earnings should put that notion to rest.

The bank’s $2.24 billion loss should be the final act of Lewis’ failed tenure as a merger-crazed chief executive. He is solely responsible for turning Bank of America into a sickly, “too big to fail” behemoth. In writing down some $10 billion in mostly consumer loans as uncollectible, investors need look no further than the past acquisitions of credit card giant MBNA and mortgage lender Countrywide Financial for signs of Lewis’ fingerprints on its current woes.

And there’s no indication the pain the bank is feeling from its exposure to the struggling American consumer will end anytime soon. With tens of millions of credit card users, homeowners and small businesses as customers, Bank of America is more sensitive to the ailing U.S. economy than any other bank.

So any further uptick in the unemployment rate or another surge in foreclosures will inevitably mean billions more in loan write-downs.

Right now, Bank of America has $35.8 billion in total set aside for loan and lease losses — nearly $15 billion more than a year ago. Overall, it lists $33.8 billion in nonperforming assets. The bank says the “deterioration in credit quality slowed” in the third quarter. But it’s anyone’s guess whether that trend will hold in the coming quarters.

Lewis now points to the bank’s much-maligned acquisition of Merrill Lynch as a savior for the financial conglomerate. Net income from the bank’s global market group rose by $2.8 billion largely because of the addition of Merrill’s stock and bond trading desks.

That’s great. But let’s be honest: In this environment any trading desk worth with a modicum of talent can make money with the Federal Reserve all but handing over money to investment banks at dirt cheap interest rates.

The tough sledding with Merrill is still to come as the bank will have to fight to retain top talent, some of whom are already being poached by more financially fit competitors. But that could be hard as long as Bank of America remains a ward of the state and subject to the edicts of pay czar Kenneth Feinberg.

And there could be trouble ahead — all the additional derivatives risk that Bank of America took on with Merrill. As my Reuters Commentary colleague Felix Salmon pointed out last week, the total value of Bank of America’s derivatives holdings nearly doubled in the wake of the Merrill deal to $75.3 trillion.

In terms of derivatives exposure, Bank of America is closing in quick on JPMorgan Chase (JPM) — the perennial derivatives leader — with $79.9 trillion of these sophisticated and little-understood financial instruments on its books.

Guess that means that after the Merrill deal, Bank of America is now too big to fail squared.

Update: By request, here’s a link to the derivative league tables for big US banks. Table 2 is the relevant chart. Enjoy.

Comments

[Oldbobg:]

I find it amazing how a bank CEO goes from bringing an institution like BofA from a success (Nations Bank-granted he wasn't CEO, but powerful leader) to bringing it to its knees as stated by the author. His job was to make the bank continue to grow. The dividiends prove over time to be on Mr. Lewis's side. The problem here is everyone wishes to find a scapegoat to point fingers at when the circumstances change and governmental officials make demands. Shame on all of us for following this type of thinking. One must look at the situation in total befor saying that Mr. Lewis must go. Everyone has opinions based on what they feel the situation tells them. Just take the entire situation into pesepective.

Oct 18 08:48 AM

[katmark:]

History will show Ken Lewis made the right moves at the
worst possible times for America.

Oct 18 09:29 AM

[MrBuzz:]

Ken Lewis has lead Bank of America for many years. During all but the last few years the bank was building on year after year success. As a customer of the bank I am really impressed with the online services. It is the easiest bank to use and I have been a customer since it bought Barnnet Bank in the 1980's. Huge did a great job pulling the pieces together to make America's 1st Nationwide bank. Ken Lewis has been at his side and then at the head most of the way. How he got hoodwinked by the Treasury and then President Obama is sad. Have you noticed. Any business leader or manager who trys to work with Obama or his people end up trashed? I think its going to be a trend of his presidency.

Oct 18 10:01 AM

[HBWOW:]

Derivatives, unearned bonuses, unwarranted stock options, all too
much fraud BUT no punishment AS USUAL.

Oct 18 02:04 PM