BofA CEO Lewis the Next to Fall?

Ken Lewis is the current chairman and CEO of the Bank of America Corporation (BAC), the largest consumer bank in the United States. As the CEO, he has made some incredible acquisitions which have added enormous shareholder value to the company:

• MBNA (2005) $35 billion in cash and stock
• Fleet Boston Financial (2004) $47 billion in stock
• US Trust (2006) $3.3 billion, all cash

However, the latest acquisition, Countrywide Financial (CFC), may spell the end of Ken Lewis’s reign as the prolific leader of this Charlotte, NC banking juggernaut.

Bank of America, in 2007, made a $2 billion dollar stock investment in Countrywide. Subsequently, the current mortgage crisis started to gain steam, where Countrywide Financial became the face and center of attention of this volatile situation. By 2008, the stock of Countrywide had dropped tremendously where a large majority of its mortgage loans were in default and many more predicted to default well into the year 2010.

With the drop in Countrywide’s stock price, the $2 billion dollar investment made by BofA diminished in value. If Countrywide had filed for Chapter 11 bankruptcy, as many analysts predicted it would, BofA’s investment would have become worthless.

So, rather than wait for the ceiling to drop, and report a $2 billion lost on its books, Bank of America decided to buy the entire company in January ‘08 for $4 billion in stock.

However, Bank of America has had its share of losses from this current economic environment as are other financial companies. Adding Countrywide to its balance sheet would only increase its losses well into the near future.

Ken Lewis’s former Charlotte counterpart, former Wachovia CEO Ken Thompson, was ousted recently due to the financial losses at his bank. Like BofA, Wachovia purchased a mortgage lender, California based Golden West Financial. This purchase was made before the current housing market environment. However, California has one of the highest foreclosure rates in the country. Golden West suffered as a result and provided Wachovia with billions of dollars in loan losses.

I believe that if BofA does proceed with the Countrywide merger, Ken’s future at the bank may come to a swift end. BofA will continue to report quarterly losses, just as others in the financial sector. The stock price will suffer and they may have to cut jobs and the dividend rate to conserve capital.

If Ken Lewis can turn this around, he will definitely have earned my respect as a true visionary.

However, I will not buy any BofA stock until it falls into the mid-teens. My time period would be within the spring of 2009. That way, some of the Countrywide losses should be built into its financials. But as of now, I would not touch BofA.

Just speculating....

Disclosure: none

Comments

[jnuef]

And that speculation that it will drop to the mid-teens is based on what valuation? The Wachovia purchase happened before the implosion of Golden West. The Countrywide purchase happened after, so that is an apples to oranges comparison. Or at least apples to pears. You really think BofA will drop to half of its book value or less? Hmm. Again, I'd like to see some numbers to support that claim.

[helplessobserver]

Ken Lewis and BofA are just plain stupid.

[User 215162]

Seeking Alpha is starting to look like a yahoo mesage board. This is a terrible article with absolutely no value. Editors should really tighten their standards.

[swro]

I agree with User 215162. This article borders on a message board posting. Yet, I will admit to bing long on BofA with a basis of $15 per share - been with her since the 1980s.

[Honest John]

I understand BAC has a scheme to create a holding company. When it becomes owner of CFC it will deposit as much toxic waste (under-secured loans to CFC) into that company as possible. Payments, if any, to that holding company will be as little as possible to satisy nearly worthless loans.

If that is not Mr. Lewis's plan, I agree with Alpha Dog. The man is nuts!

[pondee]

"Editors should really tighten their standards. "

Are there editors?

"Just speculating...."

A tip off not to take the article too seriously.

"Seeking Alpha is starting to look like a yahoo mesage board"

I thought it was a message board. There is little given upon which to judge the reliability of any of the posters.

[User 118677]

What Lewis wanted was the Countrywide Banks,, but he forgot he had to take the rest of the garbage with them. By now he should know that the garbage is stinking real bad and either redo the deal or run like hell. I would run as fast as I could.

[Jerry Dill]

I disagree. I think it takes important articles about a pertinent subject and portrays commentary. If you don't like it don't read it.

[lastName, firstName]

Controversial title w/ controversial opinions therein.. guaranteed to evoke responses.. Responses mean people are reading it ..getting hits for the website..Perhaps that is the only goal for SA

[Charlie Bottle]

I agree, very suprised that they seem poised to close the transaction, which I think is imminent now; I was expecting BAC to keep post-ponning the close and drop it at an opportune moment so as to minimize the likelly resulting disruption in the market.

I have not reviewed the financials but I supect that this is not in the best interests of BAC shareholders; possibly a desperate attempt by Lewis to save face and post-pone loosing his job?

[Job314]

I totally understanf the fear of fall if Countrywide does not hold its value and continue to have massive defaults. However, I think that Ken Lewis made cautious puchase terms. The purchase did not happened overnight like other companies's. Lewis waited about six months period (so far) and have BoA people start to engage CFC managements during this period. If there are major issues lurking around, they can abort the purchase. Lewis also played the valuation fairly well. He pay only 1/10 of CFC before the crisis. I still believe he is a great banker.

[Chemist29]

In all fairness to ken Lewis, all the previous acquisitions have been good. MAYBE he knows what he's doing. BAC has had its eye on CFC for a LONG time, now they get it for a total of 6 billion? They are the #1 mortgage originator and servicer (or something like that) now for measly 6 billion. You dont think that's going to pay off in a few years?

[F.P]

look guys!!my opinion is that Ken Lewis,indeed, made a risky choice by deciding to purchase CFC.But isn't it really strange that everybody is criticizing Ken Lewis's action??isn't it really strange that everybody is accusing the largest consumer bank in the United States for this big step??The recent drop of the stock price is a made-up event!be sure about that!A STRONG FORCE (via articles) is trying to make BAC sharholders to sell their stocks!!Guys DON'T fall for this CRAP!! P.S I totally agree with Job 314

[wolf_33]

Ken should recast the CFC deal (LOWER) if a.) he values his JOB b.) he cares about BAC shareholder value and c.) he wants BAC employees to keep sending LUCKYGAL over his way
i am told the CFC default ramp is a steep one - by T.HAWK

[rarp2000]

We must not forget that US dollar is at its lowest value against mayor currencies.

The risk of BofA stock falling into the mid-teens, is that many foreign investors could see the opportunity to get a big piece of the US financial market acquiring or positioning, in this or other US financial institutions.

[bmsmith]

Everyone has their opinions. But for all of you that write like you know what your writing about, what are your qualifications to be able to say this is a bum deal or not?
Are any of you bankers, business people or money managers of anything other than your piddly take home pay?

[hammer]

Unlike his other counterparts Lewis has the will to sharply reduce expenses. Since eighty percent of the business is domestic Lewis has a lot of flexibility in reducing expenses by billions without damaging the franchise. What Lewis is terrible at is risk management, credit management and capital allocation. BAC will have a 100% of dividends in 2008. This cannot continue. The credit cycle still hasn't peaked and BAC is still experiencing credit loss growth. Capital ratios are weak and could get weaker with writeoffs and reserves. Lewis is too stubborn and unwilling to take no for an answer. The only thing that is saving him is his entrenched board of good old boys and friends.

[stopthemadness]

The naivete' of those supporting Mr. Lewis and this deal is striking. By way of response: This deal is the third iteration of good-money-after-bad decisioning by BofA. It started with mortgage origination and warehousing line of credit relationship(s), the latter of which defaulted ($700+MM); followed immediately by the $2 Billion convert deal which is now gone; followed finally by this deal which the market says has negative asset and enterprise value. You challenge our credentials or basis of criticism? I happen to know the principle decision makers here, and I have incurred well into 8 figures in shareholder value destruction with the Lewis group. Compare this stock to JPM, WFC and C over even the last 6 months. Ken never had the intellect or the experience to understand the risk of this organization...or to even chose the right people. I have first hand knowledge concerning the [lack of] depth of due diligence which typically accompanies his string of acquisitions. To coin Ken's phraesology: "we shareholders have had all the fun we can stand with Lewis' lack of judgement and weakest-on-the-street wholesale finance capabilities". He now tells us, the shareholders of this institution, he can position it to be the largest mortgage originator by buying a strip-mall huckster of mortgage services with a negative value. He and his team couldn't begin to properly price Countrywide's contingent liabilities, nor structure a firewall to mitigate the knock-on effect to BAC's franchise. The board is asleep at the switch and among the weakest on the street by any governance measure.

[Erick]

B of A could easily create a separate entity for all of its sub-prime loans (both those it made and Countrywide's). If it doesn't work out, the rest of the bank survives. Perhaps it will be something much more complicated, but don't underestimate banker's creativity when survival is at stake. Also remember, the trusty Federal Reserve could step in, just as with Chase/Bear Stearns, because B of A is "too big to fail" and the fallout in the rest of the financial sector would be severe. Our tax dollars at work! So much for the private enterprise system when the big kahunas make big mistakes, they are protected; not so for the little fry who don't send campaign contributions to our elected officials.

[W.C. Varones]

"As the CEO, he has made some incredible acquisitions which have added enormous shareholder value to the company:

MBNA (2005) $35 billion in cash and stock
Fleet Boston Financial (2004) $47 billion in stock
US Trust (2006) $3.3 billion, all cash"


As the stock was in the 40's and 50's in 2004-2006, and is now in the low-20's, I fail to see how these acquisitions added enormous shareholder value.

[jmas4u]

Lucky, I guess you invested the C note in B of A? Dividends just keep coming in each Qtr. Lucky Lucky Lucky

[dr.h]

Very poor article - author fails to mention that BAC is paying $9B less than tangible book value.

CFC only lost $0.2B last quarter.

The author and stopthemaddness seem to have an imagination that BofA actually posted a quarterly loss at some point when that is totally false.

When this is over the BAC super bank has access to the 10 Million more customers and originates $480 Billion in prime mortgages per year - the cross selling alone will be a tremendous boon to revenue and earning growth.

SA is terrible with these authors who lack knowledge of the companies they 'short and distort'

[investedone]

Shallow point of view. And when was the last quarterly loss at BAC? Did you mean quarter over quarter underperformance? Yet, still a profit. Sorry my naive friend, you will not be adding BAC to your portfolio because it will not drop to the mid teens.
Next time, do your homework.

[investedone]

Interesting...I checked the bio on the esteemed author of this disappointing article. Here is the amazing bio:
"George Bowser, Jr., the chief editor, is an attorney with a decade of stock trading experience."
Wow! I wonder how old George is, and where he gained his amazing trading experience? Incredible! If that's not a thorough bio, and it isn't, it certainly should be. Credibility!!!!