Bank of America (NYSE:BAC) CEO Ken Lewis seems to have been effectively pressured into dealing a near deathblow to his own company. He's indicated that the consummation of his company's acquisition/absorption of Merrill Lynch came at the prodding of government representatives, according to the Wall Street Journal's accounting of his sworn testimony to the New York District Attorney's Office.
It seems Mr. Lewis is a good obedient citizen, and whatever he is asked to do by any federal official, he will do. In February, he was asked by New York District Attorney Cuomo why he bought the highly troubled Merrill Lynch, even after getting a good look at the books. More importantly, the DA wanted to know why Lewis didn't disclose Merrill's toxic load to shareholders before closing the deal and issuing bonus payouts. The embattled CEO answered like the good soldier would, with the truth, which effectively shifted the spotlight to our old pals, Bernanke and Paulson.
Before that, in late 2008, Lewis was reportedly asked to move forward with his acquisition of Merrill Lynch despite gaining awareness of its poisonous balance sheet. Again he, and the BofA Board, obeyed the good will of their government, or at least its representatives, and closed the deal. But, just in case, BofA took on another trailer full of government “aid,” which Lewis later said was precautionary and prudent though proved unnecessary.
God bless America, and who is to say that we would not have done the same thing in that moment of chaos that did in Lehman Brothers and brought AIG (NYSE:AIG) to its knees? As a matter of fact, I believe "The Greek" was a supporter of the "system crusade," through the passage of TARP-I anyway. Not long after that, it became clear some of the chickens in DC had lost their wits.
Still, here's the problem with what took place in BofA's situation. Bank of America is a private company, owned by its shareholders, to which Mr. Lewis holds fiduciary responsibility to serve and obey. It's the job of the Fed and Treasury to protect the system, not Bank of America's job! Unfortunately for the parties involved, we don't live in the days of J.P. Morgan when CEOs and central bankers could get away with this kind of cowboy bravado (I really mean it - it's unfortunate). So the axe will fall and the guys who stuck their necks out will be sacrificed (read Lewis and maybe Paulson).
The story goes that Lewis had second thoughts about Merrill as he had time to learn the details of its woes (more than the sleepless weekend in September anyway). Lewis was rumored to have considered employing a clause rarely used in M&A, in order to back out of the deal. He would have effectively claimed Merrill's condition had deteriorated significantly enough to allow for his firm's exit.
However, the government, namely Messengers Bernanke and Paulson, allegedly leaned on Lewis. As it seems impossible for Chairman Bernanke to apply intimidation tactics, the two may have rather implied that "mum" was the word regarding the condition of Merrill. However, it is alleged that Lewis was told that failure to consummate could cost him and his team their jobs, or something like that. Needless to say, the rest is history. I must admit that I'm now even more curious of how the big Merrill bonus payments came to be through this whole mess. The scandal expands and writers have fodder for their fingers...
Why Did BAC Shares Rise Given Thursday's Scandalous News?
You must be wondering why the stock jumped 7.8% on Thursday ($0.56), given the news flow. Well, in one word, I would say the answer is culpability. BAC investors are hoping the company's pain, and the blame for it, can be shifted over to the government to bear. It's the least Uncle Sam can do, considering the mess it engineered for them while saving the rest of us. In my humble opinion, this is one of those cases where bad news is actually viewed positively by shareholders. You can look at it a few ways...
Lewis' Era Concludes - BofA's CEO has probably seen his last days at the helm, as nice a guy as he seems to be. Whether it be by shareholder vote or by stress-driven resignation, the odds are stacked against him now more than ever. A pivotal shareholder meeting is set for April 29. Even if the company's betrayed shareholders find a patriotic bone to chew on and can sympathize (money beats patriotism though), is any amount of post-TARP executive compensation worth the stress that Mr. Lewis has got to be bearing these days? The problem is that TARP babies carry all kinds of limitations on once-golden parachutes, now made simply of silk.
Sometimes walking away can be a victory of sorts, and God knows the man still has a great deal more than so many of you who are reading... and we who are scribbling. So, given the broad interpretation of (read utter disgust with) some of the decisions this management team has made, including its purchase of Countrywide, shareholders were likely enthused on Wednesday that there might be a new captain at the helm of their ship soon. Thus, the share rise.
- Culpability Shift - The other potential driver of the stock Thursday is similar, yet different. Shareholder suits now have a bigger fish to fry, the federal government. If there is pliable credence to the alleged claims of Mr. Lewis, than there may be culpability to place in Washington. And oh by the way, that's where all the money comes from. Thus, the share rise.