Praise for BofA's ex-CEO Lewis: Outrageous and Out of Line

| About: Bank of (BAC)

Here’s whaat Bank of America (NYSE:BAC) chairman Walter Massey has to say in BofA’s 2009 letter to Bank of America’s shareholders, which just arrived in the mail:

After 40 years of service, including nine years as the company’s chief executive officer, Kenneth D. Lewis retired from Bank of America on December 31st, 2009, having transformed the company from a U.S-focused retail and commercial bank to one of the largest and strongest global financial services companies in the world.

Haba-wha? Ken Lewis transformed BofA into one of the “strongest financial services companies in the world”? That’s news! My recollection of the circumstances of Lewis’s departure is that he had to retire early because the last deal he engineered, BofA’s acquisition of Merrill Lynch, was such a disaster that it forced BofA to become a ward of the federal government. Either Walter Massey is a lot dumber than people realize, or that old-style BofA-style insularity and arrogance, which has served the company so well for all these years, hasn’t yet been swept out of the executive suite down there in Charlotte.

Regardless, Massey’s comments are ludicrous. Instead of praising Ken Lewis, he should be apologizing on behalf of the board for permitting him to wreak so much havoc for so long.

Let’s put some numbers on Ken Lewis’s legacy of value destruction, shall we? In 2001, Lewis’ first year as CEO, the company reported basic earnings of $2.13 per share, itself something of a depressed number since BofA was still recovering from the mess Lewis’ predecessor, Hugh McColl, created with a disastrous round of acquisitions in the late 1990s. In 2009, Lewis’s last year as CEO, BofA lost 29 cents a share. So over Lewis’ entire tenure as CEO, compound earning growth at BofA wasn’t growth at all, but rather an average annual decline of . . . .

Hold on just a darn minute, you are saying. No fair using 2009 as a meaningful end point, since credit costs last year were at a temporary, cyclical high, not just for BofA, but for the entire industry.

OK, fine. In setting the end point, let’s throw out that 29-cent loss last year as unreasonably, cycically low. Instead, let’s use BofA’s post-recession “normalized” earnings. I put those at around $3.00. So from $2.31 in 2001 to $3.00 in (let’s say) 2012, Bank of America under Ken Lewis generated average annual recurring E.P.S. growth of just over 3%.


Memo to Walter Massey: Shareholders don’t care how “global” Bank of America is! They don’t care how big it gets, either. They care about how much BofA can earn per share! That’s what drives the company’s stock price and its ability to pay dividends. And on those scores, Ken Lewis totally, abysmally failed.

We already know what happened to E.P.S. growth under Ken Lewis. Now let’s look at what happened to its share price and dividends. Hint: it’s not pretty.

When Ken Lewis became CEO, Bank of America’s stock price was $27. On December 31, it closed at $15. For perspective, the KBW Bank Index stood at 86 in April of 2001. The BKX ended the year at $43. Let’s see: stock down 44%; index down 50%--over nine years. So throughout Lewis’s time as CEO—and notwithstanding the management theatrics, bet-the-company deals, and run-ins with the government that BofA shareholders had to endure over that period—BofA’s stock generated a return that’s basically indistinguishable from what investors would have earned had they owned an index. It’s been all risk, no reward.

And heaven help you if you actually relied upon BofA’s dividends to pay your mortgage or keep your refrigerator full! When Ken Lewis became CEO, BofA paid out $1.14 per share. When he retired, it paid 4 cents. Even if you assume that the company gets back to normalized earnings in 2012 and that it pays out 50% of those earnings to shareholders, the dividend will come to just $1.50. So over Ken Lewis’s full term as CEO and then into an expected economic recovery, BofA figures to generate average annual recurring dividend growth of 2.5%.

Regardless of what Walter Massey seems to believe, Ken Lewis was simply an egomaniac. As CEO of Bank of America, he cared more about size, power, and personal compensation that he did about creating value for shareholders. The single most important lesson that Lewis learned from Hugh McColl—and he learned it well!—is that, the bigger the institution, the more the CEO gets paid. So for Ken Lewis, size was all that mattered.

According to the company’s proxies, Ken Lewis made over $150 million in compensation during his reign of destruction. Walter Massey played no small part in handing over all that wealth to Lewis for all those years. That he’s praising Lewis now—given how Lewis treated his shareholders--is disgusting. Considering all the value destruction that’s occurred, BofA’s chairman shouldn’t have a single positive thing to say about Lewis. If anyone has a kind word to say about him at the annual meeting in April, I’ll be there to set the record straight.

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