Bank of America's Lewis Resigns After Betting on US Rebound
Oct. 1 (Bloomberg) -- Kenneth D. Lewis bet Bank of AmericaCorp.’s future on America at a time when America went bust.
Lewis, 62, said yesterday he will resign as chief executiveofficer at the end of the year, leaving his successor tocapitalize on, or salvage, the acquisitions that led to hisdownfall. The bank didn’t name a replacement.
The CEO has become a distraction, pilloried by regulatorsand lawmakers since he engineered the $29 billion takeover ofMerrill Lynch & Co. in January and bought subprime home lenderCountrywide Financial Corp. in 2008, said CreditSights Inc.analyst David Hendler.
“He’s drifting out to sea like a dying Eskimo, knowing thecompany can do better and thrive without him,” Hendler said.
Bank of America more than tripled in size since Lewis tookover in April 2001 and became the biggest U.S. lender by assetsand deposits. He spent more than $130 billion on acquisitions.
In the worst housing slump since the 1930s, Lewis boughtCountrywide, the nation’s biggest home lender, and as financialmarkets teetered near collapse a year ago, he agreed to pay $29a share for Merrill Lynch, the world’s largest brokerage. TheU.S. economy then shrank for four quarters, including a 6.4percent contraction of gross domestic product in the first threemonths of this year.
Lewis is one of the last leaders of the biggest U.S.financial firms to depart in the three-year-old financialcrunch. Other CEOs who have left under pressure include JamesCayne of Bear Stearns Cos., Charles Prince of Citigroup Inc.,Stanley O’Neal of Merrill, Kennedy Thompson of Wachovia andRichard Fuld of Lehman Brothers Holdings Inc.
Merrill Pays Off
Jamie Dimon, CEO of JPMorgan Chase & Co., strengthened hisbank by taking on the assets of Bear Stearns in a government-assisted transaction. John Mack, the head of Morgan Stanley,said he plans to step down as CEO on Jan. 1.
Lewis, who started as a credit analyst at NCNB Corp. in1969, has said the Merrill bet is already paying dividends. Thebrokerage contributed 24 percent of the company’s first-halfprofit as an improving stock market and soaring demand for debtissues boosted trading and investment-banking revenue, while theretail bank struggled to curb rising defaults on credit cards,consumer loans and commercial real estate.
“I am gratified that even some of the critics of ouracquisition of Merrill Lynch have come to acknowledge how wellthe deal is working out for our clients,” Lewis said in a memoto employees yesterday. “This journey has been a rocky one andnot for the faint of heart, but perseverance is paying off.”
Dividend, Shares Drop
Potholes included the reduction of the bank’s quarterlydividend to 1 cent from 64 cents in 2008, and the shares remainmore than a third lower than in April 2001 when Lewis becameCEO. The Standard & Poor’s 500 Index declined 14 percent duringthe same period. The stock closed yesterday at $16.92 on the NewYork Stock Exchange.
Lewis’s journey may have been cut short by the Merrilldeal, which he arranged in September 2008 as Lehman, once thebiggest underwriter of mortgage securities, was collapsing. Hetried to cancel the acquisition last December as fourth-quarterlosses at the brokerage spiraled past $15 billion.
That triggered a clash with regulators, including then-Treasury Secretary Hank Paulson, who told Lewis management mightbe ousted if the deal wasn’t completed, according to Paulson’scongressional testimony. It also led to probes of the deal byCongress, the Securities and Exchange Commission and New York’sattorney general on whether Lewis had misled investors aboutMerrill’s losses and bonuses.
Settlement Rejected
A federal judge in September rejected a $33 millionsettlement between the bank and the SEC tied to the bonuses,asking whether the bank had lied to shareholders and why thecompany’s executives haven’t been sued. At the April annualmeeting, shareholders stripped Lewis of the chairman’s title.
Lewis said in the memo to staff he was “disappointed inhow we managed credit risk. The next two quarters will bedifficult.” The bank will be “an earnings machine” when theeconomy rebounds, Lewis wrote. The bank may report profit of$7.4 billion this year, $12.6 billion in 2010 and $23 billion in2011, according to analysts’ estimates compiled by Bloomberg.
“Their loan portfolio is horrible looking and it’s notgoing to be easy for them,” Mike Williams, research director atGradient Analytics in Scottsdale, Arizona, said in an interviewbefore Lewis announced his departure. “They would have beenbetter off without the Merrill and Countrywide acquisitions overthe next few years.”
Shareholder Opposition
The resignation “is the overdue but inevitable result ofthe overwhelming shareholder opposition registered at Bank ofAmerica’s 2009 annual meeting,” said William Patterson,executive director of CtW Investment Group, a union-sponsoredgroup that pushed for the CEO’s ouster earlier this year.
Andrew Cuomo, the New York attorney general, has said he’sdeciding whether to bring charges against executives. In astatement, Cuomo said Lewis’s departure won’t affect his probe.
“We hope that Bank of America’s new leadership willquickly repay American taxpayers and help us finally resolveunanswered questioned about this merger,” said Edolphus Towns,a New York Democrat and chairman of the House OversightCommittee that grilled Lewis about the Merrill deal.
Bank of America’s board will set up a committee to find asuccessor, spokesman Robert Stickler said. Internal candidatesinclude retail-bank leader Brian Moynihan, 49, home-lending headBarbara Desoer, 56, investment-banking head Tom Montag, 52,Chief Financial Officer Joe Price, 48, wealth-management’sSallie Krawcheck, 44, and Greg Curl, chief risk officer.
‘Hang On’
There is “no indication” that the bank’s headquarterswould leave North Carolina, Stickler said.
“I really thought that he would hang on long enough forBrian Moynihan to get enough experience as the head of retail sothat he could step into Lewis’s shoes,” said Nancy Bush, anindependent bank analyst in Annandale, New Jersey. Montag, whojoined Merrill Lynch last year from Goldman Sachs Group Inc.,and Krawcheck, who came in August, are unlikely picks because oftheir short tenure, Hendler said.
Lewis’s resignation after 40 years, including the lasteight as CEO, “was my decision and mine alone,” he toldemployees in the memo. While Lewis denied any outside pressureprompted his decision, “all the nasty things said about him inso many different circles were beginning to weigh on him,” saida person familiar with the CEO’s thinking.
Bank’s Acquisitions
Acquisitions during his tenure included FleetBostonFinancial Corp. for $48 billion in 2004, MBNA Corp for $35billion in 2006, LaSalle Bank of Chicago for $21 billion in 2007and Countrywide for $2.5 billion in 2008.
Lewis said in a June 2007 interview that Bank of America’sbest potential for growth is at home, not in Europe or Asia. Hecited research by his company and a separate study by McKinsey &Co. that show the U.S. offers the greatest potential for newfees in the next decade, even more than Europe or Asia.
Lewis was “focused on size and footprint and marketshare,” said Jonathan Finger, whose Houston family owns 1.1million shares and pressed for Lewis’s resignation this year.“You listen to a lot of their conference calls announcing thesemergers, that’s what they talked about, they never talked aboutreturn on equity or return to shareholders.”
Lewis had said this year he planned to resign once the bankmatched its record profit of $21 billion in 2006, then latersaid he expected to stay until the bank repaid funds from theU.S. Troubled Asset Relief Program. He reconsidered afterworking half-days at his Colorado home in August, Stickler said.
“The company is farther along, partly because the economyis doing better than expected, and we’re poised to pay backTARP,” Stickler said.
Bank of America’s board met in a telephone conferencemeeting after Lewis told Chairman Walter Massey of hisretirement plans, Stickler said. Massey told Lewis that theboard was “fully behind him,” Stickler said.
Lewis hasn’t had an employment contract since 2003,Stickler said. After 40 years, he has stock options that may beworth “tens of millions of dollars,” Stickler said.
To contact the reporter on this story:David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Last Updated: October 1, 2009 01:12 EDTSource: Bloomberg
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