Oct. 1 (Bloomberg) -- Kenneth D. Lewis bet Bank of America Corp.’s future on America at a time when America went bust.
Lewis, 62, said yesterday he will resign as chief executive officer at the end of the year, leaving his successor to capitalize on, or salvage, the acquisitions that led to his downfall. The bank didn’t name a replacement.
The CEO has become a distraction, pilloried by regulators and lawmakers since he engineered the $29 billion takeover of Merrill Lynch & Co. in January and bought subprime home lender Countrywide Financial Corp. in 2008, said CreditSights Inc. analyst David Hendler.
“He’s drifting out to sea like a dying Eskimo, knowing the company can do better and thrive without him,” Hendler said.
Bank of America more than tripled in size since Lewis took over in April 2001 and became the biggest U.S. lender by assets and deposits. He spent more than $130 billion on acquisitions.
In the worst housing slump since the 1930s, Lewis bought Countrywide, the nation’s biggest home lender, and as financial markets teetered near collapse a year ago, he agreed to pay $29 a share for Merrill Lynch, the world’s largest brokerage. The U.S. economy then shrank for four quarters, including a 6.4 percent contraction of gross domestic product in the first three months of this year.
Lewis is one of the last leaders of the biggest U.S. financial firms to depart in the three-year-old financial crunch. Other CEOs who have left under pressure include James Cayne of Bear Stearns Cos., Charles Prince of Citigroup Inc., Stanley O’Neal of Merrill, Kennedy Thompson of Wachovia and Richard Fuld of Lehman Brothers Holdings Inc.
Merrill Pays Off
Jamie Dimon, CEO of JPMorgan Chase & Co., strengthened his bank 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. in 1969, has said the Merrill bet is already paying dividends. The brokerage contributed 24 percent of the company’s first-half profit as an improving stock market and soaring demand for debt issues boosted trading and investment-banking revenue, while the retail 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 our acquisition of Merrill Lynch have come to acknowledge how well the deal is working out for our clients,” Lewis said in a memo to employees yesterday. “This journey has been a rocky one and not for the faint of heart, but perseverance is paying off.”
Dividend, Shares Drop
Potholes included the reduction of the bank’s quarterly dividend to 1 cent from 64 cents in 2008, and the shares remain more than a third lower than in April 2001 when Lewis became CEO. The Standard & Poor’s 500 Index declined 14 percent during the same period. The stock fell 20 cents to $16.72 at 10:10 a.m. in New York Stock Exchange trading.
Lewis’s journey may have been cut short by the Merrill deal, which he arranged in September 2008 as Lehman, once the biggest underwriter of mortgage securities, was collapsing. He tried to cancel the acquisition last December as fourth-quarter losses at the brokerage spiraled past $15 billion.
That triggered a clash with regulators, including then- Treasury Secretary Hank Paulson, who told Lewis management might be ousted if the deal wasn’t completed, according to Paulson’s congressional testimony. It also led to probes of the deal by Congress, the Securities and Exchange Commission and New York’s attorney general on whether Lewis had misled investors about Merrill’s losses and bonuses.
Settlement Rejected
A federal judge in September rejected a $33 million settlement between the bank and the SEC tied to the bonuses, asking whether the bank had lied to shareholders and why the company’s executives haven’t been sued. At the April annual meeting, shareholders stripped Lewis of the chairman’s title.
Lewis said in the memo to staff he was “disappointed in how we managed credit risk. The next two quarters will be difficult.” The bank will be “an earnings machine” when the economy rebounds, Lewis wrote. The bank may report profit of $7.4 billion this year, $12.6 billion in 2010 and $23 billion in 2011, according to analysts’ estimates compiled by Bloomberg.
“Their loan portfolio is horrible looking and it’s not going to be easy for them,” Mike Williams, research director at Gradient Analytics in Scottsdale, Arizona, said in an interview before Lewis announced his departure. “They would have been better off without the Merrill and Countrywide acquisitions over the next few years.”
Shareholder Opposition
The resignation “is the overdue but inevitable result of the overwhelming shareholder opposition registered at Bank of America’s 2009 annual meeting,” said William Patterson, executive director of CtW Investment Group, a union-sponsored group that pushed for the CEO’s ouster earlier this year.
Andrew Cuomo, the New York attorney general, has said he’s deciding whether to bring charges against executives. In a statement, Cuomo said Lewis’s departure won’t affect his probe.
“We hope that Bank of America’s new leadership will quickly repay American taxpayers and help us finally resolve unanswered questions about this merger,” said Edolphus Towns, a New York Democrat and chairman of the House Oversight Committee that grilled Lewis about the Merrill deal.
Bank of America’s board will set up a committee to find a successor, spokesman Robert Stickler said. Internal candidates include retail-bank leader Brian Moynihan, 49, home-lending head Barbara Desoer, 56, investment-banking head Tom Montag, 52, Chief Financial Officer Joe Price, 48, wealth-management’s Sallie Krawcheck, 44, and Greg Curl, chief risk officer.
‘Hang On’
There is “no indication” that the bank’s headquarters would leave North Carolina, Stickler said.
“I really thought that he would hang on long enough for Brian Moynihan to get enough experience as the head of retail so that he could step into Lewis’s shoes,” said Nancy Bush, an independent bank analyst in Annandale, New Jersey. Montag, who joined Merrill Lynch last year from Goldman Sachs Group Inc., and Krawcheck, who came in August, are unlikely picks because of their short tenure, Hendler said.
Lewis’s resignation after 40 years, including the last eight as CEO, “was my decision and mine alone,” he told employees in the memo. While Lewis denied any outside pressure prompted his decision, “all the nasty things said about him in so many different circles were beginning to weigh on him,” said a person familiar with the CEO’s thinking.
Bank’s Acquisitions
Acquisitions during his tenure included FleetBoston Financial Corp. for $48 billion in 2004, MBNA Corp for $35 billion in 2006, LaSalle Bank of Chicago for $21 billion in 2007 and Countrywide for $2.5 billion in 2008.
Lewis said in a June 2007 interview that Bank of America’s best potential for growth is at home, not in Europe or Asia. He cited research by his company and a separate study by McKinsey & Co. that show the U.S. offers the greatest potential for new fees in the next decade, even more than Europe or Asia.
Lewis was “focused on size and footprint and market share,” said Jonathan Finger, whose Houston family owns 1.1 million shares and pressed for Lewis’s resignation this year. “You listen to a lot of their conference calls announcing these mergers, that’s what they talked about, they never talked about return on equity or return to shareholders.”
Company ‘Farther Along’
Lewis had said this year he planned to resign once the bank matched its record profit of $21 billion in 2006, then later said he expected to stay until the bank repaid funds from the U.S. Troubled Asset Relief Program. He reconsidered after working half-days at his Colorado home in August, Stickler said.
“The company is farther along, partly because the economy is doing better than expected, and we’re poised to pay back TARP,” Stickler said.
Bank of America’s board met in a telephone conference meeting after Lewis told Chairman Walter Massey of his retirement plans, Stickler said. Massey told Lewis that the board was “fully behind him,” Stickler said.
While Lewis isn’t entitled to severance, he stands to collect pension benefits worth $53.2 million, largely from a retirement program that was frozen in 2003, the New York Times reported, citing an analysis of corporate filings by James F. Reda & Associates, an independent consulting firm. Lewis will also walk away with $81.8 million in stock and other compensation that he accumulated over his career, the analysis found.
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