Bank of America Needs a Regime Change

I have to admit, I thought Bank of America (NYSE: BAC  ) would end up as one of the few banks strong enough to pull through the credit crisis without momentous problems. Yes, it's brutal for every bank right now, but as recently as last quarter things were still hanging in there.

Not anymore.

After news of a $2.39 billion quarterly loss and the announcement that dividends are all but history, my hope is waning. Not because of the loss, but because investors now have sincere reasons to question the capability of CEO Ken Lewis.

B of A's recent Merrill Lynch acquisition necessitated another government bailout, which will drop an extra $20 billion into its coffers, plus a government guarantee of 90% of losses on a $118 billion pool of bad assets after B of A sucks up the first $10 billion -- similar to the bailout part deux that Citigroup (NYSE: C  ) received in November. In return, taxpayers get $4 billion in preferred stock yielding 8%, plus warrants for 10% of that amount.

What's shady to me is that the B of A bailout is needed solely because of the two-week-old, $33 billion acquisition. CEO Ken Lewis apparently realized he bit off more than he could chew and debated renegotiating the deal last month, only to have the Treasury swarm in and beg otherwise, fearing that a failed deal might upend financial markets.

While havoc certainly would have ensued, B of A essentially sacrificed its own shareholders to save Merrill Lynch. As part of the bailout, quarterly dividends of more than a penny per share are banned for three years without government consent, leaving shareholders at a huge disadvantage compared to JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) . This after Ken Lewis described the deal as "a great opportunity for our shareholders" back in September.

Make no mistake about what happened here: Lewis jumped the gun with Merrill Lynch, and shareholders are now paying dearly. On top of the $33 billion already paid for the broker, let's tack on the $4 billion in preferred stock (plus $320 million a year in associated dividends), $400 million in warrants, and lost income from having to ax common shareholder dividends. Ah, the gift that keeps on pillaging ...

Anyone else agree that it's time for Ken Lewis to go? Perhaps former Merrill Lynch CEO John Thain -- who was able to convince Lewis to pay such an ungodly amount -- could take over. His dealmaking skills look nothing short of brilliant at this point.

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Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase and Bank of America are Motley Fool Income Investor recommendations. The Motley Fool is investors writing for investors.


Read/Post Comments (22) | Recommend This Article (49)

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  • Report this Comment On January 16, 2009, at 3:21 PM, TexasLonghorns wrote:

    BAC has gone to the dogs......The U.S. taxpayer is getting SOAKED big time in this TARP debacle. It was recently disclosed today that BAC/Countrywide lawyers were caught being quoted about the mortgage refinancing law passed by Congress as "puffrey talk" and they had no intention of re-negotiating existing mortgages. Let these dogs die the natural death they need. The Market will step in and pick the bones.

  • Report this Comment On January 16, 2009, at 3:38 PM, chtrplyr wrote:

    Motley Fool needs a regime change their shorts are always showing anymore and unadultered bias. Like a short selling momentum playing hedge fund now. The "short sell" America strategy will only last so long. BAC modifies and keeps 1 Million or so Americans in their homes and absorbs losses because of a wrecked economy and keeps on lending to keep things running and this is the thanks they get. Really sad.

  • Report this Comment On January 16, 2009, at 4:02 PM, buckbeach wrote:

    Yes I totally agree and have agree with his removal throughout last year when it was very evident that he was more interested than ever in building a dynasty and not being the steward of the shareholders interests.

    I recommended him for Mad Money's wall of shame over two months ago.

    He needs to go as his performance is truly shameful.

  • Report this Comment On January 16, 2009, at 4:30 PM, dzz12345 wrote:

    I completely agree that you.

  • Report this Comment On January 16, 2009, at 5:01 PM, tbrenna wrote:

    I agree. I thought the deal with Merrill Lynch was to have been voted on by the BAC Stockholders, but I never saw a ballot.

    He has made a mess out of B of A and its time he went out to the retirement pasture.

  • Report this Comment On January 16, 2009, at 7:11 PM, TMFAleph1 wrote:

    chtrplyr,

    Bank of America's first duty is to its its owners, i.e. its shareholders, not U.S. homeowners.

  • Report this Comment On January 16, 2009, at 10:53 PM, bigdividends wrote:

    First thing I would do is FIRE Thain. If it wasn't for B of A, his company would of imploded within a month after the Lehman collapse. Many of you are putting B of A in the same sentence as Citigroup. I would strongly disagree with this. If it wasn't for the merrril transaction, B of A would of been able to swallow the $2 billion dollar loss.

    Citi on the other hand is in the process of liquidating themselves. By the end of next year, Citi banking buisness will be swallowed up while their investment group will be sold to the highest bidder.

    B of A will survive the storm probably stronger than most people see it. Overall, B of A was a fairly conservative bank but the last three acquistions have hurt their bottom line (la salle, countrywide and merrill). The one thing I am watching is how congress and this administration will go after the banking industry fee structure. If they go after this agressively, B of A will have a major problem.

  • Report this Comment On January 17, 2009, at 1:14 PM, JustMee01 wrote:

    Would Thain be management you could trust? I think not. Lewis screwed up big time, especially by putting up a premium in the first place. But, Thain is not trustworthy. The age old excuse of his getting the maximum for his shareholders is garbage. Misrepresentation for any reason shows a flaw of character. That same character flaw will ultimately rear its ugly head time and time again, as Thain does anything necessary to manipulate and manufacture earnings.

    Both need to be shown the door and replaced with responsible and ethical management.

  • Report this Comment On January 17, 2009, at 1:21 PM, bunngolf wrote:

    Ken Lewis must go now! How can the government and we, the taxpayers, allow this man to remain CEO AND Chairman of the Board of BAC. We are ALL now owners of BAC, like it or not, and this bumbling idiot is allowed to skate. There is truly something wrong with this picture. He will go down as one of the biggest destroyers of wealth in this economic downturn, and now the government is allowing him to continue his folly with our (taxpayer) money. This is intolerable and CAN NOT STAND!

    BG

  • Report this Comment On January 17, 2009, at 3:04 PM, kgeechee wrote:

    I'd rather have Huey Lewis & the News!

    I have been writing to BAC for years that Ken Lewis & Cronies MUST GO! My letters to the BAC Board regarding the increased risks for BAC have been unanswered so now I ask that the Board be included in the PURGE. Ken Lewis and his Cronies have lined their pockets with BIG salaries and underserved bonuses.

    Fire the Bastards, all of them and then Sue the Bastards for all wages and bonuses; for everything we can get back.

    Jail! Jail! Jail!

  • Report this Comment On January 17, 2009, at 5:48 PM, valari25 wrote:

    Ummmm, didn't Ken Lewis tell the Feds that BofA was going to walk away from the MER deal only to be told they couldn't because of what it would do to the market?

  • Report this Comment On January 17, 2009, at 6:44 PM, Seano67 wrote:

    I wouldn't trust Thain so far as I could throw him, in fact I think he's a creep. He's sort of your stereotypic greedy, leeching corporate slug, continuing to press for and insist upon these obscenely high bonuses for his top management and most especially for himself, all while his company threatened to disintegrate right around him. I pictue Nero blissfully fiddling away as the entirety of Rome lay burning behind him, and that's John Thain.

    RE: Ken Lewis- as a BAC shareholder, I'm pretty appalled. Much of that is my own fault, as I rode this sucker ALL the way down. I've held the stock for over a decade now, and frankly was being stubborn and foolish (small f) and didn't want to get rid of it. I figured....Hey, this is Bank of America, *the* alpha dog of American banks. This is about as sound as it gets. I figured their exposure to the toxic stuff was comparatively limited, and that they had ample cash and liquidity to be able to weather any storm relatively unscathed.

    But then it's like they willingly swallowed poison pills of their own making in this series of extremely questionable acquisitions, and why? For what? They've now jeopardized their own company, and they have absolutely screwed over their shareholders nine ways to Sunday.

    I'm pretty pissed off about that- and disappointed in myself for not seeing the writing on the wall much sooner and getting the hell out. And now I'm stuck with it, and there is no possible way I would sell after incurring those kinds of losses. But without the possibility of a dividend for at least the next three years, damn...this could realistically take 20 or 30 years in order for me to recoup some of those losses.

    Painful, serious drag- but lesson learned. I guess that's really the only positive here. Anyway, Ken Lewis probably really does need to go.

  • Report this Comment On January 17, 2009, at 6:52 PM, bidask1525 wrote:

    Shareholders need to demand that Lewis and his cronies disclose any hedging they may transacted on their own personal shares received as compensation over the last 2 years. Can you imagine receiving 6 figure dollar amounts of stock, being required to hold it for say 3 years and have no control over its price??? What fool would take a bonus worth say $800,000 today but two years out when cashing out its worth is now market driven to $300,000??? If they did hedge, they did so while possessing information in the decision making process that "Joe Shareholder" didn't. C'mon regulators make "full disclosure" really mean FULL DISCLOSURE.

  • Report this Comment On January 18, 2009, at 3:20 PM, ctangus wrote:

    Interesting editorial in the WSJ yesterday. Not to absolve Lewis of all responsibility, but it sounds like the Feds are pushing the deal down his throat, too:

    http://online.wsj.com/article/SB123215299934192217.html

  • Report this Comment On January 18, 2009, at 5:26 PM, TMFHousel wrote:

    All,

    Thanks for the great comments. One thing: Let's not confuse "Feds pushing the deal down Lewis's throat" with "Lewis had buyer's remorse and the Feds freaked out when he tried to bail."

    No one forced Lewis to buy Merrill in the first place. I completely disagree with the WSJ's assessment that: "In other words, the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want."

    It didn't want the assets? Really? If BAC didn't want the assets, why did it offer to pay $55 billion for them in the first place? No one forced BAC to buy Merrill. It was entirely up to Lewis.

    -Morgan

  • Report this Comment On January 19, 2009, at 1:04 PM, valari25 wrote:

    TMFHousel, could it be possible that BofA didn't know how toxic MER was when it made the initial offer? You have Lehmans going under and throwing the market into a tizzy and the specter of MER and others following very quickly.

    So BofA steps up, makes the bid at the behest of the Feds to stave off another bankruptcy and stablize the markets.

    Then BofA gets a chance to look at the books and realizes MER should have gone under, they were screwed. So Lewis tells the Feds that BofA is going to walk away, MER is too far gone and could take down his bank.

    That scenario fits the facts as we know them, just as much as Ken Lewis not knowing what he is doing. The Feds have their fingerprints all over this deal from start to finish. Imagine what happens to the stock markets if BofA DID walk away from the deal and let MER go under? We go right back to 900 pt swings.

  • Report this Comment On January 19, 2009, at 1:14 PM, TMFHousel wrote:

    valari25,

    Thanks for your comments. I think that's exactly what happened -- Lewis made a $55 billion bid without fully understanding the toxicity of Merrill's books. Whether investors want to take that as an excuse to exonerate Lewis or as an example of extreme irresponsibility is up to you.

    As for, "Imagine what happens to the stock markets if BofA DID walk away from the deal and let MER go under? We go right back to 900 pt swings."

    Lewis has a responsibility to look after his shareholders, not to protect the stock market from daily point swings.

    -Morgan

  • Report this Comment On January 19, 2009, at 10:20 PM, valari25 wrote:

    I meant the "we go back to 900 pt swings" as the reason why the Feds wouldn't let BofA back out of the MER deal.

    I remember watching CNBC while all this was going on, the late night meetings that weren't just between companies but had Fed people franticly trying to get deals done to stop these massive financial companies from going under.

    I simply cannot believe that this deal was anything other then a shotgun marriage, with Uncle Sam making sure that MER did not get left at the alter.

    You can't blame Lewis for what he did, he had a no lose bet in front of him. Takeover MER, if it the markets don't completely crater in the next 4 months you are a god among men and if they do, you hold out for a much better deal or walk away. No one could have foreseen the Feds forcing the takeover.

  • Report this Comment On January 19, 2009, at 10:22 PM, valari25 wrote:

    An addendum: I think this way about what has happened because BofA had managed to navigate the financial implosion rather adeptly up until MER was officially theirs. I just don't see Lewis and company making those kinds of smart decisions only to make this one HUGE, DUMB decision that the whole world saw coming unless they were forced.

  • Report this Comment On January 19, 2009, at 10:45 PM, TMFHousel wrote:

    valari25,

    Thanks again for the comments. Just curious: what are you referencing to show the Feds *forced* this deal, as opposed to enticing BAC by bailing out Merrill's worst assets? I only ask because the Federal Reserve and the Treasury by no means have anything close to the legal authority to force a merger if BAC already had contractual reasons to ditch the deal.

    The best summary I've found is, "Bernanke and Paulson responded that doing so would reflect not only the bank’s lack of due diligence in acquiring Merrill, but Bank of America’s inability to meet its commitment. They said that Bank of America’s failure to consummate the deal would cause further systemic risk to an already fragile financial system."

    Let's not confuse "forced" with "pleaded."

    -Morgan

  • Report this Comment On January 19, 2009, at 11:46 PM, valari25 wrote:

    From here:http://online.wsj.com/article/SB123233878902794523.html

    Particularly this part: The policy makers said abandoning the deal would further destabilize markets, <b>and would hurt the bank</b>, potentially setting off a ripple effect that would exacerbate a fragile situation.

    That same type of phrase appears in almost every article about the merger written in the last week or so.

    (I accept some possible tinfoil hattery on my part here)

    When Paulson and Bernake tell you that walking away from the deal would be a bad thing for the stock market and your bank, I think it means that you can't walk away from the deal. Legal authority had nothing to do with it at those levels and these consequences.

    The whole thing just doesn't fit with how BofA has handled things throughout the past year.

  • Report this Comment On January 19, 2009, at 11:46 PM, valari25 wrote:

    oops, wrong markup codes. Tried to bold part of that.

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