First, Fire All the Bad Bankers

A lot of us debate if saving the financial system is the right thing to do. Some say that a system on life support is better than one in the coffin. Some say we'd be better off letting it fail and starting from scratch. Some say shoot the wounded and strengthen the healthy. Others say it's time to move to Canada. We're a divided bunch.

One thing that most see eye to eye on, however, is that management of bailed banks should be thrown out. And why not? Most employees can be fired for showing up late, while bank CEOs are still employed after obliterating hundreds of billions of dollars in wealth. It's appalling.                                          

Case in point: Bank of America (NYSE: BAC  ) CEO Ken Lewis. After offering nearly a 100% premium for Merrill Lynch, shareholders have seen the majority of their investment go up in smoke. Yet, remarkably, Lewis still has a job, not to mention the full backing of the company's board. Shareholders are infuriated and are suing the pants off of Lewis and former Merrill CEO John Thain. As they should.

That's why I was shocked to see the Financial Times not only defending Lewis' job, but attempting to justify buying Merrill in the first place. As the Times put it:

Last autumn, the entire US banking deck of cards was thrown in the air. How they landed would shape the financial landscape for decades – and sharp bank bosses knew it … Sure, BofA overpaid in retrospect. But had markets surged in the fourth quarter, Mr. Lewis would have been a hero.

Now hiring at Fails 'R Us
I think I can rebut this argument fairly easily:

  • True, had the market surged, Lewis would have been a god among gods.   
  • But it didn't. And shareholders were destroyed as a result.
  • Consequently, he should be fired. Easy as that.

Now, I get what the Times was getting at: In order to achieve acceptable return, you have to accept a certain degree of risk, which is what Lewis did. That's true of all businesses in all industries.

Nonetheless, here's where Lewis went catastrophically overboard: If downside risk in a deal is large enough that it could turn your firm into sawdust, it's not a risk worth taking. And if a CEO is unable to accurately price risk in the first place, the deal should be avoided like the plague. Lewis either took an enormously stupid risk, or he didn't understand the risk to begin with -- both of which seem like grounds for getting the boot.

Don't let the door hit you on the way out
Former Treasury Secretary and Citigroup (NYSE: C  ) director Robert Rubin provides another example. After resigning last month, he apologetically admitted, "I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today."

Didn't realize the possibility? Really? Rubin's own 2003 memoir includes a chapter appropriately titled "Greed, Fear, and Complacency" which devotes an entire section to the "possibility of extreme circumstances." In his own words:

There is one type of financial risk, the risk of remote contingencies -- which, if they occur, can be devastating -- that market participants of all kinds almost always systematically underestimate. The list of firms and individuals who have gone broke by failing to focus on remote risks is a long one.

When credit was easy and Wall Street was prosperous, management asserted a supreme ability to understand risk. When the tide went out and risks backfired, they conveniently pleaded ignorance. The same type of risk Rubin warned of just six years ago is the same risk that destroyed his own firm. You can't make this stuff up.

Excuses, excuses
It's worthwhile to point out these blunders because other CEOs proved that not acting like drunken madmen was indeed possible. For example:

  • When JPMorgan Chase (NYSE: JPM  ) bought Bear Stearns, it paid less than the value of Bear's headquarters and made the Fed backstop its riskiest assets before the deal was closed.
  • Wells Fargo (NYSE: WFC  ) , US Bancorp (NYSE: USB  ) , and BB&T (NYSE: BBT  ) all managed to escape the credit meltdown relatively unscathed solely because they properly priced risk during the boom years.
  • While the market was still liquid, Berkshire Hathaway (NYSE: BRK-B  ) unwound over 23,000 derivative contracts inherited through acquisition, knowing full well that they were an accident waiting to happen.

Bottom line
Let's not forget the definition of insanity: Doing the same thing over and over and expecting a different result. There's a very real difference between propping up a bank to keep the financial system alive, and subsidizing a CEO's failed mistakes. With Ken Lewis still in place, we're waist-deep in the latter. It's time for him to go.

For related Foolishness:

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. US Bancorp, JPMorgan Chase, and BB&T are Motley Fool Income Investor recommendations; Bank of America is a former Income Investor pick. Berkshire Hathaway is a Motley Fool Inside Value selection as well as a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. The Motley Fool is investors writing for investors.


Read/Post Comments (16) | Recommend This Article (81)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 04, 2009, at 10:42 AM, danapokerfish wrote:

    While I agree with the general point, in the case of Lewis, you need to allow for the fact that the purchase of Merrill was essentially at the point of Paulson's gun.

  • Report this Comment On February 04, 2009, at 10:49 AM, TMFHousel wrote:

    danapokerfish,

    Thanks for your comments. I disagree: Buying Merrill in the first place was entirely up to Lewis.

    From the WSJ back in September:

    "Bank of America Chief Executive Ken Lewis said on Monday that he felt "no pressure" from federal government regulators to sign the deal."

  • Report this Comment On February 04, 2009, at 10:50 AM, MattSF1 wrote:

    I like it. I'm personally boycotting any bank that behaved in such foolish activities. Fool.com would be a good place to start such a nationwide movement... remove the idiot management teams or we pull our accounts!

  • Report this Comment On February 04, 2009, at 10:55 AM, JKAonEconomics wrote:

    Greater shareholder involvement is required.

    Wait for the AGM and throw shoes at the Board.

    It seems to be catching on as a protest.

    JKA

  • Report this Comment On February 04, 2009, at 11:01 AM, ByrneShill wrote:

    If the MER buyout had been under Paulson's gun, BofA wouldn't have paid an 80% premium.

    I say we fire Lewis and bring DeMolina as CEO for a 1-2 year interim. Then we'll see.

  • Report this Comment On February 04, 2009, at 11:03 AM, SteveTheInvestor wrote:

    Pretty much agree. The fact is that greed and/or ego and/or incompetence caused these problems. I don't feel that there is room at the top for any of them.

    As I have said before, if we still have a sufficient number of solvent banks in the country, the feds should move all insolvent bank accounts there. At that point, shutter the insolvent banks. No rescue.... no bailout.... no CEO job rescues. Just turn out the lights and send them on their way.

  • Report this Comment On February 04, 2009, at 12:04 PM, TMFKopp wrote:

    Great work Morgan

  • Report this Comment On February 04, 2009, at 12:56 PM, NormTheInvestor wrote:

    I agree with TMFHousel - the Merrill Lynch deal was entirely up to Ken Lewis. However, in fairness Lewis did attempt to back out of the deal in Dec after the huge, unanticipated ML 4Q losses, but was forced by the Feds to close the deal. Destroyed shareholders should place some blame on the Feds for preventing BofA from exercising their legal option to cancel the deal.

    From CNNMoney.com:

    "When Lewis saw Merrill's write-downs mounting, he wanted to get out of the deal....Lewis feared that BofA no longer had enough capital to absorb a damaged Merrill. On Wednesday, Dec. 17, he flew to Washington to discuss his options....Lewis told Bernanke and Paulson that because Merrill's losses were so much worse than expected, BofA was in a position to invoke a "material adverse effect" clause from the merger contract to cancel the deal.

    Bernanke and Paulson...told Lewis that the Fed's legal staff had read the contract, and that under the law, BofA absolutely had to close the deal...They made it clear that renegotiating the price - a natural move in normal times - was not an option

    Technically the government did not have the authority to force Lewis to buy Merrill. But it hardly matters: In the current crisis bankers have little alternative but to do what Washington tells them. "The Fed and Treasury made it crystal clear," says one person familiar with the talks. "Our position is your position."

  • Report this Comment On February 04, 2009, at 1:06 PM, TMFLomax wrote:

    Hear hear!

  • Report this Comment On February 04, 2009, at 1:56 PM, bunngolf wrote:

    "However, in fairness Lewis did attempt to back out of the deal in Dec after the huge, unanticipated ML 4Q losses, but was forced by the Feds to close the deal."

    I think they call this something like...due dilligence...something Mr. Lewis is obviously unaware of, especially after the acquisition of Countrywide.

    It is interesting to note in today's article from AP regarding announced restrictions on executive compensation by the government that.............

    "The pay cap would apply to institutions that negotiate agreements with the Treasury Department for "exceptional assistance" in the future. The restriction would not apply to such firms as American International Group Inc., Bank of America Corp., and Citigroup Inc., that already have received such help."

    http://finance.yahoo.com/news/Obama-caps-executive-pay-tied-...

    Incredible! Reward the institutions that need to fail to cleanse the system.

    BG

  • Report this Comment On February 04, 2009, at 5:11 PM, mcculda wrote:

    In a recent Marketwatch column several superb bankers names were mentioned including John Allison who recently stepped down as CEO of BB&T but is still on the Board. The point of the column was why does our leadership not hire as Secretary of the Treasury a banker like Mr. Allison to run things since he has always run things correctly, honestly, and in an exemplary way without turning into a greedmonger. He is extremely intelligent. The point is that there are smart ,honest, and proven bank leaders who do things correctly. Why do we have to choose someone who has been part of the problem? I would bet that Mr Allison does not owe any taxes. Finally, the extraordinarily greedy folks in many of our financial institutions have nearly destroyed capitalism in the eyes of US citizens and the rest of the world. We need to clean house and start over again.

  • Report this Comment On February 04, 2009, at 5:36 PM, Deadman18 wrote:

    I believe the expression is ( Let's kill all of the lawyers ),because even though there are probably a smattering of accounting majors in the brew,most if not all have a law degree and are schooled in legalese to the point off covering their royal behinds to a degree.It is only a complete arrogance on their part that led to this fiasco and some being prosecuted,but most escaped the lynching.

  • Report this Comment On February 04, 2009, at 5:49 PM, Deadman18 wrote:

    Isn't the consumer always told,LET THE BUYER BEWARE,there is no excuse for not reading the fine print that these minions create to befuddle your mind.

    Don't think that for one minute that any of these C.E.O.s are without sin,they live together play together,work together.How many of these people serve on companion boards and watch the proverbial ship sink without raising an alarm,they just cash out their options.There are no innocents here.

  • Report this Comment On February 04, 2009, at 6:00 PM, Deadman18 wrote:

    Here is another bad investment,buying Rubins book,and not taking heed of the prediction.

  • Report this Comment On February 18, 2009, at 3:27 PM, allegra wrote:

    Joining them, or perhaps leading the parade to jail, should be all those at Moody's S&P and MBIA who, knowingly, gave AAA ratings to CDOs that they knew were worthless paper, thereby reassuring pension fund managers, state and city governments, foreign banks and sovereign government managers all over the world that those worthless mortgage instruments were solvent. No wonder the rest of the world blames America for this fiasco.

  • Report this Comment On April 22, 2009, at 1:40 AM, kurtisj wrote:

    Gee whiz, where, oh where, would we get a new banker to head up a company like this one? Shouldn't taxpayers lather him up with bonuses funded by taxpayer dollars because we wouldn't be anywhere without such a sharp banking mind?

    I think that was the argument throughout the whole AIG/Goldman/Poulson scandal.

    This mess is not a necessary bailout, it's a scandal and they need to be stopped. Lewis and Thain deserve more than a hand slap. Rubin needs to be taken to task as well. Hopefully class actions do some good here for more than the re-employed banks' legal counsel.

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