It's a big day for Bank of America (NYSE: BAC ) and its head honcho. Today, shareholders have gathered in Charlotte, N.C. to give CEO and Chairman Ken Lewis and the rest of the bank's board a piece of their minds. Already, pension giant CalPERS has said that it would vote against both Lewis and the other 17 members of the Bank of America board.
The vote today could cost Lewis his position as the chairman of B of A, but I think the bank needs to go one step further. Sorry, Ken, but it's time to go. As a shareholder of Bank of America, I've spent a lot of time chewing on what's been going down with the banking giant, and in the end, I think a good deal of the struggles at B of A can be attributed to actions that Lewis took or failed to take. As a result, I'd say it's time to bring some new blood into that CEO spot.
Bank of America wouldn't be alone in bringing on a new CEO. Fellow banking giant Citigroup (NYSE: C ) gave its former head, Chuck Prince, the boot in favor of Vikram Pandit, and although Pandit largely inherited the lousy situation, there's enough discontent that it wouldn't surprise me if he ended up with a pink slip, too. Before its sale to B of A, Merrill Lynch also saw a change at the top. The chiefs at other large banks, like Wells Fargo (NYSE: WFC ) and JPMorgan Chase (NYSE: JPM ) , have stayed put, but those banks have arguably weathered the crisis much better than Citi or B of A.
But before we start changing the decor in the corner office, let's take a look at the charges against Ken Lewis.
The trouble with acquisitions
Much of the Lewis era has been characterized by significant acquisition activity, starting with the major buyout of FleetBoston in 2004 and continuing through to the Merrill Lynch purchase last year. Given the massive amount of money spent on acquisitions, it would be impossible to consider Lewis a success without considering his acquisition campaign a boon for the bank. So was it?
If you ask me, we ought to break out the rotten vegetables, rather than the champagne, when talking about Bank of America's major acquisitions. Starting all the way back at FleetBoston, Lewis and B of A seemed to have a burning desire to make the financial giant even giant-er, no matter what the cost.
An article at the time of the acquisition from Knowledge@Wharton -- the online business journal of the University of Pennsylvania's Wharton School -- suggested that while the FleetBoston buyout undoubtedly made B of A much larger, the price was downright ugly.
B of A paid $47 billion for FleetBoston, which represented a 40% premium on its shares. Knowledge@Wharton quoted Wharton finance professor Richard Herring as saying, "I think that Lewis would have been cheered if he had acquired FleetBoston for $11 billion less."
But it didn't stop there. Lewis went on to acquire credit card lender MBNA in early 2006. Not only was it poor timing to acquire the largest independent credit card issuer at near the height of a credit bubble, but the bank once again paid through the nose. B of A paid a 31% premium for MBNA, which was more than 2.5 times book value and 19 times the annualized net income from the first nine months of 2005.
For sake of comparison, the $35 billion that B of A spent on MBNA could today buy both Discover Financial and the iconic American Express (NYSE: AXP ) , with a couple of billion left over.
Timing- or pricewise, the acquisitions of U.S. Trust from Charles Schwab (Nasdaq: SCHW ) or LaSalle Bank weren't any better. The deals were initiated in late 2006 and mid-2007, respectively, while the credit markets were still soaring away. The $3.3 billion that Bank of America paid for U.S. Trust represented about 3.5% of assets under management -- which is at the very top end of asset manager valuations. LaSalle, meanwhile, is said to have been valued at more than 20 times trailing earnings.
Counterintuitively, Countrywide could have been Lewis' best acquisition. The leading mortgage lender was bought when it was under severe pressure and had already seen its stock take a major shellacking. However, it's tough to judge just how bad Countrywide's books really were -- the buy wouldn't look like such a bargain if B of A were just buying a toxic waste dump.
And then there's Merrill Lynch. Bank of America paid roughly $50 billion for Merrill, in what some say was a purchase arranged so that Merrill wouldn't face a Lehman-like extinction. That whole Bank-of-America-as-savior explanation kind of mystifies me, though, since it paid considerably more than stated book value for the struggling financial company -- a price that represented a 70% premium to the price at which Merrill's shares had been trading.
When we look at the record as a whole, perhaps the best thing we can say about Lewis' string of acquisitions is that it helped the bank achieve "too big to fail" status -- a dubious distinction that let it hold the U.S. government ransom for enough bucks to keep the lights on.
A noncyclical bank? I don't think so.
Every business is cyclical to some extent, since it's tough to completely buck the undulations of the economy. Some, however -- particularly more commoditized businesses -- are more cyclical than others.
Banking definitely falls on the more cyclical end of that spectrum. Whether you're US Bancorp (NYSE: USB ) or Huntington Bancshares, you're essentially offering the same principal product -- credit. Size and brand certainly offer some advantages, but like any commodity, the industry expands supply during boom times, and it has to rapidly pull back when the cycle turns. Inevitably, there are some that are prepared for the turn, and some that are -- as Warren Buffett would say -- swimming naked.
Bank of America? I'm not sure I see any swimming trunks. Looking back at the company's annual letters, it seems to me that management was more intent on notching growth and meeting Wall Street's expectations than on making good, conservative loans. Lewis may not have been caught in a quote as infamous as Chuck Prince's "dancing" comment, but in B of A's 2006 letter to its shareholders Lewis wrote:
Our ability to distribute credit risk through the securitization of various asset classes adds further stability. And as our risk managers analyze information about our customers in ever more sophisticated ways, we can grow our portfolio without significantly increasing our risk profile. In fact, in some parts of our business we are actually saying "yes" to more customers while at the same time improving the average quality of our loans.
As my fellow Fool Alex Dumortier pointed out yesterday, B of A's low capital levels mean that it'll need to shore itself up with new capital -- and soon. Seems maybe the company should have been saying "no" a little more often.
The Merrill mess
Since I've already covered this in great detail, I'll make this short and sweet. If there's one thing that we learned about Ken Lewis from the recent coverage about the Merrill Lynch acquisition, it's that he's in it for Ken Lewis.
Rumors have been flying about the government's role in "encouraging" the bank to buy Merrill Lynch. And if it also told Lewis to keep quiet about Merrill's problems, that was not only reprehensible, but probably borderline illegal. However, as the CEO of the company, Lewis' job is to look out for the interests of the business and the shareholders. If the Merrill Lynch acquisition was a bad one, he shouldn't have gone through with it. If Merrill Lynch's books were looking ugly, he should have disclosed it.
Plain and simple, he chose to try and keep his job by neglecting the duties of his job. For that, the board needs to hand him his walking papers and find somebody who will do the job all the time.
The final assessment
Overall, Lewis hasn't really shown any particular savvy that would inspire confidence in him as a CEO. He made a handful of significant acquisitions -- some of which may have been ill-timed, and many of which were probably overpriced -- and ran the company largely in a very favorable environment of low rates, low defaults, and high borrowing activity. The downturn in the credit markets in 2007 was the first real test he faced as the head of the company, and it would be tough to give him a passing grade.
I've personally been a Bank of America shareholder for years, and I've been proven wrong for believing in Lewis. However, that doesn't mean that I have to continue to stand behind him. If Bank of America survives this crisis, it will be in spite of Lewis, not because of him. It's time for a change at B of A, and if it doesn't come, I'm ready to find a better place to invest my money.
So now you know exactly where I stand, but what do you think? Take our Motley Poll below and use the comments section if you want to say more.
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