By Jonathan Stempel - Analysis
NEW YORK (Reuters) - Kenneth Lewis’ ability to transform Bank of America Corp’s takeover of Merrill Lynch & Co from a lemon in the short-term to lemonade in the long-term may turn on how bad the economy gets.
Just as when he saved mortgage giant Countrywide Financial Corp, the Bank of America chief executive looked like a savior in September when he scooped up Merrill after less than 48 hours of talks, the same weekend Lehman Brothers Holdings Inc went bankrupt.
But Lewis found Merrill’s balance sheet was in far worse shape than he expected, resulting in a $15.31 billion fourth-quarter loss, and necessitating an emergency government bailout last month for what is now the largest U.S. bank.
The government has poured in $45 billion of taxpayer money and agreed to share losses on $118 billion of troubled assets.
Bank of America shares this week dipped below $4, the lowest since 1984, and have lost about three-fourths of their value since the 61-year-old Lewis took over in April 2001. They powered higher on Friday after Lewis told CNBC television the bank does not need more bailout money.
“This guy’s job is on the line, and he knows it,” said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. “He’s trying to outrun the recession, and praying things will be better in the second half of the year. It’s going to be a slow process, but given the mistakes Ken has made, it will be difficult for him to keep his job during the year.”
Lewis was unavailable for comment. But in the CNBC interview, he said that the bank will “categorically” not need more government cash and hopes to pay off Treasury within three years. He also said the Merrill acquisition will succeed, and that it is “absurd” to believe the bank will be nationalized.
“Nobody executes better than we do,” he said.
Lewis this week put his money where his mouth was, buying $958,000 of the bank’s stock on top of $1.2 million less than three weeks earlier. Several directors, including lead outside director O. Temple Sloan Jr, also bought stock over that time.
But that has not stopped critics.
“Decisive actions” are needed, including “new leadership with a clear and consistent strategic plan,” Fox-Pitt Kelton analyst Andrew Marquardt wrote on Thursday.
Through some $130 billion of acquisitions, Lewis created a behemoth with dominant or leading positions in retail banking, credit cards, investment banking and brokerage.
Bank of America now resembles the financial supermarket that Citigroup Inc once aspired, and failed, to be. The challenges proved insurmountable at Citigroup, and look no easier for its Charlotte, North Carolina-based rival.
Bill Hackney, chief investment officer of Atlanta Capital Management Co, is avoiding Bank of America shares amid “general uncertainty about the value of their assets, and the banking industry.” But even he said Lewis would be tough to replace.
“I don’t know who you could bring in,” Hackney said. “Lewis is a hard-nosed, no-nonsense guy, and though his performance has not been flawless, it’s hard to come up with someone who could do a better job.”
Richard Bove, an analyst at Ladenburg Thalmann & Co, on Thursday wrote: “Ken Lewis may be the best operating manager of any bank in the United States.”
In the CNBC interview, Lewis stuck to his previous comments that Merrill’s losses began to accelerate in “mid- to late” December, and he threatened to scuttle the merger. He said federal regulators strongly advised him to plow ahead, and not pose “systemic risk” to the financial system and the nation.
But the Wall Street Journal this week said bank executives were queasy about the merger weeks earlier, prior to December 5 shareholder votes. Shareholders have filed several lawsuits saying the bank should have backed out or reworked the terms.
“It will be telling to learn who knew what information about the extent of the losses, and when,” said Jacob Frenkel, a Maryland lawyer and former U.S. Securities and Exchange Commission enforcement counsel. “There is clearly fodder for the SEC to inquire about the adequacy of the disclosures.”
SEC spokesman John Nester declined to comment.
If Lewis were replaced, possible successors could include investment banking and wealth management chief Brian Moynihan, mortgage chief Barbara Desoer, and former chief financial officer James Hance, though the latter is older than Lewis.
Friedman, Billings, Ramsey’s Miller declined to say on who could replace Lewis, but said “there are people out there.” For now he expects the government to take a greater role at the bank, perhaps by guaranteeing more assets, or eventually injecting common equity.
“The government has to fix Bank of America because of its size,” he said. “You can’t have B of A be a dead bank.”
Reporting by Jonathan Stempel; Additional reporting by Elinor Comlay in New York and Rachelle Younglai in Washington, D.C.; Editing by Tim Dobbyn