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Editor's Note

So It's Shareholders First, Then Country?

This article appears in the May issue of American Banker Magazine.

My daughter is at that hilarious stage where she's applying grownup vocabulary words to her world as a first-grader. Want some chicken fingers for lunch? Mom, technically ("teck-nick-ully," she says it) these are not actually chicken fingers.

I guess her language has rubbed off on me, because I find myself using similar qualifiers to describe how I feel about the recent news from the New York attorney general's office regarding former Bank of America CEO Ken Lewis. You may have heard, Lewis was docked $10 million in March for failing to tell shareholders about the losses that were piling up at Merrill Lynch in late 2008 as BofA prepared to buy the business. BofA, which is covering Lewis' settlement payment, is kicking in an additional $15 million in fines on its own behalf.

As a law-abiding citizen and fervent fan of transparency and free markets, I agree that technically, Lewis neglected to disclose material information about his company. Obviously if he was concerned enough about the Merrill losses to be getting cold feet, then his investors would have wanted to know about the losses as well. And clearly, turning a blind eye to his handling of the situation would have set a bad precedent.

But I find myself feeling sorry for Lewis. (I know, I never thought I would say that about a retired gazillionaire either.) The truth is, I'd been feeling a certain amount of sympathy toward him since mid-2009, when I first read his testimony in the case. The information he gave under oath strongly suggests that he was pressured by powerful federal officials, during a very confusing time, to swallow his buyer's remorse and get the deal done at all costs, at the terms his firm already had agreed to.

Did then-Treasury Secretary Hank Paulson and the Federal Reserve's then-Chairman Ben Bernanke actually instruct Lewis to violate securities laws for the sake of getting the merger to go through? Unlikely. But let's not forget, these were men who, in what was a scary period for the country, would say things like, "[W]e may not have an economy on Monday." The stakes were apparent. If the Merrill deal unraveled, the firm might go the way of Lehman Brothers and the dominoes would begin falling over once again.

What to do, then, about the CEO who, grudgingly or not, ensured there would be no repeat of September 2008's chaos? I'm not suggesting a ticker-tape parade. But it feels a little ridiculous to be treating him like a criminal.

The ambivalence that the attorney general's office has shown in the settlement only raises my suspicions about it. New York Attorney General Eric Schneiderman, who inherited the investigation from his predecessor, Andrew Cuomo, crows in the news release announcing the settlement that since taking office, he's "acted on the belief that no one, no matter how rich or powerful, should escape accountability for their actions." But if you're really seeking accountability, and conflating the Merrill disclosure affair with "frauds that occurred in and around the financial crisis," shouldn't the penalties you extract actually mean something?

Instead, we get a fine that doesn't even have to be paid by Lewis himself, and a three-year ban on public company board service for a 67-year-old guy who quit work four and a half years ago and was so checked out by then that he'd grown a beard. Given the apparent difficulty in prosecuting the rampant unscrupulousness that actually caused the financial crisis, perhaps this is the best the government can come up with to feed the public's appetite for a hanging.

Heather Landy
Editor in Chief


(8) Comments



Comments (8)
Couldn't agree more with the comment posted by fingerin. I used to work at BOFA and left as soon as I could when Ken Lewis became the CEO. He was only interested in becoming the biggest bank not the best bank. I am a "small fish" BOFA shareholder too, and lost money due to Mr. Lewis acquisition of Merrill, and mis-management of the bank. He should be in jail not playing golf with oodles of money in his bank account. I am sure that there are others just like Mr. Lewis who should be prosecuted instead of pitied.
Posted by pel58 | Wednesday, May 14 2014 at 10:39AM ET
Heather, as a shareholder that suffered badly at the hands of Ken Lewis and his board of directors, I could not disagree more with your implications that Lewis was forced by any regulator to break the law and fail to disclose Merrill's losses to shareholders prior to the shareholder vote.

Recall that the alleged bullying of Lewis by Hank Paulson and Ben Bernanke was in mid-December 2008 when Ken suggested BofA might invoke a MAC and not close the Merrill deal. The failure of Ken Lewis and Joe Price to disclose Merrill's losses to B of A shareholders occurred over the course of weeks leading up to the shareholder vote on December 5th.

I would add the Lewis and his board did have a duty, first and foremost to their shareholders, and not to any other party and cdertainly not the government. Your article seems to suggest that if B of A had decided they would not close the Merrill deal, that there would be a collapse of the financial system. Such a theory is just speculation. I would also argue that in light of the huge (and undisclosed) losses of Merrill, B of A and the board had a duty to disclose the losses to shareholders. A negative vote by shareholder would have given B of A's board the legal authority to renegotiate the terms of the Merrill acquisition that were not permanently dilutive to shareholders. Remember that absent B of A's foolhardy acquisition terms ($29/share), Merrill would have failed the day after Lehman failed. Firther, it was not clear that Lewis and BofA had the ability to declare a MAC under the terms of the merger agreement, given how poorly it was negotiated / drafted. Many have speculated that Lewis was bluffing Paulson and Bernanke when he discussed invoking a MAC.

For Lewis, it was all about being the biggest and had nothing to do with risk and reward or returns to shareholders. With the acquiescence of his board, Lewis permanently destroyed billions of shareholder value and damaged the lives of thousands of individuals who depended upon BofA dividends for living expenses during retirement. I know that firsthand as I met and spoke to many of them in Charlotte. Do not pity Ken Lewis or Joe Price. Their fines were paid for by the company. They made off with millions in unjust compensation that was based on fictitious earnings generated by acquisition after acquisition. Look that the (lack of) growth in tangible book value during their tenure and you will see they generated nothing more than goodwill on the balance sheet. They left their successors with a badly wounded company bereft of qualified managers and dragged down by legacy assets acquired in many ill conceived deals. They are on the golf course now with millions in the bank and no penalty other than a sullied reputation. I suggest a little deeper research and a clear look at facts rather than a conclusion pulled from the air based only on the failure of the NYAG to prosecute.
Posted by fingerin | Wednesday, May 07 2014 at 12:09PM ET
Thoughtful article, Heather--and your point is well-made. BofA paid, Schneiderman crowed, Lewis goes back to his golf game (now sans beard). Lewis was in an untenable situation, he made the best decision he could with the information available at the time, and now the regulators and DA's get to sift records in support of their careers.
Posted by RDKoncerak | Tuesday, April 29 2014 at 8:46PM ET
No pity for Lewis. He did not have to comply, it is just that the Feds were rampantly breaking law, or reinventing it dynamically, and Lewis knew they could put him in jail or otherwise for other too many to number self serving business transgressions. the only people who were screwed were the American taxpayer and the public. NO banker, of note was prosecuted........NONE. Frank - Dodd were both eyewash. Many in congress were paid off with submarket Mortgages so they were 'in on it'. Dodd was paid off with a lucrative retainer of 1 million + as soon as he left office .....wait !! wasn't he going after banks !!!?? And now he is their # 1 lobbyists. I see.
Posted by thomascannon | Sunday, April 27 2014 at 3:17PM ET
Heather, it is about time someone else said this publicly. The media and a lot of securities lawyers have allowed their dislike of Ken Lewis to obscure the fact that fiduciary duties to shareholders and the board simply do not trump everything else, particularly with an industry as closely entangled with government as the banking industry. Who among any of the nation's CEOs would have told the chairman of the Fed and the Treasury Secretary to jump in the lake when they threatened national and global catastrophe? It is time for the fiduciary duties of large bank boards and CEOs to be re-evaluated. Bernanke and Geithner should have been held to account for their obvious dissembling when they later denied the threat. And bankers should stop fooling themselves that they can operate independently of government. Ken Lewis and, even more, his general counsel were the fall guys in this particular, sordid episode.
Posted by Lawrence Baxter | Saturday, April 26 2014 at 9:05AM ET
Kevin V. right on!!!!!!!!And Landy, I would say that 99.9% of Senior Executives would have done the same thing these guys did at Bank of America. In fact, I would not have found them guilty of anything. But your comments about certain government figures and regulators are most likely right on the money!!!!!!!!

Great article!!!!! Let us remember this was the perfect storm. The Senate, The House, The GSE's, the Regulators, the Investment Houses, the Housing Market, Human Greed, and other variables all came together at the right time, or should I say wrong time. If we kept FNMA & FHLMC as they are today, most likely, this would never happen again.
Posted by robrose | Friday, April 25 2014 at 5:51PM ET
You mean names like Barney Frank and Chris Dodd: oops. those were our saviors, promising "never again"!
Posted by kvillani | Friday, April 25 2014 at 5:28PM ET
The real culprits behind the "rampant unscrupulousness" referred to in this article are getting off scot-free - like certain legislators and others who set the stage for the whole economic debacle over the last several years. Admire Landy for her comments here and would like to see someone like her with clout take it to the next level and talk about those real culprits - perhaps even name names.......would take a lot of guts to do so!
Posted by MCBKR | Friday, April 25 2014 at 5:03PM ET
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