Put the load right on me
For all its commitment to facts and truthfulness, the writing of history always proves to be more art than science. Whatever version of past events you read today may be superseded by, and dramatically differ from, another version tomorrow. There’s an obvious reason for that, of course. Every dawn brings the possibility of new information that changes our understanding of the past. When British cavalry made a death-defying charge into Russian guns during the Crimean War — an event immortalized in ”The Charge of the Light Brigade” — the troopers were hailed for their courage and daring. Only later did it become clear that the charge was inadvertent, the result of a botched battlefield communication. What was first seen as a brave act was subsequently viewed as a stupid mistake.
And thus we come to Ken Lewis, former chief executive officer of Bank of America Corp. and a man whose reputation we’ll put through a similar revision here. There’s a twist, though. Unlike the case of the Light Brigade, the first drafts of history have gotten Lewis wrong in the other direction: His actions during the Great Recession, initially judged to be bad, will surely be seen someday much more favorably. In fact, we’ll skip ahead to someday right now and offer this bold bit of revisionist history sooner rather than later: Not only is Lewis not a symbol of all that’s wrong about capitalism, he’s the man who saved it in one stroke. That’s why, during a period in which he was stripped of his title of chairman of the board, piled upon relentlessly by shareholders, regulators and politicians and which he ended by, in effect, quitting his job, he is Business North Carolina’s Mover and Shaker of the Year.
It should be said right away that Lewis is no Lord Cardigan, who led the Lights on their charge. The flash and dash of a cavalry leader was never his style at BofA. That was left to Lewis’ predecessor, Hugh McColl, the South Carolina-born ex-Marine whose assault on the banking establishment had a Light Brigade feel to it (but with a much more successful result). McColl spent most of the 1990s acquiring other banks at a clip of almost one a year, expanding BofA’s geographic reach and deposit base so dramatically that the company came close to bumping against a federal regulation limiting any single bank’s slice of the national deposit pie to 10%. When Lewis took over from McColl in 2001, industry observers expected a caretaker. Surprisingly, BofA found itself in the hands of someone whose style may have been much different from McColl’s but whose results were not. In 2003, Lewis engineered the $48 billion acquisition of FleetBoston Financial Corp. and in 2005 the $35 billion purchase of credit-card issuer MBNA Corp. By mid-2008, after acquiring mortgage originator Countrywide Financial Corp. in a $2.5 billion deal, the only thing missing from Lewis’ trophy collection was the same thing missing from McColl’s: a brand-name investment bank with global reach.
Enter Merrill Lynch Inc. In September 2008, the Wall Street icon was on the brink of becoming the third major investment bank to disappear that year. Bear Stearns, days away from collapse, had been absorbed into JP Morgan Chase in March. Six months later, after Lehman Brothers had been refused a federal bailout, it filed for bankruptcy and saw its remains later scooped up by the British bank Barclays. Morgan Stanley and Goldman Sachs, the last firms standing, themselves were rocked by the rapidly shrinking economy. Even as Lehman Brothers was preparing its bankruptcy paperwork, Lewis — over the course of a single, frenetic weekend — engineered BofA’s purchase of Merrill Lynch, putting the resources of the country’s largest bank behind the ailing investment firm. The deal came at virtually the same moment the country’s money market was close to a meltdown (a critically important fact, on which we’ll say more in a moment).
Huge mistake, right? Most of the world thought so. The conventional wisdom was that BofA had paid too much for a failing company (especially when it might have been picked up for pennies on the dollar out of bankruptcy, a la Lehman Brothers) and that no rational entity commits to a $45 billion deal after only two days or so of duly diligent examination of Merrill’s books. The market voted against BofA, sending its share price dramatically downward, and a second investment of federal Troubled Asset Relief Program money — larger than the first — was needed to shore up the bank’s capital position. But one year later, things look very different. BofA’s stock price has recovered some ground, Merrill’s operations have given the bank’s bottom line a huge boost, and all the TARP money (which totaled, not coincidentally, the original price for Merrill) has been paid back. More to the point, the deal is often described these days in the same close-call terms people might speak of an asteroid that had brushed by Earth. ”If Merrill Lynch had come apart, it would have destabilized capitalism,” says Tony Plath, associate professor of finance at UNC Charlotte. “It would have been a much more difficult repair job [on the economy].”
Warren Buffett, the éminence grise of investing, made the same point about Lewis and BofA four months ago at a conference sponsored by Fortune magazine — albeit in terms that qualified as damning with faint praise. Calling Lewis an “ironic hero” who “inadvertently saved” the economy, Buffett credited him for playing a key role in avoiding a collapse. “If you think Lehman Brothers was bad, imagine Lehman compounded by Merrill Lynch,” Buffett told conference attendees. “I don’t know what [the authorities] would have done.”
It’s worth recalling just how bad the situation was in September 2008. Stock indexes were in free fall, Treasury officials were haranguing financial CEOs several times a day (read Andrew Ross Sorkin’s book Too Big to Fail for details), Republican presidential candidate John McCain suspended his campaign to help (ineffectually) with the mess, retirement portfolios were being vaporized, the credit system was locked up, and, most ominous, the money market was flirting with “breaking the buck” — which is to say, money-market funds, considered the safest, most stable investments, were close to having their share prices fall below $1. That’s akin to having some of the money under your mattress mysteriously disappear or having it vanish from your safe-deposit box. It’s just not supposed to happen. In fact, shares of one fund — Reserve Primary Fund — dipped to 97 cents, forcing it to suspend redemptions as investors scrambled to pull their money out. It was only the second time in history that a money-market fund had broken the buck.
Money-market funds are critical to the economy because they are buyers of short-term debt: government securities, certificates of deposit, commercial paper, repurchase agreements, short-term corporate bonds, etc. Companies use this market essentially as a payday lender. It’s the place where quick cash is available to bridge the occasional gap between fixed obligations (meeting payroll, for instance) and an inconsistent revenue stream. Money-market funds are grease to the financial system, helping the machinery purr rather than grind. They perform so vital a function that after Reserve Primary Fund came close to collapse, the U.S. Treasury stepped in to make $50 billion available to guarantee money-market funds against losses — thus helping to stem the tide of withdrawals by nervous investors.
Against that backdrop, imagine what might have happened if in that same week Merrill Lynch had collapsed and taken the investment-banking system down with it. Investment banks, of course, perform a long-term version of the same service provided by money-market funds in the short term. They finance stock offerings, bond issues, mergers and acquisitions, etc. If money markets are the financial system’s daily lubrication, investment banks are its engine, providing the horsepower needed to keep the economy revved up and growing. In December, business writer and commentator Ben Stein described a conversation he had over dinner with Buffett, during which the subject of Lewis and Merrill came up. As Stein wrote: “The man who saved [the system], he said, was Ken Lewis, beleaguered head of Bank of America. By buying Merrill Lynch just as everything at Lehman was falling apart, he put some confidence back into the system and stopped — or helped mightily to stop — a ‘run on the bank,’ which would have laid waste all of Wall Street. If Merrill had failed, said Buffett, it would have been followed swiftly by Morgan and then by Goldman. By overpaying wildly for Merrill, Lewis essentially saved the nation from financial collapse. Without that buy, commercial paper would have simply stopped dead and the banks’ slender capital would have been swamped by debt as that commercial paper could not be rolled over.”
What’s consistent between Buffett’s remarks about Lewis in September and then again in December is the sense that he considers the banker to be something akin to Inspector Clouseau — a clueless bumbler who flounders around but somehow still manages to come up with a solution. What’s different, though, is that Buffett’s sense of bemusement seems to have disappeared in those intervening months. What was said first as a punch line was later uttered as a recollection of a close call — and not a funny one.
Buffett is right about one thing: Whatever role Lewis may have played in preventing the American economy from sliding into the abyss, and taking the rest of the world with it, that role was inadvertent. But when history is written, the difference between intent and result is but a footnote. The only important thing is what happened — or in this case, what didn’t. You, like Buffett, may consider Lewis a bumbler. You may hold wholesale resentment for all bank CEOs and their pay-checks, be justifiably unhappy with BofA’s pact with the government devil that followed the Merrill deal and be appalled by the sight of the crisis makers turned into bailout takers. But give Lewis his due: Thanks to him, you are better off now than you would have been otherwise.
You’ve surely noticed that everything discussed so far relates to a single event in September 2008. It’s the context for what followed in 2009 — the year for which Lewis is our Mover and Shaker. Over the course of that most recent year, shareholders stripped him of his title of chairman of the board. Every branch of the federal government — executive, legislative and judicial — at different times decided to make BofA, and Lewis personally, their whipping boy. The Securities and Exchange Commission, for instance, sued BofA for allegedly misleading investors about the Merrill acquisition — a purchase that was nurtured (and eventually coerced) by officials of the Treasury Department and the Federal Reserve. All three institutions are, of course, overseen by presidential appointees. There’s the executive branch. The judicial branch chimed in when the federal judge hearing the case threw out the proposed $33 million settlement of the SEC charges, harshly criticizing the agency for being “cynical” and BofA for proposing to pay the settlement with bank money (meaning shareholder cash). Thanks to that ruling, the result was that the SEC subsequently announced its intent to pursue the case with a vigor that the judge thought it initially lacked. The agency intends to make every effort this time to ensure that the deal that saved the economy does not go unpunished.
Not to be outdone in matters of cynicism, the legislative branch — in the form of a committee of the House of Representatives — summoned Lewis to Washington in June to explore a, shall we say, novel theory: Far from being at the mercy of regulators (not to mention subject to the full power and majesty of the whole federal government), wasn’t BofA in fact the dominant party able to bend the government to its will? As Rep. Edolphus Towns, a New York Democrat, later put it, ”Based on the facts we have before us, it sure looks like it was Bank of America that was holding the shotgun at this wedding between BofA and Merrill.” (That this line of thinking fit neatly into the greedy-bankers-almost-ruined-us narrative surely was coincidental.) President Barack Obama, seeking to regain the balance of power of opprobrium, addressed bankers directly during an interview with CBS’ 60 Minutes to say “you guys” caused the whole economic mess and “I did not run for office to be helping out a bunch of fat-cat bankers on Wall Street.”
Fact is, Obama and the government explicitly and overtly did seek to help out fat-cat bankers. When Treasury Secretary Timothy Geithner was asked last month by Newsweek magazine whether the government bailout of the economy was ”too friendly to Wall Street,” he answered: ”The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Brothers.” Some people do understand that — which is why it’s appropriate for the revision of Ken Lewis’ history to start now.
BofA settles for an insider
With the clock running out on 2009 and Ken Lewis’ retirement date rapidly approaching, Bank of America’s board of directors gave the nod to Brian Moynihan. He became chief executive Jan. 1. It came down to a contest between two insiders — Moynihan, who since August had been head of consumer banking, and Greg Curl, chief risk officer — much to the consternation of critics and shareholders who wanted a CEO from outside the bank’s ranks. Both men had played key roles in the controversial acquisition of Merrill Lynch. But the board’s courtship of outsiders — including Bank of New York Mellon Chairman and CEO Bob Kelly, a former Wachovia chief financial officer — never made it to the altar.
Unlike Lewis and his predecessor, Hugh McColl, who spent their entire careers with the Charlotte-based bank, Curl and Moynihan came with two of the deals McColl and Lewis used to build the nation’s biggest bank by assets. Curl, 61, arrived in 1996 in the merger with St. Louis-based Boatmen’s Bancshares, and Moynihan, 50, with FleetBoston Financial, which BofA bought in 2004.
In announcing Moynihan’s selection, the board said headquarters would remain in the Queen City. But its new CEO lives in Boston and, as of mid-January, had not said when — or even if — he plans to move.