Surreal is a word rarely associated with investor relations and usually not with bank earnings conference calls. Yet, surreal is how it feels as one bank after another proudly presents super profit numbers when only months ago many had been knocking on death’s door. The prize for the most surreal earnings conference call goes to Bank of America.
Bank of America’s CEO Ken Lewis is a dead man walking. He is at the centre of a Washington fire storm that has so far touched but not torched the former Treasury Secretary and the Chairman of the United States Federal Reserve. Lewis faces a class action suit that alleges materially untrue statements and failure to disclose material information in connection with Bank of America’s acquisition of Merrill Lynch.
Lewis never discussed these issues during the conference call and analysts who have expressed strong opinions on these matters to the media, such as Nancy Bush from NAB Research, stayed strangely silent on the topics. Were they showing deference to the dying? It had that feel about it. (full transcript)
Only the day before the earnings call the House Committee on Oversight and Government Reform had called Hank Paulson as a witness in their probe of the Bank of America’s $50 billion purchase of Merrill Lynch. ("Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part III")
Committee Chairman, Congressman Edolphus Towns seemed to think that Ken Lewis should have been fired for using Merrill’s deteriorating financial condition to get more bailout money from the Federal Reserve in December last year.
Republicans on the committee seemed to believe that both Paulson and Bernanke overreached by intimidating Lewis into proceeding with the acquisition despite his concerns about the rapidly deteriorating financial condition of Merrill Lynch.
Committee member, Dennis Kuchinih, an Ohio Democrat told the New York Times (Looking Back in Anger at the Crisis) that Lewis’ failure to inform shareholders was a “potential violation of securities law.” Not a surprising position for Kuchinih given that just two weeks earlier the State teachers Retirement System of Ohio and the Ohio Public Employees Retirement System had been granted lead plaintiff status in a class action suit against Bank of America over the failure to disclose material to shareholders. (Five lead plaintiffs named in Bank of America class action)
And, there’s the nub of the issue. It doesn’t really matter whether Paulson heavied Lewis into doing a deal he had reservations about or whether Bernanke encouraged Lewis to stay quiet about the extent of Merrill’s problems for fear of another market meltdown. What matters now is to restore investor confidence in the principle of full and fair disclosure and that means expurgating a sin which was at the time wholly understandable, probably very necessary but now that the crisis has past one that is fundamentally damaging to the most basic principles on which our modern capital markets depend, full and fair disclosure.
Lewis surely knows his position is untenable. Merrill’s financial problems were sufficient for him to talk with Paulson about walking away from the Merrill acquisition on December 17, 2009 citing the “material adverse event” clause. The discussions resulted in $20 billion of additional TARP money for Bank of America. Yet, just days earlier Lewis had stood before Bank of America shareholders as they voted to approve the acquisition of Merrill and been silent about the extent of these very problems.
When Ben Bernanke told the House Committee on June 25th that “disclosure obligations belong squarely with the company, and the Federal Reserve did not interfere in the company’s disclosure decisions” he was as good as signing Lewis’ death warrant. ("Bank of America and Merrill Lynch: How Did a Private Deal Turn Into a Federal Bailout? Part II.")
There won’t be many tears shed at the Fed when Lewis goes if the following excerpt from a subpoenaed internal email is any guide: “I always had my doubts about the due diligence they did on the ML deal. Don’t forget they paid a premium. How do you pay premium and now ask for help? This will not go over well at all.” (Fed e-mails, Fed documents 1)
I expect Lewis to go soon but probably not until sufficient time has past that he can leave with some dignity. I don’t expect him to enter the witness box as the Bank of America CEO. Questions about “what did you know” and “when did you know it” raise issues of management competence and corporate transparency that no company, particularly a bank, can afford today.
When the time comes to show Lewis the door Bank of America’s Chairman and directors need look no further than their company’s own website for inspiration. The corporate governance section says: “We also do not hesitate to separate ourselves from individuals who violate our values or ethical standards, regardless of performance or potential.” Ironically, Lewis’ signature is at the bottom of the page. (Bank of America's IR website)
Of course when Bank of America finally puts their money where their mouth is that will be shareholder money and Lewis will no doubt receive a nice fat check to help ease his departure pain.
Lewis’ actions in December may well have helped save the banking system from a second round meltdown. Certainly Lewis thinks so. He recently told an interviewer from the PBS program “Front Line” that the Bank of America acquisition of Merrill Lynch was “a perfect example of how no good deed goes unpunished”. Unfortunately, as epitaphs go this one has a shortcoming, it fails to recognize that it was the Bank of America shareholders who were punished. (Bank of America-Merrill Lynch Merger)
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