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28 February 2024

Bank of America CEO's toughest test

By Jonathan Stempel

Bank of America Corp Chief Executive Kenneth Lewis' hold on his job may be more in the hands of others than his own. Lewis' ouster on Thursday and of former Merrill Lynch Chief Executive John Thain, 21 days after Bank of America bought the brokerage in a rushed $19.4 billion (Dh71.25bn) merger, has left some commentators and bloggers rushing to label the combination as among the most troubled in US corporate history.

Time will tell if they are right. But the evaporation of well over $100bn of shareholder wealth since Lewis and Thain joined forces on September 15 last year has raised questions about how long Lewis' nearly eight-year tenure running what is now the largest US bank by assets should continue.

"Lewis is skating on thin ice," said Michael Mullaney, who helps invest $9.5bn at Fiduciary Trust Company in Boston, which is reducing its Bank of America holdings. "If there are more negative surprises coming out of the combined balance sheets, Lewis will be very vulnerable."

Bank of America said it considered backing out of the merger after realising the extent of losses on Merrill's books. It said Merrill lost $15.31bn in the fourth quarter. Bank of America itself posted an unexpectedly large $1.79bn loss, its first quarterly deficit in 17 years.

Lewis got $20bn of capital from the government's Troubled Asset Relief Program (TARP) to absorb Merrill, along with an agreement to cap its losses on $118bn of assets. That brought its total TARP infusion to $45bn – more than the bank's current market value of roughly $40bn. Bank of America stock closed at $6.24 on Friday, down 82 per cent since the Merrill merger was announced.

Board indicates support

In the last 16 months, Lewis has spent roughly $43bn to buy Merrill, mortgage lender Countrywide Financial Corp and LaSalle Bank Corp, a large lender in the US Midwest.

The purchases magnified Charlotte, North Carolina-based Bank of America's exposures to the fast-deteriorating economy and credit markets. Thain had been head of global banking, securities and wealth management before his ouster. But Lewis showed enough confidence this week to buy $1.2 million of the bank's shares. Five directors also bought shares, including lead outside director O Temple Sloan.

The board plans to hold a "routine" meeting next week, bank spokesman Robert Stickler said. He added he has seen no agenda to indicate that the directors plan to evaluate Lewis' status as either chairman or chief executive.

"We are working hard on making a profit in the first quarter," he said. "Merrill is an important part of our strategy. We are very pleased with Merrill's performance year-to-date."

Sloan did not return a request for comment.

Out of bank's control?

"The market will give Ken as much time as he needs, so long as the stock performs," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "The stock's performance is a function of how successfully he can integrate Merrill Lynch, and how he maintains the credit quality of the consumer loan book. Those are tall orders in this economy."

And that would be true for any replacement, too.

"A lot of it is out of his control," said Donald Hodges, a principal at Hodges Capital Management. "The condition of a bank is in large part a function of the condition of its customers."

Thain was replaced by Brian Moynihan, who joined Bank of America when it acquired his former employer, FleetBoston Financial Corp, in 2004. That cements Moynihan's status as a top candidate to eventually succeed the 61-year-old Lewis.

Government role

It is unclear what role regulators might take in Bank of America's affairs and their treatment of management at other companies facing financial difficulties has been inconsistent.

Last year, the government replaced management at mortgage financiers Fannie Mae and Freddie Mac and the insurer American International Group Inc. In contrast, it left Vikram Pandit in charge of Citigroup Inc.

"Ken Lewis is in a very difficult spot," said Sherry Jarrell, a business professor at Wake Forest University in Winston-Salem, North Carolina. "He cannot please the political interest that the government role entails and the market interest in maximising value for shareholders."

Mullaney said "shareholders will revolt" if the bank has another substantially worse-than-expected quarter.

But observers struggled to identify who could easily replace Lewis. It is also unclear what role Timothy Geithner, the Treasury Secretary nominee of President Barack Obama, might play. The Treasury Department declined to comment.

"It's either Ken Lewis, or they nationalise the bank and let the Treasury figure it out," Plath said. "And I don't think Tim Geithner wants to go that route. So I think Ken Lewis is safe for now."