David Gaffen’s Profile
Ken Lewis: When Buying the Dips Fails
In a bull market, buying on the dips works like a charm. Pullbacks in the market are quickly cannibalized by hungry investors looking for anything that smells like a bargain.
In a bear market, dip-buying does not work so well, as supposed bargains turn out to be value traps. This brings us to Ken Lewis, retiring as CEO of Bank of America. If dip-buying is a disaster in bear markets, Lewis engineered the M&A version of “dip buying” at the worst time not once, but twice.
He struck first with a $2 billion investment in Countrywide Financial in August of 2007, just before stock markets peaked – and after real estate was already teetering. In a good environment, it’s a potentially solid investment. Not so much this one, when Countrywide was at $18 a share, and Lewis doubled down with a $4 billion buy (well, rescue) of Countrywide in January of 2008. That’s hit the bank hard due to rising defaults in the housing market, which some analysts believe have not peaked.
But the real blow came on that fateful mid-September weekend when Lewis spurned Richard Fuld of Lehman Brothers and instead agreed to purchase Merrill Lynch for $ 29 a share, a 70 percent premium to where it was trading at the time. This has been more than problematic; the brokerage accelerated $3 billion in bonus payments in advance of a shareholder vote on the deal, in the midst of a quarter in which it lost billions. Lewis said he had second thoughts about the deal, testifying before Congress that then-Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke pushed him to go through with the purchase.
The damage had been done, particularly to the stock price. Eventually, the company may recover, though the housing market’s drag will weigh for a long time, as consumer behavior has been altered dramatically. Whatever happens, it wasn’t enough to save Lewis.