Opinion

Felix Salmon

Why give Ken Lewis a break?

By Felix Salmon
October 3, 2009

Tom Lindmark says I should give Ken Lewis a break:

Felix Salmon made a good point in a post yesterday when he said that running a mega bank was not something that any individual was capable of doing…

While Felix thinks that bank CEO’s cannot positively influence the outcome of their institutions, he seems perfectly willing to assert that they can destroy the bank. This makes no sense logically but it does typify the sort of disparagement that has been dealt out to Lewis and others.

I do think that the importance of CEOs is often overrated, but of course Ken Lewis is and was entirely capable of destroying shareholder value. One of the ways he did that was by growing Nationsbank, by acquisition, into a bank which is now too big to manage or effectively run. Another way he did that was by buying Countrywide and Merrill Lynch.

Conversely, there are ways for bank CEOs to protect shareholder value. In an interest-rate environment like the one we have right now, banks will be steadily and highly profitable on a week-to-week basis. The job of senior management is to keep an eye on the risk book, and make sure that no one is taking outsize risks which can’t be managed. Goldman Sachs and JP Morgan are both very good at this. Ken Lewis was always very bad at that aspect of the job: when things started heading south in the housing market, he decided the best thing to do was to redouble his housing bets by buying Countrywide.

Lindmark suggests that the disparagement of Lewis is snobbish NYC elitism:

Lewis’s real problem was never about his ability to run a bank but rather about his looks, demeanor, background and geographic location. He isn’t Jamie Dimon smooth and he looks like a man either in a permanent state of confusion or one about to rip out a subordinates throat. He never made any bones about his middle class background nor about his strong desire to succeed and running a bank based in Charlotte automatically knocks you down a lot of pegs in the viewpoint of the New York crowd.

Jamie Dimon bought Bear Stearns and got a sweetheart deal from the government to make it work. Ken Lewis bought Merrill Lynch and went back after the fact to get their backing. Little is said of Dimon’s deal while Lewis is vilified for everything connected with the Merrill acquisition.

This is ridiculous. People hate Lewis because he’s middle class? Er, no. Because he’s ambitious? (And Dimon isn’t?) Because he’s based in Charlotte? Come on. They hated on Stan O’Neal and Dick Fuld and Jimmy Cayne and Chuck Prince just as much, and they were based in New York.

As for Ken Lewis getting more grief for buying Merrill than Dimon has got for buying Bear, well, yes. Lewis overpaid massively for his failing investment bank, while Dimon got the Federal Reserve to subsidize his purchase to the tune of $29 billion. Both CEOs are ambitious, but only one let his ambition get the better of him. And he’s the one who just resigned.

Comments
27 comments so far | RSS Comments RSS

If you dig out the old news, some said Ken were “told” by the government to buy Merrill & Countrywide.

Posted by Tony | Report as abusive
 

Ken Lewis is a pompous a**

Posted by Me | Report as abusive
 

If you watch earlier interviews with Ken Lewis (I think in particular there was a documentary recently about the whole mess), you can clearly see that the whole “he’s from Charlotte and not New York” thing is really about Lewis’s own sense of outsiderishness – he was so freaking thrilled that he “got one over” on the “new york” crowd that he didn’t stop to actually look at what he was doing. it’s his own sense of inadequacy about not being from new york that drives him (at least in my opinion) to take some of the crazy risks that he took, culminating in the Merrill purchase.

 

that’s exactly why i think he is a pompous a** because he hasn’t gotten over the whole “north/south” thing and he is just bringing the south down

Posted by Me | Report as abusive
 

” he decided the best thing to do was to redouble his housing bets by buying Countrywide.”

The countrywide purchase has been enormously profitable for Bank of America. See Q1 10-Q and Q2 10-Q.

Mortgage banking income –

Q1 – 2008 – 451 (before)
Q2 – 2008 – 439 (before countrywide)
Q1 – 2009 – 3313 (after)
Q2 – 2009 – 2527 (after)

Insurance income
Q1 – 2008 – 197
Q2 – 2008 – 217
Q1 – 2009 – 688
Q2 – 2009 – 662

Total of 5.9 billion dollars in revenue for the first half of 2009 that can be attributed to countrywide not including interest income or fees. Without the inclusion of countrywide its doubtful the firm would have been profitable in 2009. Merrill Lynch has generated 7.5 billion dollars in profit in 2009.

Bank of Americas card portfolio (MBNA purchase) is what is dragging the firm down at this point.

The total loans remaining from the countrywide acquisition are listed under discontinued real-estate on the 10-Q at 17.49 billion. These loans are currently held at 51% of par.

 

before this is all over, someone’s head will roll. either by the conspiracy trying to hide itself(read another suspicious suicide in the news) , or from a nutjob in the public who is angry and desperate enough to think he can make a statement by killing one of these banker bosses, in which case the murder will probably be public and the killer immediately subdued

Posted by zeev | Report as abusive
 

It’s not a question of wether Merrill and Countrywide have been profitable. It’s a question of what he could have gotten Merrill for if he waited another couple of days.

Posted by Ryan | Report as abusive
 

Hey Tim,

Here is a little lesson in reading bank financials: dig deeper than what maanagement wants you to see.

You split out mortgage banking revenue before and after Countrywide. Well…big deal. Where are the numbers that report whether Countrywide has added to the BOTTOM LINE? Do you know how much Countrywide has added to credit losses or merger/restructuring charges? Of course not! Management would rather not have you see that. You are only reporting half the story. I bet Countrywide has not added to dime thus far to BofAs bottom line once you take into account all the costs of integration and credit losses. And the same can be said of Merrill Lynch.

Also, if you look at the components of mortgage banking revenue in Q1, you would have noticed massive trading gains in hedging their MSR. That is not even real operational profit; it is just bets on interest rates. Without it, BofA would have reported its second consecutive quarterly loss. Funny how different things look when you can actually read through the fine print, right?

Posted by Mike | Report as abusive
 

Another “too big to fail” bank and another $53 millions in compensation just to go away. Why do we pay so much for the incompetence of these guys who created the financial mess we are in? It seems the higher unemployment goes the more these guys get pay. When would these guys go to jail?

Posted by Eddie Zalez | Report as abusive
 

Lewis is overrated and overpaid for what he did and what he does. And, so are most CEOs of public firms, which they typically the CEO did not own or start, but where they are nothing but a hired hand, just like a gardener or a plumber, to do a job for the owner i.e. the shareholders.

The major premise that the executive search firms and “top” business schools will have us believe is that CEOs are a scarce commodity. The reality is – What is scarce about a commodity that typically does not create value and simple transfers large amount of shareholder wealth to CEOs. Ken Lewis destroyed value and took in over $100M, over $50M in “retirement benefits”. This is simple board sanctioned theft. Even more ludicrous is Nardelli at Home Depot – $400M or so for destroying value.

Ok- they will argue things were outside of their control to shape the value. I will grant them that in many cases. But that then just supports the need for not paying these average people a fixed and decent salary and nothing more.

CEOs are not a scarce commodity. My college going son could do at least as good maybe a better job than Lewis and Nardelli and he would cost much less to the shareholders. He would do this for $200K or less. He is far more moral and ethical than them and he is motivated by accomplishment and making a difference, and not by making money. As parents we brought him up that way and I can tell with certainty that I would sleep far better if he were the CEO than a Ken Lewis and would do a better job.

CEO scarcity is a contrived and unproven assertion made to benefit a few who take advantage of legislators who are essentially bribed to protect Boards who cheat shareholders.

Ken Lewis needs to be personally sued and hounded until he returns the money to shareholders. So do most other CEOs, with the exception of a handful.

There also no evidence of firm performance being correlated with CEO pay, but as long as Boards can get away with it (and not just bank boards), because there is no downside, they will continue to steal from shareholders.

Posted by Jay | Report as abusive
 

edit to previous post

Ok- they will argue things were outside of their control to shape the value. I will grant them that in many cases. But that then just supports the need for paying these average people a fixed and decent salary and nothing more.

Posted by Jay | Report as abusive
 
 

Eddie Z is right – when will these guys go to jail?
The mentaility of the current and past ceo’s of BOA, former NationsBank, NationsCredit, etc. as handed down from Hugh McColl – IF YOU CAN BEAT THEM, BUY THEM!

They don’t listen to their employees who try to tell them something isn’t right, the left hand doesn’t know what the right hand is doing because of their “silo” business models.

Give them a bit more time and the implosion will happen and when it does, look for major numbers of unemployment claims.

Posted by NGuthrie | Report as abusive
 

Nobody’s being forced to buys stock in any business.
All companies have positives and negatives.
If you aren’t comfortable with BoA or whoever’s compensation of their CEO, invest your money elsewhere.
And if you’re *not* a share holder, it’s no concern of yours anyways. Call their investors stupid, if you must criticize someone.

I’d love to see substituted “CEO’s are getting paid too much” with “Gosh, people are stupid investing companies that pay their CEO so much!” If we did that everywhere, it would probably have an actual effect on CEO compensation, rightly or wrongly.

 

I lost $54,000 can Ken give it back to me please out of his 53 million retirement

Posted by deniro11 | Report as abusive
 

JP Morgan Chase & Co.

$30 Billion Fed Loan for Bear Stearns.
+
$25 Billion TARP loan.
+
Maiden Lane I

= $55 Billion + Maiden Lane.

Sure the Jamimie Did a “good” job of protecting the shareholders, but he raped the country. Far worse than anybank, that includes Citigroup.

Of course the Media does a good job of forgetting the Fed loan which we are all paying through inflation, the biggest form of tax.

I think your the first this mention this. Thanks

Posted by John | Report as abusive
 

Someone who says “I lost $54,000 can Ken give it back” doesn’t need that kind of money anyway. You would just blow it on toothless hookers.

Posted by Boyd | Report as abusive
 

You guys blame Ken Lewis and CEOs for the financial meltdown. CEOs work for the shareholders, not for the benefit of humanity.

The reality is that our lawmakers were asleep at the controls, too pre-occupied on how to get kickbacks from lobbiest in the form of campaign contributions to care about the ramifiactaions of giving sub-prime mortages to people who could not afford them. And even if the lawmakers would read the bills they pass, they are too stupid to know the ramifications anyway.

The reason we have stupid lawmakers is that voters like you are stupid too, you vote choices based upon social issues while both the left and right rob you blind and waste your tax dollars. For example, why did we do “clash for clunkers”? So that you can pay for your neighbor to buy a new car while the guy is unemployed – you idiots. If Obama can take 500 billion out of the existing medicare due to fraud, why arent we throwing people into jail? Because you again are idiots.

Prove positive you are idiots (in case you still had doubts): not a single government official was jailed or even lost his job because of the financial meltdown. We have exactly the government we collectly deserve thanks to you.

Posted by Dave | Report as abusive
 

Dave,
It looks like you are the only smart one here as the others are stupid. Maybe you should be CEO???

Posted by Jay | Report as abusive
 

Sorry, but only a fool (or the Fed) would have bailed at Merrill. Everybody knew Merril was a disaster, that it was a basket case, that it was worth nothing. Everyone, apparently, except Lewis. He is a fool.

Posted by maynardGkeynes | Report as abusive
 

The issue now is the $53 million retirement package that Lewis will receive. After driving the company into the ground and destroying the shareholders’ investments, Mr. Lewis should not be rewarded. It doesn’t matter if he is from the north or the south, or if he is from a “middle class” background. He has destroyed people’s lives and should not be rewarded.

Posted by RSG | Report as abusive
 

By what possible criteria could it be determined that this guy deserves one penny of bonus? He is being rewarded by the “good old boys” for being one of them. If anything he should be sued and investigated criminally, along with the rest of BOA’s officers and directors.

Why are we rewarding such colossal failure and why are we ignoring the insider trading and reckless risk taking that has destroyed so many lives?

Posted by CEB | Report as abusive
 

Tim, if you look at the 10-Q’s carefully you will see that the AOCI balance has declined by $10 billion dollars over the year. That is $10 billion dollars of losses in the period that haven’t been run through the income statement. If you believe these losses are likely to reverse themselves in future periods, feel free to continue excluding them. If, like me, you are skeptical… you may want to take them into consideration when doing your analysis.

Posted by Basho | Report as abusive
 

Tim:
“Total of 5.9 billion dollars in revenue for the first half of 2009 that can be attributed to countrywide not including interest income or fees.”

The vast increase is in REVENUE, a natural outcome when you just acquired another business. It says nothing of PROFIT due to these acquisitions.

Dave:
“You guys blame Ken Lewis and CEOs for the financial meltdown. CEOs work for the shareholders, not for the benefit of humanity.”

This statement pinpoints the raw trouble of American big biz. Jack Walsh of GE said ‘shareholder value is almost everything, because stakeholders of society can sink you too’. Well, many CEOs operate on the belief that shareholder value is NOT everything. Profit is. Indeed it is the only thing. When you have entire generations of executives educated to think this way, foremost of which are the bank executives, then the following are inevitable:

a) Investors demand ever increasing quarterly profits.
b) CEOs operates only for the short term gain. That’s what they are compensated for, and what the investors want.
c) Anything other profit maximization must be minimized, or eliminated. Most common of which include staff, systems, overhead, R&D, benefits. Any thing that contributes to profit must be maximized – ever more M&A.
d) Take this business culture to its logical conclusion what you get is winners at the executive suites over the short term. And losers everywhere else, including shareholders and stakeholders, over the longer term.

Note that this ideological management fundamentalism is uniquely American big biz culture. I don’t know of any other country practicing anything even close to it – perhaps UK being the exception.

When you have government regulators giving the profit-only CEOs a free hand; and violating moral hazard by giving every indications that big financial gamble failures will be bailed out (e.g. LTCM), then you invite a runaway nuclear reaction.

Posted by The Real Deal | Report as abusive
 

Perhaps shareholders are not rational – perhaps you have not seen how much money Merrill Lynch has made for BAC this year…

Posted by Nemo | Report as abusive
 

-Response

“Total of 5.9 billion dollars in revenue for the first half of 2009 that can be attributed to countrywide not including interest income or fees.”

The vast increase is in REVENUE, a natural outcome when you just acquired another business. It says nothing of PROFIT due to these acquisitions.”

Countrywide 10-Q 2Q-2008
http://www.sec.gov/Archives/edgar/data/2 5191/000104746908009150/a2187147z10-q.ht m

Total expenses Q2 2008 – 2.192 billion
Total expenses H1 2008 – 4.364 billion

5.9 billion revenue – 4.364 expenses = 1.53 billion
(note: this understates the profit. Revenue did not include net-interest income or fee revenue.)

 

Those running index funds can’t add much value, but they can destroy value by poor and expensive execution.

CEO’s can’t add much value, but they sure can destroy value.

Posted by Richard | Report as abusive
 

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