Bank of America's Lewis: Stooge or Savior?

Watching lawmakers grill Bank of America's (BAC) chief executive on Thursday, and considering all the pressures and discussions that happened outside of public view, one has to wonder: Should we feel bad for Ken Lewis?

Lewis told lawmakers on Thursday that when he considered walking away from the Merrill Lynch deal, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson not only threatened his job and said they would replace the board, but sought to limit public disclosure about the friction.

Lewis had second thoughts about acquiring Merrill due to escalating losses on toxic assets. Those losses would have made the acquisition untenable, so regulators offered to inject another $20 billion into BofA to absorb Merrill-related losses instead.

"What gave me concern is that they gave that threat to a bank in good standing," Lewis told the House Oversight and Government Reform Committee. "So it showed the seriousness with which they thought that we should not" back out.

But did Lewis have his back to the wall? There are two sides to this debate.

Some are filled with disdain over Lewis' behavior, viewing him as a hubristic and overcompensated lout. They say he used the housing bubble and its implosion to book profits while building a banking empire. He didn't consider the taxpayers and investors who stood to get burned from sloppy risk management in the process, they allege.

Those shareholders say Lewis acquired two deeply troubled firms -- Countrywide and Merrill Lynch -- despite indications that the deals could sour. They allege that the deals lacked adequate due diligence and that Lewis was not sufficiently transparent about the process.

When losses were revealed, he caved to regulators' demands to accept another $20 billion in taxpayer funds and seal the Merrill deal. This exposed BofA to more credit risk, as well as lawsuits and political rebuke -- all factors that imply Lewis made the decision without shareholders as the No. 1 priority, which he is charged with doing as CEO.

While campaigns by several shareholder groups stripped Lewis of his chairman title at Bank of America's annual meeting in late April, taxpayers have a different goal. They simply want a target for their fury and bewilderment, and want BofA to give them their money back.

Consumers see higher rates on credit-card bills, higher fees on bank statements, less available credit and lower value in their homes, stock portfolios and other assets. They also see Bank of America relying on government subsidies to the housing market, and a $45 billion federal cash cushion to report a booming profit.

And while the big bonuses paid out at Merrill Lynch along with Countrywide's shady mortgage-origination tactics may not have occurred under Lewis' watch, they also create resentment for the company that now owns them. As a firm that services one half of all U.S. households, it's unsurprising that many of those angry taxpayers are also Bank of America clients and are directing their anger at the man who runs the show.

"It's time for Bank of America and Ken Lewis to do what's right and take responsibility for the damage it has caused," Anna Burger, secretary-treasurer of the Service Employees International Union, or SEIU, said in a statement.

The SEIU, which often acts as a soundboard for populist angst, demanded to know ahead of the hearing whether Lewis would "apologize for his bank's role in bringing down the economy," or end "exorbitant overdraft fees, predatory financial practices, and the bank's irresponsible lending and acquisitions."

The anger and frustration is palpable, as evidenced by representatives' heated questioning of Lewis Thursday before the House Committee on Oversight and Government Reform. Rep. Dennis Kucinich (D., Ohio) cited BofA's "huge taxpayer-provided subsidy" and called the firm an example of how bank CEOs "operate with virtual impunity for their mistakes."

Yet others are sympathetic to Lewis' struggles, and defend the manner in which he has run Bank of America throughout the financial crisis.

Lewis has built his reputation as not only a banker, but a Bank of America banker, over four decades at the firm.

He joined the company -- actually, a component that merged into the mammoth institution it has become -- as a 22-year-old credit analyst in 1969 and worked his way through the ranks to his current position. As CEO for more than eight years, Lewis has engineered BofA into the country's biggest bank through several major acquisitions as well as core branch growth.

None of that seemed like a bad idea until recently. And some investors still believe his tactics and the "financial supermarket" model they evoke are wise -- if managed correctly, unlike Citigroup (C).

Certainly those who snatched up the 1.25 billion new shares BofA recently issued and helped quadruple its price up over the past few months have faith in the firm's earnings power. They say Lewis' Countrywide and Merrill Lynch decisions were time-sensitive and certainly helped stabilize the financial markets at a crucial time.

"If Ken Lewis did something to save the markets, he did it to save Bank of America," says Chris Armbruster, senior research analyst at Al Frank Asset Management, which has BofA on its buy list. "Actions that he took were beneficial to the market in general, and in turn, that helped Bank of America shareholders -- I believe that to be true."

Lewis noted on Thursday that both Countrywide and Merrill have been hugely profitable this year. He and others also believe they will add value to Bank of America and its investors over the long haul.

Furthermore, the pressure from Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke to close the Merrill Lynch deal made Lewis' choice even more difficult. Two top regulators were essentially telling him his choice could make or break the market during the most severe crisis since the Great Depression.

Could Lewis have had thicker skin? Sure. Jonathan Finger, an activist shareholder who runs the firm Finger Interests and was seeking Lewis' unseating, said he believed the CEO "totally wilted" and "should have been a little bit tougher in standing up to regulators."

But if Lewis insisted on walking away, regulators might have replaced him and the entire board, effectively turning the largest privately owned bank in the country into one that was run by government-selected management. (Think the Fannie Mae (FNM)/Freddie Mac (FRE)/American International Group (AIG)/General Motors(GMGMQ) of banks.)

If that occurred, the Merrill deal still would have gone through; BofA still would have been forced to accept funds for it; and the stress test may have had more stressful results than the $33.9 billion capital shortfall it uncovered.

On the other hand, other managers have bristled against regulatory pressure with some success. Wells Fargo (WFC) management constantly butts heads with regulators, to the point of publicly calling the stress tests "asinine," criticizing the results and insisting on earning much of the capital shortfall rather than diluting shareholders further with more stock sales. Their stress-test plans were approved by the Fed.

Ordinarily charming JPMorgan Chase (JPM) CEO Jamie Dimon has called bailout money a "scarlet letter" and put major, publicized effort into paying it back as soon as possible. Dimon has also engineered the fire-sale acquisitions of Bear Stearns and Washington Mutual, while JPMorgan passed the stress test with flying colors and is in the process of paying back bailout funds.

Could Lewis have done the same? It's hard to say.

And will he be able to hold onto his job until Bank of America begins to repay its $45 billion in taxpayer support? Perhaps even harder to say.

What is clear is that the CEO faced massive pressure to make a host of difficult choices whose outcome was ambiguous at best.

What's also clear is that all the government intervention, pressure and scrutiny has had disastrous effects on confidence in Bank of America and its ability to operate as a solid, independent entity.

Julia Plotts, a onetime investment banker at the firm who now teaches finance and economics at the University of Southern California, believes action by the Fed, Treasury, Congress and executive branch have "killed the company and continues to affect its ability to recover."

As to whether or not Lewis will be forced to relinquish his remaining titles as president and CEO, she notes that apparent support from what seemed to be an old boys' network may be diminishing, especially amid the shuffle that has taken place in recent weeks.

"Whenever a board has to come out and say 'We fully support the CEO,' it's a good indication that CEO will be gone shortly thereafter," says Plotts.

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