Cover Story
Associated Press/Photo by Paul Sancya

Split decision

Bank of America shareholders take the unusual step of stripping CEO Kenneth Lewis of his chairman's role, but there was little usual about his dealings with Merrill Lynch-except that they may portend the future of politicized banks

Issue: "Playing with capitalism," May 23, 2009

CHARLOTTE, N.C.-Nearly three hours before embattled Bank of America (BofA) CEO Kenneth Lewis faced hundreds of anxious shareholders gathering to decide his fate at their annual meeting in downtown Charlotte, Judy Koenick wore her vote on a homemade T-shirt etched with large, black letters: "Fire!!! Kenneth Lewis."

Koenick, a shareholder from Chevy Chase, Md., paced on a sidewalk outside BofA headquarters, talking about the ire that caused her to travel to Charlotte for the April 29 meeting. Her anger hinged on two words: Merrill Lynch.

Indeed, much of BofA shareholders' exasperation with Lewis centered on the bank's acquisition of Merrill Lynch on Jan. 1. After learning in December that the troubled bank's fourth-quarter losses totaled a staggering $15.84 billion, Lewis did something that many shareholders couldn't forgive: He didn't tell them.

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Lewis says Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured him to proceed with the purchase of Merrill Lynch-and to keep their losses secret-fearing the bad news would worsen an already deplorable economic climate. Lewis-who had already accepted some $20 billion in government bailout funds for BofA-remained silent. Shareholders learned about Merrill Lynch's end-of-year hemorrhaging after the sale closed and then watched BofA's stock value plummet.

Outside BofA headquarters, Koenick says she lost a substantial portion of her retirement, pointing to a manila folder stuffed full of bank statements, shareholder letters, and a comic strip about a greedy banker to which she's pasted a photo of Lewis' head. She says she's not sympathetic to the intense pressure the CEO faced from two of the most powerful men in the country: "I don't care. Let him have the guts to say, 'I'm not going to lie to my shareholders.'"

By the end of the day, BofA shareholders would hand Lewis their razor-thin verdict: The 40-year veteran of the largest bank in America would remain CEO but lose his position as chairman of the board. Shareholders favored splitting the two positions by a margin of 50.34 percent, marking the first time shareholders have demanded such a split in a company in Standard & Poor's 500-stock index.

Considering that many financial experts praised Lewis' leadership before his involvement with Bernanke and Paulson, the BofA episode illustrates a troubling trend: an increasing federal entanglement in the banking system that could redefine the relationship between government and financial institutions and wage a simmering war on capitalism.

Many BofA shareholders were already simmering as they began lining up nearly two hours early for the meeting to be moderated by Lewis. Outside at the city's main intersection, protesters were already chanting: "Hey, hey, ho, ho, Ken Lewis has got to go!" Another group from the Service Employees International Union chanted: "Bank of America is in a spiral! Its greed is going viral!" One protester held a photo of Lewis' corporate jet. Another suit-clad man wore a Lewis mask and encouraged boos from his f-ellow protesters.

Inside, the crowd was more subdued, but still feisty. When a security guard jokingly offered shareholders a better place in line for $20, one shareholder sarcastically replied: "Hey, I could buy two shares for that today."

Actually, he was right: BofA shares were trading that week at around $9. That was up from a dismal $3 in March, but far below $40 about a year ago. A few days before the meeting, BofA announced a $4.2 billion profit for the first quarter, but the bank's shares still dipped more than 20 percent, as investors were skittish over a still-shaky economy and the Merrill Lynch revelations.

Those revelations came in January, more than two weeks after the Merrill Lynch sale closed. But untangling the complicated timeline means going back to July of last year, when BofA agreed to buy mortgage lender Countrywide Financial Corp. for $4 billion. Countrywide was near collapse under the weight of subprime loans gone bad and legal woes related to accusations of reckless lending practices. Financial experts said Lewis' willingness to absorb the spiraling company helped temporarily stabilize a faltering mortgage industry.

When Merrill Lynch faced an even bigger catastrophe in September, Lewis stepped in again, agreeing to buy the troubled investment bank for $50 billion. The proposed deal came with the economy convulsing from the stunning, domino-like collapse of banking giants like Bear Stearns and Lehman Brothers, as the subprime bubble violently erupted.

By October, the stock market was plummeting, BofA was reporting a 68 percent drop in profits, and Paulson was heading the Bush administration's assembling of a $700 billion bailout for banks. Congress battled over the details, and House Republicans soundly rejected the massive use of taxpayer funds for private banks, but Paulson's plan prevailed with Bush's approval. The Treasury targeted nine banks-including BofA-for the first $250 billion of infusions from the Troubled Asset Relief Program (TARP).


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