Ken Lewis Undoes His Empire

On BestCashCow.com in September, I questioned Ken Lewis's decision to pay so much for Merrill Lynch on the same evening that Lehman Brothers filed for bankruptcy. While my voice was unique, I also thought that the acquisition made strategic sense, whereas I had been less sanguine about the earlier Countrywide acquisition. It is now increasingly clear that Ken Lewis didn't have a clue what he was doing with Merrill either and destroyed $108 billion in shareholder value in less than 4 months (BoA's stock has fallen from $34 on September 12 to $7 now). Even more troubling is that he has endangered the entire economy by requiring a government bailout of the largest financial institution in the country.

Even though many, including me (in this article) had believed that Merrill Lynch has marked all of its assets down fully as early as July 2008, Lewis revealed on the January 16, 2009 conference call that he knew of massive losses before the deal closed and declined to inform Bank of America shareholders. In that same conference call, Merrill Lynch recorded an operating loss of $21.5 billion in the Q4 2008, requiring an additional $20 billion cash infusion and a backstop of $118 billion from the U.S. government.

At the time of the acquisition, BoA took pains to convince its shareholders it performed appropriate analysis, cited extensive work by J.C. Flowers to evaluate Merrill's operations and assets. It is clear now that Lewis misled shareholders at the time and right up to December 5, 2008. The fixed income markets suffered major dislocations in October and November, ahead of the shareholder vote, but Lewis claimed on the January 16 earnings call that the problems only surfaced in mid to late December.

Ultimately Ken Lewis was forced by the government in a December 17, 2008 meeting government to do the Merrill deal, after he obtained the government's commitment to provide the support that it is now providing. The company now claims that the Merrill deal will be dilutive to earnings for 2 years. By that point, Bank of America may be ward of the taxpayer with the equity worthless. Hardly the earnings powerhouse that Ken Lewis promised shareholders.

Next question: What disaster did Wells Fargo open up when it acquired Wachovia and will any banks survive this?