Paulsen

Alright I admit that’s a bit harsh. But he’s done nothing but foul up lately. The Bank of America shareholders meeting next week, on the 29th of April, should be a fun one to sit in on.

It appears that our indomitable Ken was coerced by Hank Paulsen, then Treasury Secretary, into going ahead with B. of A.’s takeover of Merrill Lynch even though revelations about the awful state of Merrill were becoming known to the bank’s executives. Apparently Lewis, a banking empire builder par excellence, was getting cold feet at the prospect of having to absorb Merrill’s balance sheet, stuffed as it was with a myriad unpleasant surprises. All of which were costly. Having sold his shareholders a bill of goods with his ‘opportunistic’ acquisition of Countrywide, whose corrosive book of sub-prime mortgages was already eating its way through B. of A.’s income, Lewis realized that taking on Merrill would most likely sink the bank entirely.

So he baulked.

Paulsen reacted with his best Goldman Sachs swagger, and read Lewis the riot act. Basically the message was: go through with the Merrill deal or the government will oust you as CEO. After all B. of A. was already a basket case by then and on the taxpayer dole, so combining with Merrill was only going to make a dead bank deader. It wasn’t going to kill a live bank.

Naturally Lewis saw the light. B. of A. went ahead with the deal, and we, the taxpayers, have been supporting it with ever more fervor ever since. We absolutely love B. of A.. Or at least we must in view of all the money we give it.

So now Ken has a problem.

It seems that some of his shareholders have awoken, and to their horror have discovered that the Merrill deal has not gone supremely well from their point of view. In fact it appears to have destroyed that part of whatever shareholder value had managed to survive the Countrywide deal.

Ken’s acquisition record is not too good just now.

These pesky shareholders now appear to believe – how could they? – that they have the right to oust poor old Ken. The nerve of these shareholders! There is nothing worse in all of corporate America than shareholders who think that management should be working for them and not the other way around.

I digress.

Lewis, having buckled and done his patriotic duty even though it clobbered his own shareholders pocket books, now has to face those shareholders and explain why he chose country over company.

That’s an ugly choice. Especially since his legal obligation is to the company.

So much for patriotism. Perhaps Ken can insulate himself by wearing a flag pin at next week’s meeting.

All of this is now roiling Washington. It is Andrew Cuomo mischievously supplying copies of all the correspondence that provide details of Paulsen’s strong arm approach and Lewis’ capitulation. It makes for great political theater. But it also raises a tough point: just how much can the government expect a private company to act in the public interest?

Obviously, had Lewis acted solely on his shareholders behalf he would have walked away from the Merrill deal. That would have left Paulsen in dire straits because Merrill would almost certainly have gone the way of Bear Stearns, only on a much larger scale. As Paulsen apparently put it to Lewis: there was a risk of systemic failure had Merrill gone belly up. In the heat of the moment the only viable option Paulsen had was to force Merrill into B. of A. regardless of the damage it did to the bank. There was no time to get shareholder input, and in any case, given the leaks about Merrill’s condition, the shareholders would most likely have rejected the deal had they been asked.

So the government effectively pushed B. of A. closer to the brink of insolvency, knowing it was going to have to bail it out anyway, rather than risk the liquidation of Merrill on the open market.

Paulsen probably also calculated that poor old Ken was going get the heave ho sooner or later. B. of A’s executive team has managed to destroy too much shareholder wealth for them to survive for long. So given that Ken’s demise was a matter of time, Paulsen must have thought he could use Lewis’ fear of being fired for his own, and the country’s, best ends.

So the conflict of interest between public and private interests has caught Lewis in a vice. He came through with flying colors from the public’s perspective, although that won’t do him any good when he faces his shareholders.

Was Paulsen right? Should he have coerced a CEO to act against the interests of his shareholders? Given the options there wasn’t much choice. I give Paulsen a pass on this one. It was Lewis who could have pressed for a better deal from the government. As it is: B. of A. is one of our weaker banks and will need long term support to nurture it back to health. It probably needs breaking up so that it is no longer ‘too big to fail’. That would undo about eight years of Ken Lewis empire building.

The taxpayers owe Ken for taking on Merrill. B. of A. should fire him nonetheless: his empire building will have produced nothing but the erosion of wealth for its shareholders.

It’s a tough life being a bank CEO.

Ken Lewis must go!

Addendum:

This story is now exploding in importance. Friday’s Financial Times pursues it aggressively and lists all the documents you need to read.

The timing of Cuomo’s release of documents means that shareholder pressure on Lewis is bound to escalate rapidly. His chances of survival are looking slim right now, although it isn’t at all clear how much of his executive team also needs to go. Perhaps Paulsen’s strategy all along was to force the shareholders to clean house, so the fact that Cuomo’s investigative team suddenly send such inflammatory documents to Congressional committees right before the annual shareholder meeting may not be a coincidence after all. Then again the implication of that is an unusual level of cooperation between people like Cuomo and Paulsen, neither of whom seem to me to be the kind of people who willingly share the limelight.

In any case Ken Lewis, who’s leadership of B. of A., has been terrible, now has his career in jeopardy. His record says he deserves this moment. I only wish it had arrived through the normal course of corporate governance, and not through what appears to be a highly contrived and possibly politically motivated maneuver by Cuomo’s office.