The Rise and Sudden Fall of Bank of America’s Ken Lewis

Last December at a black-tie industry gala in New York City’s famed Plaza Hotel, Ken Lewis strode past other top financial executives to the podium to accept the award for Banker of the Year. The financial industry was crashing, but Lewis looked to be at the top of his game. The CEO told the crowd, “It is incumbent upon all of us, especially those of us whose performance has left us in a strengthened leadership position, to help our industry find a new balance between our desire for economic growth and our need for market stability.”

This December, Lewis will be out of a job. On Wednesday, he sent an e-mail to the bank’s staffers saying he will retire by the end of the year. Lewis, 62, said it was his decision to leave, but no one could miss the huge legal dustup swirling around him over the bank’s deal late last year to buy Merrill Lynch. The Securities and Exchange Commission (SEC) and New York attorney general Andrew Cuomo have been investigating whether Lewis misled shareholders to gain approval of that acquisition. He could soon face charges in those probes.

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Bank of America said a replacement for Lewis has yet to be named.

The financial meltdown has claimed the careers of many banking-industry stars. But no executive has had as big a roller-coaster ride during this crisis as Lewis. At its start, Lewis and Bank of America looked to benefit from the turmoil facing the banking business. The firm, based in Charlotte, N.C., had never been a big player in the subprime-mortgage business, in either lending or underwriting loans. That prudence led to smaller lending losses at B of A than at Citigroup and other rivals. What’s more, while other financial firms were verging on broke, Bank of America seemed to have enough capital to play the role of rescuer in the credit crunch.

On the weekend before Lehman Brothers’ collapse, Merrill Lynch CEO John Thain turned to Lewis for help. Thain called Lewis to offer him 10% of his firm. Lewis said he wanted it all. By the end of the weekend, the deal was done. Lewis was hailed as a hero for saving Merrill on the same morning that Lehman was forced to file for bankruptcy.

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Son of an Army sergeant and a nurse, Lewis grew up in Columbus, Ga. He joined the firm that would become Bank of America right after graduating from George State College in 1969. Early on, Lewis’ cool demeanor and keen credit judgment caught the eye of the bank’s chief executive, Hugh McColl. Soon Lewis became the wingman to McColl’s swashbuckling merger ways. McColl would do the deals, and Lewis would parachute in to do the cost-cutting and integration. Along the way, the two built Bank of America to become the country’s largest bank in terms of deposits.

When McColl retired in 2001, Lewis took over. But rather than retrenching as most people expected, Lewis proved he liked the art of the deal as much as McColl. In 2003, Bank of America bought Boston-based bank Fleet for $47 billion. Two years later he spent $35 billion to buy credit card giant MBNA. And as the credit crisis began to unfold, Lewis picked up Countrywide, which at its height was the nation’s largest independent mortgage lender, for just over $4 billion.

Lewis had long coveted the retail brokerage business. Merrill Lynch, with its legions of investment salespeople, was to be Lewis’ crowning acquisition. It ended up being his undoing. In the quickly hatched deal, Lewis paid $19 billion for Merrill, which most people agreed was nearly bankrupt. In the fourth quarter alone, Merrill Lynch lost more than $15 billion.

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Since the acquisition, Bank of America’s stock has fallen 50% and at one point went as low as $2.53. The problems at Merrill Lynch have turned out to be much bigger than Lewis originally thought. And at times, the Merrill-related losses have raised anxiety about the health of the entire bank. In January the Treasury Department announced it was injecting an additional $20 billion into Bank of America. In all, the government has spent $45 billion trying to stabilize the finances of the bank.

Many analysts believe that the Merrill deal, while risking the solvency of Bank of America, will end up being a boon for the bank. Merrill still has a strong investment-banking franchise, and even in the depth of the financial crisis, its wealth-management business continued to be profitable. Nonetheless, Lewis won’t be around to see the fruits of the deal.

Anger among Bank of America investors about the Merrill Lynch deal has been brewing for months. In April, shareholders voted to strip Lewis of the title of chairman. Even then, some people predicted Lewis was not long for the bank, but he managed to hold on to his CEO title for six more months.

Lewis’ problems came to a head this summer. Bank of America had struck a deal with the SEC to pay $33 million to end an investigation into whether some unnamed Bank of America executives had mislead shareholders when it purchased Merrill. The SEC alleges that in early December, on the eve of a vote to approve the Merrill deal, Bank of America executives told shareholders that no bonuses would be paid to Merrill executives prior to the acquisition. In fact, Bank of America had agreed more than a month earlier to approve the payment of more than $5 billion in year-end bonuses to Merrill employees.

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But in September, Judge Jed Rakoff said he would not accept a settlement that did not name specific executives. New York attorney general Cuomo is reportedly considering pursing his own charges against Lewis and other Bank of America executives on issues surrounding the Merrill acquisition. Pursuant to Rakoff’s ruling, the SEC has gone ahead with its case against the bank in general but has yet to name individual executives in the suit. Cuomo recently subpoenaed a number of current and former Bank of America board members. He has not indicated whether he intends to bring charges.

In his letter on Wednesday to Bank of America employees, Lewis wrote, “Some will suggest that I am leaving under pressure or because of questions regarding the Merrill deal. I will simply say that this was my decision, and mine alone.” It is also abrupt. Just months ago, Lewis told Congress he intended to stay on as head of Bank of America until all the assistance it had gotten from the government to survive the financial crisis had been repaid. It seems unlikely that Bank of America will be able to pay back the government $45 billion anytime soon.

In a statement, Bank of America said it plans to name a successor to Lewis before the end of the year. Observers say Brian Moynihan, who in August was promoted to the head of the bank’s retail network, is the most likely to replace Lewis. Another possible though less likely contender is Sallie Krawcheck, who was formerly the head of Citigroup’s brokerage division and joined Bank of America in August.

But whoever takes over from Lewis will have a tough job returning the bank to the position it was in on the eve of the credit crisis. Lewis seems to agree. In the resignation e-mail that went out to employees, Lewis wrote, “I am disappointed in how we managed credit risk. The next two quarters will be difficult.”

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