Could it be any more convoluted? Conspiracy theories are normally complex and necessitate a searing sense of paranoia. At least that is what I thought when I read the complaint New York attorney-general Andrew Cuomo filed in early February against Bank of America; its former chief executive, Ken Lewis; and the former chief financial officer, Joe Price. The defendants are accused of civil fraud.
A mole murmurs that the replacement of Mayopoulos as general counsel by Moynihan had less to do with the mounting losses at Merrill and more to do with internal Bank of America politics and the need to find Moynihan a senior job following the merger. Indeed, mighty Moynihan had a succession of senior jobs in such a short period of time that I feel seasick recounting them. In December 2008, Moynihan ran Bank of America’s corporate and investment banking division. He then replaced Mayopoulos as general counsel for about seven weeks before being promoted to run global banking and wealth management (essentially Merrill Lynch) when John Thain was fired in late January 2009. After six months Moynihan moved on again. In August 2009, he was put in charge of the consumer division. In December 2009, he was named chief executive of the whole bank. Isn’t that five posts in roughly 12 months and isn’t that a bit weird?
In September 2008, Bank of America agreed to purchase Merrill Lynch as the flames leapt around the financial firmament following the immolation of Lehman Brothers. Cuomo accuses the dynamic duo of understating Merrill Lynch’s loss to shareholders (the deal had to be approved by Bank of America shareholders at a December 5 meeting) and overstating the bank’s ability to terminate the Merrill purchase in order to secure taxpayer funds. In January 2009, it was announced that the government would offer Bank of America $20 billion in view of problems with the Merrill acquisition. The 90-page document alleges that the bank’s leaders, faced with spiralling losses at Merrill that totalled more than $15 billion by the time of the shareholders’ vote, ignored advice from auditors and outside counsel, kept the firm’s top internal lawyer, Tim Mayopoulos, "in the dark" and fired him after he discovered that the Merrill losses were larger than he had been led to believe. Bank of America denies all wrongdoing: "BofA and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary duties."
The complaint says general counsel Mayopoulos decided shareholders probably should be told of the losses and met the bank’s law firm, Wachtell, Lipton, Rosen & Katz. However, according to Cuomo: "The decision was reversed, Wachtell’s role was marginalized and the bank made its own decision not to disclose." On December 3 2008, the complaint says: "Price told Mayopoulos about an increase in losses to $7 billion as opposed to what he actually knew or should have known that known losses plus further expected losses would exceed $10 billion." Based on the $7 billion figure, Mayopoulos said no disclosure was necessary before the December 5 vote. When Mayopoulos learnt of the increased losses on December 9, he sought out Price to discuss the deterioration but was told Price was in a meeting and could not be interrupted. The next day, Mayopoulos's job was summarily terminated and he was escorted from the building immediately, according to the complaint. This sequence of events is baffling but it is also important because the person who took over from Mayopoulos as general counsel was Brian Moynihan, the current Bank of America chief executive.
So what if any tentative conclusions can we draw from this surreal saga? First, Joe Price, who on February 1 2010 was put in charge of Bank of America’s important consumer banking division, may have to take leave of absence to focus on the lawsuit. This is bad news. Bank of America is stretched thinly at the senior level: remember that the current CFO, Neil Cotty, is only a temporary appointment. The firm has a search out for this position.
Second, Moynihan has a "get out of jail" pass. The attorney-general has said Moynihan will not be part of his continuing investigation.
All this hot-desking by Lewis’s inner circle is perplexing, although obviously a major merger means upheaval for everybody. Such rapid senior management change hints at a chaotic corporate hierarchy and a management team in turmoil reacting to rather than shaping events. Am I the only person who thinks it would have been much cleaner for the firm if the board had made a clear break with the past and appointed an outsider to succeed Lewis as chief executive?
Third, Ken Lewis himself is transformed from titanium titan to demonized defendant. His dream of combining a top commercial banking franchise with a bulge-bracket investment bank is intact but Ken is no longer in the picture. I have never met Lewis and I have no animosity towards the man. However, in a way, he is responsible for his own downfall. Ken was a tough taskmaster: you didn’t want to bring him bad news or argue against his views. I don’t think his behaviour was fraudulent. He got into trouble because he wasn’t close enough to the losses at Merrill, relied on others to brief him (as most chief executives do) and didn’t understand how damagingly dynamic the situation was. However, Ken’s biggest mistake was one of timing. He agreed to buy Merrill on Sunday September 14 2008, the weekend that Lehman failed, and he paid a high price for the investment bank (a 70% premium to the closing stock price). Yet if Ken had waited a mere two days, he could have picked up Merrill a lot more cheaply.
With the Lehman bankruptcy, there would have been a lethal run on the investment banks: Merrill’s share price would have plunged along with that of Morgan Stanley and Goldman Sachs. Hindsight is wonderfully informative but perhaps if Lewis had been more patient fate would have judged him more kindly. Of course, patience with its overtone of passivity is not a characteristic in most chief executives’ repertoire. Ironically, in October 2007 after announcing a disastrous quarter in Bank of America’s investment banking division, Lewis barked: "I never say never but I’ve had all the fun I can stand in investment banking." If only Lewis had stuck to that view and avoided the Trojan horse, Merrill Lynch, he would probably be running Bank of America today. In the end, maybe Lewis was simply not lucky.