The pressure on Bank of America (BAC) Chief Executive Officer Kenneth D. Lewis is growing by the day.
It was bad enough that shareholders recently voted to strip Lewis of his chairmanship—a revolt the 62-year-old executive called a "humbling experience." Now some powerful policymakers in Washington want to push out Lewis altogether, according to people close to the bank. "It's a battle of wills," says a person close to the board. "If the bank turns a profit, Lewis is fine. But if there's another blip down, the board may have to succumb." A Treasury spokesman declined to comment.
In the weeks since the government released the results of stress tests on big U.S. financial institutions, regulators have made it clear that banks needing extra money from Washington could face a management shakeup. The BofA board, which so far has resisted pressure to replace Lewis and has stood by him, is quietly preparing for that possibility and will soon create a list of potential successors. Regulators also want the bank to revamp its board.
"This May Be Payback"
Why some officials might want Lewis out isn't entirely clear. The bank's loan losses last year prompted a $45 billion capital infusion from the U.S. Some people close to the bank and industry experts suspect that dethroning Lewis could help the Administration defuse further taxpayer outrage over the billions being spent to bail out troubled banks. Earlier this year, Lewis criticized the government, claiming in a now-public deposition that in late 2008 then-Treasury Secretary Henry Paulson bullied BofA into its ill-fated purchase of Merrill Lynch. "What it comes down to is the exercise of power," says Bert Ely, a banking industry consultant in Alexandria, Va. "This may be payback."
For now the board—which is heavily influenced by three men, former CEO Hugh L. McColl Jr., longtime shareholder C.D. "Dick" Spangler Jr., and director O. Temple Sloan Jr.—seems resolute in its support for Lewis as CEO. While McColl once privately worried whether Lewis had the vision to lead such a massive institution, people with ties to the bank say McColl has professed strong respect for his protÉgÉ's operational prowess. McColl also has been the CEO's biggest champion in the eight years since he stepped off the board. "Hugh [McColl] came to realize that Lewis' success was part of his own legacy," says one former BofA executive. Current directors also say shaking up the management team would further disrupt the organization, which is still laboring to integrate its acquisitions of mortgage lender Countrywide Financial and Merrill.
As the political backlash intensifies, the bank is taking a number of steps to appease the government and investors. In recent weeks, Lewis has been making the rounds in Washington, calling on top Administration officials. At the behest of regulators, newly appointed BofA Chairman Walter E. Massey is leading an effort to recruit more bankers and financial experts for BofA's board. He also will put together a succession plan that will be presented to regulators in coming months, a requirement that in part came out of the recent stress tests. Any such list would likely include Chief Risk Officer Amy W. Brinkley, the only executive to accompany Lewis on a recent meeting with Sheila C. Bair, chair of the Federal Deposit Insurance Corp. Other possible candidates: Brian T. Moynihan, head of global banking and wealth management, and Chief Financial Officer Joe L. Price.
Even Lewis has become more sanguine about his tenure at the bank. He long spoke of serving until he reaches the bank's mandatory retirement age of 65 in 2012. But in a May 11 conference call with select investors, Lewis said he wants to stay until the bank starts repaying the $45 billion it owes the government "and then kind of regroup and decide how much energy" he has.
Fate Could Hang on Quarterly Results
Aware of some policymakers' desire to oust the CEO, Lewis' supporters concede that his fate may hinge on the next few quarters. Any slip-up could give critics inside the Administration the ammunition they need to replace him, say people familiar with the situation. The bank reported relatively strong earnings of $4.2 billion for the first three months of 2009. But much of those profits came from one-time gains, including $1.9 billion from selling a piece of its stake in China Construction Bank. In the May 11 conference call, Lewis said that while he can "see the light," he hinted that loans will continue to sour for another quarter or two.
Even so, bank officials remain optimistic that BofA can weather the storm—and Lewis can keep his job. Regulators ordered the bank to come up with $34 billion in additional capital to meet the requirements of the government's stress test, on top of the $45 billion it has already received from the government. BofA is more than halfway there after selling $13 billion in new shares on May 19 and off-loading more shares of China Construction Bank for $7.3 billion. "We continue to be a profitable, well-capitalized company, and well on our way to meeting the stress test capital levels through private means," says BofA spokesman James E. Mahoney. "To support the economic recovery efforts, we are lending at the rate of $180 billion per quarter. That's a pretty strong record."
Meanwhile, Lewis continues to maintain that BofA could surprise investors once it gets beyond the current morass. Some analysts are even starting to buy into the bank's long-term potential, noting that BofA will emerge from the recession with leading positions in credit cards, mortgage lending, and retail brokerage. "It's not hard to see Bank of America having $32 billion in earnings power," or eight times what it made in 2008, says Richard X. Bove, an analyst with Rochdale Securities, a Stamford (Conn.) institutional brokerage. "If they manage that, I think this stock quadruples." But if the rebound takes too long, Lewis may not be at the helm to see it.