Ken Lewis Bullied Into Retirement By Government

As everyone knows by now, Ken Lewis, CEO and President of Bank of America (BAC), has announced that he will retire at the end of 2009. Most people won't shed a tear over the departure of a well paid CEO, especially when that CEO presides over the nation's largest bank by assets, and we are in the midst of an economic recession. Throw in the fact that this recession has been largely blamed on reckless banking practices, and it wouldn't surprise me to hear a few cheers over Mr Lewis's resignation. The problem is, this guy is the wrong scapegoat. Ken Lewis did the financial system a favor - whether it was voluntary or not - by purchasing both Countrywide Financial and Merrill Lynch. Furthermore, Bank of America's purchase of Merrill was the result of unprecedented Government coercion. The federal government has well established the fact that, in times of crisis, it may take virtually any action necessary to restore the "peace". Whether it be post-911, or post-Lehman, the reality is that the rights of any individual or corporation take a back seat to what the federal government feels is best.

My opinion of Ken Lewis as a person was distinguished by one story in particular. A good friend of mine served a term in Bank of America's internship program, during which he participated in the largely uneventful activities that occur during such stints. On the last day of the program, the bank held a small luncheon for the interns, where they were able to get a free meal and mingle with the bank's middle management. Once again, a potentially unremarkable event. In the middle of the festivities however, Ken Lewis made an unexpected appearance. He shook the hand of every single intern, and thanked each plebe for the time that he or she had devoted to the bank. Obviously, if you choose to take the cynical view on this one, the conclusion is that Ken Lewis did not care about the interns. However, the fact that the CEO of the largest bank in the country would appear at an intern luncheon is something I consider pretty remarkable.

The point is, Ken Lewis went down because of a dysfunctional federal government, and the political class' need to divert attention away from it's own culpability. Sphere: Related Content

Loan Delinquency Snapshot; Courtesy of Making Home Affordable

In the spirit of transparency, Treasury/the Obama Administration today released a status report of the Making Home Affordable (MHA) program; a dubiously crafted government loan modification initiative that has inspired such bumper stickers as "Honk if I'm paying your mortgage!". The whole thrust of the program is - to use the President's favorite word - incentivize mortgage servicers to modify certain loans, the eligibility of which is based upon a set of criteria that includes properly answering the question "Are you having trouble paying your mortgage?". The MHA also has a mortgage refinancing component to it, although to qualify for this more prestigious program, one must be able to estimate the degree to which one is underwater on his investment, as well as indicate that he is current on his mortgage.

Making Home Affordable is only an infant of a program, however less than favorable public opinion polls have prompted the Administration to release a report showing it's progress as quickly as possible. While the report below is worthless on it's face, it did provide a handful of government sponsored data points; the most intriguing being the Administration's "Estimated eligible 60+ day Delinquency loans" by mortgage servicer. That data has been converted into chart format above, and provides an interesting snapshot of the who's who of delinquent loans. Bank of America's figures do include those loans serviced by Countrywide Financial (I'm anticipating the reaction to the ridiculously high number of delinquent loans on BOA's column).

The only other worthwhile data point to come from this report is a measure of just how well each financial institution is playing a smart political game. Obviously, the Administration is going to want to see as high a percentage of eligible loans offered modifications as possible; the repercussions for not playing ball appear to be as severe as the forced removal of a CEO, a board member, or a combination of several of the aforementioned. From the data, it looks like JP Morgan is blowing the other big boys away in terms of political correctness, modifying a full 20% of it's eligible loans. In contrast, Bank of America and Wells Fargo modified only 4% and 6% of their books, respectively.


MHA Public Report 8-4-09 Sphere: Related Content

Paulson's Upcoming Testimony Leaves Questions Unanswered

Tomorrow, Hank Paulson will testify before the House Committee on Oversight and Government Reform; he is expected to read aloud the remarks below, made public by the WSJ earlier today. There are basically two important issues at hand that need to be answered by Mr. Paulson.

1. Upon what legal basis did Federal Reserve lawyers determine that Bank of America's Material Adverse Change (MAC) assertion was unacceptable grounds for termination of the Merrill lynch "merger"?
2. What sort of logic and/or legal reasoning was used by the Fed/Treasury to determine that Bank of America's shareholders did not require disclosure as to the potential (or imminent) issues at Merrill Lynch?

As for the first question, Paulson grazes by the issue without so much as a cursory legal explanation as to why MAC was invalid given the situation. States Paulson:

"During this period, the clear conclusion of Federal Reserve lawyers was that exercise of the MAC clause was not a legally reasonable option and, accordingly, that the merger contract was binding."

Moving on to question two, we find Paulson's assertion that, despite what BAC's shareholders may think, a failure to consummate the merger would have led to a violent and immediate market reaction; the consequences of which would have been far more adverse to BAC shareholders - and the market in general - than had things stayed the course. Obviously, at this point, to argue with Paulson would be to enter the world of speculation and conjecture - a world where, conveniently, it is virtually impossible to prove somebody wrong. From Paulson:

"In my view, and the view of the numerous government officials working on the matter, the interests of the nation and Bank of America were aligned with respect to the closing of the Merrill Lynch transaction. An attempt by Bank of America to break its contract to acquire Merrill Lynch would have threatened the stability of our entire financial system and the viability of both Bank of America and Merrill Lynch. Those who participated in the discussions concerning this matter recognize this point. For example, as Mr. Lewis explained to this Committee last month, “I think they thought that by us—by all of this happening [i.e., the potential failure of the merger], and the uncertainty coming back into the financial system, that, in fact, that would hurt the system and us.”

Despite all the rhetoric, the underlying and unspoken message from Paulson's testimony, in our opinion, is as follows: When the Government determines that a certain outcome is in the best interest of the country's safety and well-being, it may take any and all steps necessary in order to secure that outcome. Anybody concerned with that reasoning?

*no position in BAC

Paulson Testimony on BAC Sphere: Related Content

Distinguishing the Banks

Against the backdrop of near constant speculation concerning the financial health of the Nation's largest financial institutions, we prepared the above chart, which should be useful insofar as determining the relative deterioration of these Bank's loan portfolios. The chart tracks "Provisions for Loan Losses", which is essentially an expense (deducted from earnings) based upon management's assumptions regarding impending loan loss amounts and subsequent regulatory capital requirements. There are obviously shortcomings involved in using this metric alone as a measure of Bank health: The figures are susceptible to management's discretion and they do not account for the many other ways that a Bank can lose money i.e derivatives, trading etc. There is however, a certain amount of insight that can be gleaned from the chart above. This should not be too difficult for the average reader of this site.

Sphere: Related Content