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At a posh Florida resort in February 2007, Ken Lewis unveiled Bank of America's aggressive new strategy to a roomful of Wall Street analysts.
Using laptops packed with presentations, the chief executive and his lieutenants paraded out plans to expand in investment banking, say "yes" more to customers seeking loans and launch more innovative products. Revenues and profits would rise without doing another big deal.
"We do not have to acquire to meet our financial goals," Lewis said.
Lewis, who had become CEO in 2001, was brimming with confidence, coming off a year of record profits and a peaking stock price. Still, investors wondered how the Charlotte bank could squeeze out even more profits.
This conference was a chance to show them that the bank would be a bold leader in an industry frothing with consumer credit, business financing and complex capital markets products.
Lewis' Jan. 1 purchase of Merrill Lynch & Co. is now causing him the most public trouble. But risky steps he would take starting in early 2007 would also weigh on the company as it entered the recession and the financial crisis.
The Florida gathering marked the bank's efforts to heap on more risk in consumer lending and investment banking, a move that would end up coming just as the housing market and economy were about to falter. And despite saying the bank didn't need to buy to succeed, Lewis launched a deal-making spree a few weeks later by agreeing to buy Chicago's LaSalle Bank for $21 billion in cash. That deal, plus the later purchase of Countrywide Financial Corp., would eat into capital that would be needed later to soak up loan losses.
Lewis made these moves with a management team that some former executives say wasn't likely to challenge him on strategy or acquisitions. In recent years, he also has lost a series of top leaders, including several chief financial officers.
By late 2007, the bank was caught up in the economic tsunami that battered much of the banking industry, and it is still struggling to recover. It's hard to say if Bank of America would be better off if it hadn't done the Merrill deal in late 2008, or what shape the company would be in if it had not ramped up its risk in 2007. What's clear is the earlier moves sapped the bank just as it offered itself as savior to the distressed Merrill in the banking meltdown in the fall of 2008.
Under fire largely for the Merrill deal, Lewis, 62, is stepping down by year's end. The bank's board of directors is scrambling to find a successor among internal and external candidates.
In retrospect, the Ponte Vedra Beach, Fla., conference marked a dramatic turning point in Lewis' more than eight years as CEO.
"The first five years of his tenure were really strong," one former executive said of Lewis, who like others spoke to the Observer on the condition of anonymity so as not to damage their careers or friendships. "Maybe he got bad advice or got overconfident. Beginning in 2007, he clearly took the company in a different direction."
Many players in the banking industry entered riskier businesses during the boom years and have since suffered losses in last year's financial crisis. Some of those banks have failed or been acquired. While profitable in 2008 and so far in 2009, Bank of America is saddled with $45 billion in government loans. The Merrill deal has bolstered profits this year, but it also spurred the need for $20 billion of the government aid.
Bank spokesman Bob Stickler said Lewis followed a strategic vision that is already helping the bank's earnings and setting the stage for even stronger performance when the economy turns. "Most long-term investors believe he has created the premier financial services franchise in the U.S., if not the world," Stickler said. "As we go forward, the benefits of this diversity and earnings power will accrue to the bank's shareholders and customers."
The bank said Lewis is not doing interviews. In a conference call with analysts this month, he said the bank has created "the best financial franchise in the world" and he looks forward "to seeing it play out over the next few years."
The year leading into the conference at Ponte Vedra was a heady time. The bank reaped a record $21.1 billion in profits, and in November its stock hit an all-time high of $54.90. The bank also briefly eclipsed Citigroup for the title of the world's biggest bank by market value. Shortly before the event, the bank debuted its new "Bank of Opportunity" national marketing campaign during the Oscars awards broadcast.
Lewis benefited personally, as well. A Mississippi native who was raised by a single mother and who worked his way through Georgia State University, he landed compensation for 2006 of $97 million, including $77 million from exercising stock options accumulated over years. That compared with $6.7 million in his first year as CEO in 2001.
Before hosting a dinner featuring crab salad terrine and beef tenderloin, Lewis kicked off the conference by saying "organic growth is our primary strategy." He also promoted new products such as the bank's "Keep the Change" savings program. During the sessions the next day, consumer banking head Liam McGee highlighted the bank's recent success in making more home-equity loans and adding credit card customers. Among future growth plans, the bank planned to speed up home-equity loan decisions and get more of the loans ready to close in an hour.
In investment banking, executives planned to beef up in areas such as collateralized debt obligations, or CDOs, complex investments based on assets such as subprime loans. Wealth management leader Brian Moynihan said the bank planned to add bankers to serve affluent customers and continue to improve the performance of the bank's Columbia mutual funds.
In her presentation, chief risk officer Amy Woods Brinkley confidently expressed the bank's grasp on the risks it faced. "We are in the business of taking risk and we are deliberate about the risk we choose to take," Brinkley said, adding, "We believe our culture of measurement and accountability puts us out before our competition."
Closing out the conference, Lewis said he wanted to put the notion to rest "once and for all" that "size and scale don't matter." His big bank could reap efficiencies and plow its capital back into promising businesses such as investment banking.
NAB Research analyst Nancy Bush, who attended the conference, says the event came at a time when Lewis was feeling that he and his company weren't getting enough respect. The bank's 2004 FleetBoston Financial deal had fared much better than expected, and it had made a big splash by buying credit card giant MBNA at the beginning of 2006.
"He didn't want to accept being second place in any business," Bush said. "That is always a recipe for ruin in the banking industry when you start looking at how big things are."
Lewis kept team close
By his sixth year as CEO, Lewis had assembled a tight circle of lieutenants, some of whom had worked with him for years. While seeded with experienced bankers, the team had lost a number of strong-willed personalities more likely to joust with Lewis on strategy and acquisitions, say a half-dozen former bank executives.
While some executives say Lewis accepted their feedback, others say he didn't want lieutenants to challenge him and maintained a strict chain of command. In contrast, JPMorgan Chase CEO Jamie Dimon has a reputation for tussling with his management team before making decisions. Over time, Lewis would see major turnover in his executive ranks. Since 2005, more than half of the company's top 100 executives have left through layoffs and other departures.
One key position that had seen turnover was the chief financial officer slot. By the Ponte Vedra conference, Lewis was on his fourth CFO in less than six years.
His first CFO was Jim Hance, the long-time dealmaker for Lewis' predecessor, Hugh McColl Jr. He had once been a rival for the CEO job with Lewis and had held a spot on the bank's board, giving him additional status in the bank's power structure. When Hance retired in 2005, no other bank executive joined Lewis on the board.
Marc Oken, a bank veteran known for hiring some of the bank's top talent, followed Hance as CFO, but he was replaced in September 2005 with Al de Molina, another long-time bank executive. De Molina surprised Wall Street when he announced in December 2006 that he was leaving, saying he was looking for a more challenging job than being CFO of a well-run company. But people familiar with the situation said recently that he left after disputes with Lewis and other executives over strategy.
In his previous position as head of the corporate and investment bank, de Molina had built up the bank's portfolio of credit default swaps, a type of insurance designed to protect the bank from losses in its commercial loan portfolio. By the third-quarter of 2005, the credit default swaps had reached $16.9 billion, according to quarterly filings. The protection, however, came at a cost - $241 million in 2006 - and de Molina faced questions from other bank executives about whether the expense was worth it, former bank officials say.
The bank began reducing that insurance when de Molina became CFO in the fourth quarter of 2005. The credit default swaps portfolio fell to $8.3 billion at the end of 2006, and as low as $2 billion at the end of the second quarter of 2007. The credit protection could have been a source of profits when financial markets began deteriorating in late 2007, former bank officials say.
Christopher Whalen, managing director of financial research firm Institutional Risk Analytics, said the bank could have benefited from the credit protection in the downturn, although he's not a big fan of banks hedging their risk that way. "I'd rather see them avoid credit exposure," he said. Said Stickler, the bank spokesman: "Hindsight is 20-20."
After his departure, de Molina gained respect from investors for a speech in the spring of 2007 raising alarms about increasing risk in the banking system. He also lured top executives to GMAC Financial Services, where he is now CEO. But he continues to have critics at Bank of America. They note that the corporate and investment bank he expanded later experienced large losses, and that stock buybacks he favored hurt the bank's capital base. De Molina's backers say billions in investment banking losses came from investments engineered after he left and that a key capital ratio was higher during his tenure.
Still buying banks
Although Lewis emphasized internal growth at the Ponte Vedra conference, he didn't rule out more deals. "You wouldn't believe me anyway," he quipped.
In April 2007, he jumped at the chance to buy LaSalle Bank for $21 billion. That gave Bank of America a dominant presence in Chicago, but also added branches in economically depressed Michigan just as the auto industry's travails were deepening. Paying in cash instead of stock meant the deal wouldn't dilute the holdings of current shareholders, but it used capital that could have come in handy when loan losses began mounting.
Less than a year later, in January 2008, Lewis pounced on tottering mortgage giant Countrywide Financial in a deal initially worth $4 billion. That purchase helped the bank capitalize on the mortgage refinancing boom, but it also carried a load of bad loans and a slew of lawsuits over Countrywide's allegedly predatory lending practices.
After that deal, the bank's Tier 1 capital ratio, a key measure of its ability to absorb losses, fell below the bank's target of 8 percent but above the federally required 6 percent. That spurred tension with the bank's regulators at the Federal Reserve Bank of Richmond, even though bank officials thought they had the agency's blessing for the dip.
With the bank still merging Countrywide's operations, the financial crisis in September 2008 handed Lewis an opportunity to buy Merrill, an investment banking and brokerage franchise he had long desired. He agreed to pay $50 billion for the faltering investment firm but tried to back out when Merrill's fourth-quarter losses became clear to the bank in December.
Merrill: Good and bad
Government officials told the bank it didn't have cause to abandon the deal and stressed the dire consequences that would result for the financial system. Lewis acquiesced under the assurance the bank would receive government aid to help it replenish capital depleted by Merrill's losses. Around this time, Fed officials, who had earlier approved the Merrill merger, began questioning Bank of America's handling of the deal as well as the health of its own operations.
"Still seems to be the general consensus that problems are more significant than ML alone," Fed governor Kevin Warsh wrote in a Dec. 26 e-mail to colleagues. This spring, government stress tests mandated that the bank raise $34 billion in capital - more than was asked of any other U.S. bank - to shore up its balance sheet.
Risks didn't pay off
Since the Ponte Vedra conference, Bank of America has taken billions of writedowns on CDOs and other investment products in its investment bank. It also has been swamped by rising consumer loan losses, particularly in the credit card and home-equity units.
In 2007, the bank's loan-loss provision - an expense that chews into profits - grew to $8.4 billion from $5 billion in 2006. Through the first nine months of this year, that provision has swollen to $38.5 billion - more than the $26.8 billion the bank set aside in all of 2008. The bank said last month that losses may be peaking.
The bank's stock is trading around $15, less than a third of the high in November 2006. Since Ponte Vedra, the bank's stock is down more than 71 percent, more than double the drop in the S&P 500 benchmark.
Of eight top executives listed in the agenda for the conference, four have left - corporate and investment banking head Gene Taylor, chief risk officer Brinkley, treasurer Chan Martin and consumer banking head McGee. Lewis is on his way out.
The executives that remain are Moynihan, now head of consumer banking; Barbara Desoer, now head of home loans; and chief financial officer Joe Price, de Molina's successor. Moynihan, whose former wealth management business has been bulked up by the Merrill deal, has emerged as a leading internal candidate to replace Lewis. Hance and de Molina have been seen as possible external candidates, although their appointment has seemed less likely lately.
When McColl retired in 2001, he handed the chairman's gavel to Lewis at a triumphant farewell shareholder meeting. At what turned out to be Lewis' last meeting this spring, shareholders voted to strip him of the chairman's title. With the government closely monitoring the bank's pay, Lewis has even agreed to give up his $1.5 million salary in his final year.
In his final earnings conference call last month, Lewis, at the end of a four-decade career with the bank, thanked analysts for their support over the years and signaled optimism in the company's future.
His voice seemed tinged with emotion, but it was hard to tell over a fuzzy phone line.
