The Merger That Ruined Lewis

Ron Edmonds / AP Photo Bank of America CEO Ken Lewis was the classic American success story. But he had a weakness for big deals—and his resignation was inevitable from the second he agreed to take on Merrill Lynch.

On Wall Street, one man’s exit strategy is another man’s demise. In a world where enough is never enough, nabbing that last career-capping acquisition can kill you. Bank of America’s soon to be former CEO, Ken Lewis, knows that all too well. He was ruined by his personal nemesis—the drive to bigness. And bad timing.

As the old gambling song says, “You got to know when to walk way, know when to run.” Maybe that thought went through Lewis’ head when he agreed to buy Merrill Lynch, with its looming losses and pending bonus payouts. But whether through ego, arm-twisting, or some misplaced notion that everything would be okay in the end, he didn’t walk away.

Lurking beneath last quarter’s rather positive second quarter earnings were “liabilities including the Merrill Lynch structured notes.” Yes, Merrill will be a gift that keeps on taking.

Lewis’ resignation was inevitable from the second he agreed to take on Merrill. He joins Sandy Weill, another former CEO and merger maniac, whose insatiable need to acquire other firms both created and nearly destroyed mega-bank Citigroup.

Lewis stayed at the table too long. Indeed, his very presence secured his—and Bank of America’s—fate. No one else would take Merrill. And Merrill couldn’t die. Thus, the $50 billion Merrill deal, hammered out in 48 hours just after Lehman’s bankruptcy, was his undoing. When the deal went through on Jan. 1, Bank of America stock was trading at $33.74. Three weeks later, it had lost 80 percent of its value. That was just the beginning of Lewis’ problems. Bank of America’s stock price would bottom out at $3.14 in March.

Lewis’ weakness for mergers, particularly ones advised by Goldman Sachs, was well-established. Still, with Merrill, he was outgunned by three men: the master investment banker, Treasury Secretary and former Goldman Sachs CEO Hank Paulson; the man with the deep pockets, Fed chairman Ben Bernanke; and the man who nabbed the helm of Merrill Lynch before it oozed losses, and managed to extort $3.6 billion of bonus money out of the federal bailout, former Paulson protégé John Thain.

• Charlie Gasparino: Will the SEC Charge Ken Lewis?New York State Attorney General Andrew Cuomo later opened a probe into the timing of those bonuses—which Thain had moved to December 2008, before the merger closed—in conjunction with a $15.3 billion fourth-quarter loss, on top of what was then $45 billion in federal bailout money between Merrill Lynch and Bank of America. Thain resigned three weeks after the merger closed.

Meanwhile, investigations surrounding Lewis mostly center on those bonus payments. But they should be concentrating more on the merger itself—as in why it was allowed, even encouraged. Lewis hadn’t demanded time to review Merrill’s books, even though Merrill had been a leader in the manufacturing of collateralized debt obligations, the most toxic of toxic assets. Not that Paulson and Bernanke would have given it. There was a world to save from annihilation.