Why Ken Lewis Gave Up

People around Bank of America should have known something was up when its beleaguered CEO, Kenneth Lewis, returned from his August vacation with a beard. For a Southern, buttoned-down banker like Lewis, growing a beard in Aspen is the equivalent of a full-on existential crisis. And so the announcement of his retirement on Wednesday wasn't such a big surprise. (Here's the farewell memo.)

Analysts may cite several reasons for the seemingly abrupt end to the career of a self-made, homespun banker: the mid-crisis acquisition of Countrywide Financial, big credit losses at the bank's core operations, and the hornet's nest of troubles the bank acquired when it purchased Merrill Lynch last fall. To these, I'd add another reason for Lewis's downfall. He wanted—no, needed—to make it big in New York.

In America, there's banking—taking deposits, making loans to homeowners, small businesses, and large regional companies, and serving on local boards. And then there's Banking—lending to hedge funds, investment banking, structured finance, and serving on the boards of famous cultural institutions. You can be a very successful and large banker in Charlotte, N.C., which is where Lewis's Bank of America prospered. But you can't be a Banker unless you're in New York. It's one thing to be the chef at the best French restaurant in Chicago. But the rewards—psychic, cultural, social, emotional—are much greater if you run the top French restaurants in Paris.

For Lewis, getting into investment banking was the equivalent of seeking to open up a bistro in Paris. But unlike some of his CEO colleagues, such as JPMorgan Chase CEO Jamie Dimon, he wasn't born into the brokerage business. Born in Meridian, Miss., and a graduate of Georgia State University, Lewis lacked the social and cultural connections that frequently smooth the way for Wall Street careers. Lewis didn't summer in the Hamptons, or stroll over to Temple Emanu-El for Kol Nidre, or pop up to Allston for HBS reunions.

And so Lewis and Bank of America had to buy their way into Wall Street. Under Lewis's leadership, Bank of America spent a lot of time and money trying to build up a presence in New York, hiring bankers and erecting a tower near Bryant Park. But Bank of America couldn't push its way into the top tier. And a year before the world fell apart, Lewis began to think better of his attempt to make it here. "I never say never, but I've had all the fun I can stand in investment banking at the moment,"  he said in the fall of 2007.

A year later, he was back. As Merrill Lynch choked on losses tied to mortgage, Lewis saw a chance to buy the nation's largest brigade of stock brokers and gain control of an iconic investment banking franchise. At the press conference announcing the deal, I asked Lewis what made him think this foray into investment banking would be more fun than the last one. Lewis crowed about Merrill's quality and headed off quickly to be interviewed by Maria Bartiromo of CNBC.

At the time, I couldn't help but think that Lewis was another out-of-towner who had been pickpocketed near Times Square. As the nation's second-largest bank, B of A was only just beginning to confront its own problems with souring consumer and corporate credit. And here it was buying Merrill Lynch, which had billions of dollars of mortgage-backed securities, CDOs, and other exotica on its books? Lewis wanted to get into banking in the worst way. And with Merrill, he did. The new ownership became saddled instantly with the twin poisons that largely destroyed New York's investment-banking culture—huge, reckless plunges into risky credit areas and a culture of obscene bonuses. As the proud owner of Merrill, Bank of America instantly had to deal with the fact that Merrill's losses were worse than expected and that many of the employees would leave unless they received their bonuses.

As last year came to a close and results worsened, Lewis was pressured by government officials and regulators to complete the deal, which he did in January 2009. But the large losses at Merrill forced Bank of America to seek extraordinary help from the government. Having participated in the first round of TARP investments ($25 billion in October 2008), in January, B of A returned for more. Treasury put another $20 billion from TARP into the bank (bringing the total investment to $45 billion) and Treasury and the FDIC agreed to protect $118 billion in Bank of America loans, most acquired from Merrill. Meanwhile, Bank of America had to deal with accusations that billions of dollars in bonuses promised and paid to Merrill employees had not been adequately disclosed to investors. The ensuing Securities and Exchange Commission investigation turned into a nightmare, when a federal judge in September dismissed the $33 million settlement Bank of America entered with the government as too lenient.

In dealing with the new regime in Washington, the out-of-towner was at a disadvantage to the New York crowd. Unlike the heads of New York-based investment banks, Lewis had never been part of the local, which is to say, Democratic, power structure. The two big winners of Survivor Wall Street: 2008-2009 are Goldman Sachs CEO Lloyd Blankfein and JPMorgan Chase CEO Dimon, both active Democrats with close ties to the Obama administration. (Check out Blankfein's and Dimon's donations here and here). By contrast, Lewis's political donations show he was tight mostly with North Carolina politicians, and mostly with Republicans.

And so as a new landscape quickly emerged this year, Lewis was at a significant disadvantage to the remaining bankers. While many large banks had returned their TARP funds, Bank of America still owed $45 billion. While other banks moved to put the past behind them by cashiering the old management teams, Lewis soldiered on. Pilloried in public, lacking support in Washington, and yet more dependent on the government than many of his rivals, Lewis once again found he had all the fun he could stand in investment banking.