The story Bank of America would like you to believe about Ken Lewis stepping down as CEO at the end of the year goes something like this: Lewis’ decision to quit was his and his alone. He went on vacation, grew a beard, and thought a lot of deep thoughts about life and his 40 years in banking, and then, just before shaving off the beard, decided enough is enough. The board of one of the world’s largest banks didn’t make him do it, nor did that jerk from New York, Andrew Cuomo, who is conducting the much-touted investigation into whether Lewis violated securities laws in failing to alert BofA shareholders about problems at Merrill Lynch, including his agreement to pay billions of dollars in bonus money to Merrill executives. Lewis, they say, simply “retired” because he felt that at 62 years of age, the time was right.
There’s just one problem: Most, if not all, of that “official” account is B.S.
A charge filed by the SEC, one of BofA’s primary regulators, was, as the insider put it, “something else.” In other words, if Lewis were to be charged by the SEC, he would have to step down.
Here’s what I know: Senior executives inside Charlotte-based BofA conceded as early as last week that Lewis was on increasingly thin ice with his board as the regulatory pressure mounted not just on the firm, but on Lewis personally—and not just from Cuomo, who is now taking testimony from BofA board members about the bonus flap. The decision by U.S. District Judge Jed Rakoff to throw out the slap-on-the-wrist settlement imposed by the Securities & Exchange Commission, which fined BofA a little more than $30 million for the allegedly faulty disclosures about the merger with Merrill, guarantees a full investigation of Lewis and his role in disclosing information to investors. In other words, Lewis, whether he wants to admit it or not, is now the highest-ranking financial executive who is the subject of a major SEC investigation.
A BofA insider told me that the feeling at the board level was that Lewis would fight a civil charge filed by Cuomo, which looks increasingly likely, and he could remain as CEO. (I somehow doubt this logic, but it’s not mine.) But a charge filed by the SEC, one of BofA’s primary regulators, was, as the insider put it, “something else.” In other words, if Lewis were to be charged by the SEC, he would have to step down.
• Nomi Prins: The Merger That Ruined Ken LewisDoes that mean Lewis is about to be charged by the SEC, or is about to be indicted by Cuomo—who has strong and expansive criminal authority under the New York State “Martin Act”—or the U.S. Justice Department, which is also snooping around the Merrill disclosure issue? People at BofA say no, or to be more precise, they don’t expect anything along those lines, but the timing of Lewis’ departure was curious, to say the least. He had given the board almost no warning that he was contemplating such a move—the board was so unprepared, I am told, it is now considering bringing in an “interim CEO” until a qualified candidate emerges for the long haul. Even key associates such as Larry Fink, CEO of BlackRock—BofA owns 49 percent stake in the large money-management company—also had no clue. Fink met with Lewis for breakfast just before the announcement, and Lewis didn’t say a word.
Then, just last week, Lewis hired two of the most prominent attorneys in the white-collar crime world, former U.S. Attorney Mary Jo White and James Wyatt III, who specializes not just in SEC-related civil cases, but in criminal matters as well.
Again, all of this might mean that Lewis is simply preparing for the worst by lawyering up with the best. But somehow I doubt it. A criminal charge, at least based on the information publicly available, appears far-fetched (the level of “intent” authorities need to establish for a securities fraud charge is very high; the Justice Department or even Cuomo would have to have emails or major witnesses showing and saying that Lewis knew he was committing a crime when he failed to disclose the Merrill bonuses before the shareholder vote, or he had somehow tried to hide the extent of the Merrill Lynch losses before the vote). But an SEC charge isn’t just a possibility; I think it’s pretty likely for the simple reason that the SEC needs to look tough after Judge Rakoff threw out the agency’s bite-size settlement with BofA, not to mention all the other scams and cases the SEC missed, from Bernie Madoff to the entire financial meltdown.
Not that Lewis necessarily deserves to be charged. He certainly lusted after Merrill—in 2007 he was prepared to buy it for $90 a share, ended up buying it for $29, and could have gotten it for close to $1 in bankruptcy, had he waited and Merrill imploded like Lehman Brothers. But that doesn’t make him a crook. Barring some new and damning evidence and based on what’s been leaked, Lewis’ biggest sins may have been his eagerness to buy a firm that without all its toxic assets has a great franchise, and listening to former Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke, who forced him to go through with the Merrill purchase when he was looking to back out, once he knew about the size of the losses.
Will the SEC or Cuomo take any of this into account? Probably not. Just as Lewis lusted after Merrill Lynch, the New York attorney general lusts after the governor’s office, once held by his dad, Mario Cuomo, and he saw how taking on Wall Street scores big time with New York state voters from his predecessor, the hooker-loving former Gov. Eliot Spitzer. The SEC, meanwhile, is ever fearful of looking bad, despite the fact that it always looks pretty bad in these matters.
In other words, Ken Lewis is gone, but he will hardly be forgotten.
Charles Gasparino is CNBC's on-air editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.