Wednesday night, I suggested it was Time to Fire Ken Lewis of Bank of America. Since then, several other people have come out to echo those sentiments:

David Reilly, Bloomberg notes that the bad bet on Merrill follows a bad bet on China Construction Bank and an even worse bet on Countrywide:

Kenneth Lewis gambled big. He lost. Now taxpayers have to pick up his tab. For that, the Bank of America Corp. chief executive officer probably needs to go. At the very least, Lewis, who also is chairman, should give up one of his posts to bring greater accountability to the bank.

Not because one specific bet, Merrill Lynch & Co., is souring. Lewis could be forgiven if that were his only misstep.

It’s not. Since the crisis began, Lewis has misjudged the depth, breadth and severity of the storm that has crushed the global financial system. In doing so, he used capital that he should have been husbanding.

The WSJ’s Heidi N. Moore writes:

Making your bed, and then lying in it, is a quaint notion in the world of financial services in 2008.

Bank of America CEO Ken Lewis’s depiction today of his Merrill Lynch acquisition as a quasi-government rescue is, to be sure, a remarkable about-face. Lewis has made no secret of his desire to own a major investment bank, and he bragged of how Merrill Lynch fit the bill because of its extensive network of 17,000 brokers serving average investors. Lewis made a point of paying $29 a share for Merrill Lynch — a generous premium when he could have acquired it much less expensively as securities firms lost value — and he boasted that Bank of America required no “capital relief” from the government. Lewis’s decision to beat his chest about his own prowess by paying a high price and rejecting government help was a savvy move at the time — as Lehman was failing, the markets were rewarding companies that appeared strong. Rejecting government funds showed Bank of America was strong. The world has [since] changed.

Henry Blodget is even blunter:

As taxpayers are forced to digest the latest Wall Street-Treasury outrage–a secret bailout of Bank of America to the tune of $15 billion of capital and $120 billion of trash-asset guarantees–it’s clear that, this time, someone has to be held responsible. And that someone is Bank of America CEO Ken Lewis.

Unlike Vikram Pandit at Shitigroup and John Thain at Merrill, Lewis can’t blame the need for this bailout on his predecessor’s idiotic bets. Bank of America needs another bailout solely because of an idiotic Ken Lewis bet: His decision three months ago to buy Merrill Lynch.

No one put a gun to Ken’s head and said “You’ve got to buy Merrill.” There wasn’t some secret backroom Treasury deal where Hank Paulson forced him to take one for the team.

On the contrary, Ken Lewis bought Merrill because he had always wanted to own it and because he thought he was getting a good deal. Furthermore, he knew exactly what he was getting: A firm that, for four straight quarters had been forced to write down tens of billions of losses on idiotic bets and still had about $1 trillion of those bets on its balance sheet.

>

Previously:
Time to Fire Ken Lewis of Bank of America (January 14, 2009)

http://www.ritholtz.com/blog/2009/01/time-to-fire-ken-lewis-of-bank-of-america/

Sources:
Bank of America’s Lewis Has to Pay for Blunders
David Reilly
Bloomberg, Jan. 16 2009

http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_reilly&sid=ag..fL1BCuXo

The Street Smarts of Bank of America’s Ken Lewis
Heidi N. Moore
WSJ Deal Journal, January 16, 2009, 2:03 pm

http://blogs.wsj.com/deals/2009/01/16/counterpoint-what-else-could-ken-lewis-have-done/

Ken Lewis Should Be Fired
Henry Blodget
Fortune, JANUARY 15, 2009: 09:04

http://money.cnn.com/news/newsfeeds/siliconalley/search/2009_1_ken_lewis_should_be_fired_bac.html

Category: Bailouts, Corporate Management, M&A

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

56 Responses to “Drumbeat for Ken Lewis Resignation Builds”

  1. ButtoMcFarty says:

    I’m thinking that when it’s all said and done….these clowns will be wishing they had gone to dental school.

    I predict a Banker Nuremberg in our future.

  2. ButtoMcFarty says:

    ….but I’m a bottle half drunk kinda guy.

  3. equiv says:

    I don’t think he should be fired. I think the man is a genius. Sure country wide was a failure, but look at this. He, and other banking execs knew that they would be getting a capital injection. So why not by the giant Merrill for cheap? Even if it had toxic assets that made it sink in the first place… It was a win win for BOA. They get Merrill, plus its capital injection… Now, BOA, a bank that’s too big to fail has gotten even bigger. You think Uncle Sam is going to let them fail??? Of course not. They get another $20 billion in capital and get Merril’s assets backed. GENIUS!!! I TELL YOU!!!!! GENIUS!!!!

  4. natoK says:

    I think most people here are missing the point. Does anyone REALLY think Ken Lewis thought he was building a solid empire?

    IMHO, This has FED/Treasury all over it. Their model is for insolvent companies of scale, filled with toxic waste, to be swallowed by someone else. Why is it that on bank ‘failure’ Fridays only tiny regional banks are taken over (Save Indy MAc) Why not WA or WM? They are too big to die a natural death, so they are taken under.

    For Lewis’ tarnished reputation he may be ‘fired’, but his reward will be a 100 million golden parachute from B of A or from the TARP somehow. He will live out his days in ease at a ranch in Paraguay with George W or closer to home.

    As others have said Lewis likely had the backing of the FED/Treasury for any and all monies needed to complete these mindless take unders.

    Lewis and B of A are taking bullets for the ‘team’.

  5. Blurtman says:

    I do not think too many tears will be shed for Lewis. He will retire a very, very wealthy man. But the disaster of rewarding the culpable continues fill steam ahead.

    Tim Geithner is a perfect example. This fellow handed over billions of taxpayer dollars to Goldman Sachs, Morgan Stanley, Merrill Lynch and non-US investment banks to cover leveraged speculative bets these banks made on CDS’ that could not be covered by their bookie, AIG.

    Larry Summers worked with Phil Gramm to deregulate the financial markets, and now he is a good guy? This recent hedge fund executive and consultant to Goldman Sachs is responsible for the mess with world is in and yet he is part of the Obama team?

    Continuity you can believe in…..

  6. johnbougearel says:

    For BofA to say MER had “larger than expected Q4 losses,” as they did last week, could be well beyond disingenous ~ I suspect.

    If you want the truth of the matter, the fictitious need for taxpayers is to bailout BofA all points back to CEO Ken Lewis’s huge appetite to rope a bum steer going downhill. He simply likes to bet on losing horses, horses that are profusely bleeding. Horses that are dead on arrival.

    Think back to August 2007, when tehy announced an initial stake in CFC at $22 roughly. BofA spokseman Robert Stickler said they had examined the books and told the world that the market was undervaluing CFC’s assets and that they were getting a great deal: “we were able…to look at their operations and their books. We determined the value is greater than what the market was giving them credit for.”

    This was after CFC had drawn on all its available lines of credit in order to prepare for a nuclear winter.

    “When a company draws on its bank lines, it just basically gives off the impression that it has run out of options. Typically these bank lines are there but not really meant to be used,” said Christopher Wolfe at Fitch Ratings.

    Did Stickler stress-test the assets on CFC’s books, when they ran their valuation models or were they just talking their book because BofA/Ken Lewis believed in the subprime business model still?

    The company reassurances rang false.
    reassurances on November 28, 2007, from Countrywide’s managing director of investor relations, David Bigelow:

    We said it back in August, we said it in September, we said it last week, we’ll say it until we turn blue in the face, but we have ample liquidity to fund our growth and operational needs.
    More denials from the firm; what Bigelow failed to consider was how Countrywide would fund their contracting growth and operational needs. Amidst the declining asset values on its balance sheets, Countrywide would continue to struggle against the headwinds of both accelerating home price declines and defaulting mortgages as it entered the New Year—despite Bigelow’s pronouncements to the contrary.

    At the end of 2007, more than 7% of Countrywide’s $1.5 trillion mortgage servicing portfolio was more than 60 days past due. Taking note of that ominous figure, the once enthusiastic Dick Bove waved the white flag, noting that “there’s a rule of thumb that at the 5% level of delinquencies, you are finished.”

    on Tuesday, January 8, 2007. Countrywide spokesman Rick Simon denied that CFC was finished: “There is no substance to the rumor that Countrywide is planning to file for bankruptcy.

    Simon was right, two days later Mozilo had found his patsy/bagholder: Ken Lewis at BofA.

    “I hope Bank of America isn’t throwing good money after bad. They struck a deal that wasn’t very attractive. Hopefully they can get it right the second time around,” said Eric Schopf, at Hardesty Capital Management.

    The most circumspect comment on this BAC announcement came from Hayman Capital Partners’ Kyle Bass: “The worsening housing market makes BAC’s timing questionable. The collateral for their loans is depreciating at over 20% a year, losses are spiking and there’s a big potential ‘fat tail’ to Countrywide’s legal liabilities.”

    Ken Lewis, in his hubris, had just doubled down on one of the biggest losers of the subprime crisis. Averaging down a loser is a bozo no-no from where I come from: the trading pits of Chicago. It’s a game of Russian roulette. Ken Lewis squeezed the trigger of his gun aimed at BofA. The slow motion bullet aimed at Ken Lewis> to BofA> to taxpayer just took oh say another 11 months to blow their brains out.

    Lewis thought he was buying cheap stock (CFC and MEr) and not shaky collateral worth less than nothing. There is a colorful story dating back to 1932 that Jesse Jones had with his old cattleman friend Dick Coon:

    “Dick, I said, “why don’t we buy some of these cheap stocks?” “Hell no,” he said. “Never rope a steer going down hill: he’ll kill you every time.”

    Effectively, Ken Lewis was pulling a Stan O’Neal over at Merrill, who was an advocate of “concentrated risks.” Remember, O’Neal was the CEO who said the smartest thing he ever did for Merrill was make just a few big bets—“frees up time.” So, when Lewis bought CFC and then Merrill, he was concentrating his risks in the most dangerous securities market he possibly could do. So much for any emphasis on non-correlated risk exposures. Lewis wanted risk exposures to the worst securities in the world. And he is overdosing on the crap now and blaming MER.

    I will say it again, this all points directly back to Ken Lewis, Not Merrill!

    On September 14, 2008, BAC bought Merrill Lynch, possibly roping in what would be the second bum steer in a year! Lewis at the time called the purchase of Merrill “the ideal long-term fit.” But, as a former Merrill Lynch broker related a few months later, “There are some hand grenades on the balance sheet that are going to blow up on Bank of America. The cost savings are going to be nowhere near what they’ve already promised.” Looking in the rear view mirror after a year of acquisition binging, Ken Lewis admitted on December 3, 2008, that his “banks outlook was too optimistic. If someone had told me a year ago that things would be worse in December 2008 than in December 2007, I would have thought that person was half crazy.”

    By December 2008, no longer were BAC spokesman crying that they had “ample liquidity to fund [their] growth and operational needs.” The fact that Bank of America is broke and looking to the Treasury for a taxpayer handout does not point back to Merrill Lynch per se. The blame points squarely back to Bank of America’s tomfoolery to acquire two bum steers.

    Commenting on the sub-primordial ooze Bank of America was hell-bent on acquiring in 2008, Richard Kline said:
    “Here’s a lesson for those who feel that they are qualified to executor a money center financial administration: you don’t eat the Blob, the Blob eats you. So one had better be sure that one is shaking hands with someone/thing which is definitely NOT a Blob. Lewis twice, _TWICE_ broke that rule, and he has just about killed his firm therefore.”

    These were some cut and paste excerpts from my book on the financial mess we are faced with, due out in mid-Feb 09

  7. SteveC says:

    We need to bring back the punishment of “public humiliation” from the middle ages. When they want to ask the taxpayers for millions because of their reckless decisions, they should be put in the pillary, where people can throw rotten fruit at them.

  8. Broken says:

    Blaming Lewis seems a bit misplaced. Lewis deserves credit for avoiding the initial subprime crash. Purchasing Countrywide on the cheap, the largest issuer of mortgages in the country, made long-term sense and BAC could afford the short term losses.

    The China Construction Bank investment made good sense as well. The shares are still above the 2005 purchase price and the 2008 purchase was at 1.2 times book.

    The Merrill deal on the other hand was a bit of a shotgun wedding. Once Lewis saw what Merrill’s losses actually were, rather than what Thain was telling him, he wanted out of the deal. Thain has made a mess of Merrill upper management, and if anybody deserves to go, its him. In any case Lewis got $20 billion to cover Merrill’s losses.

    If Lewis can hold his empire together for another year or two, he may come out looking quite good. Or maybe not. In either case, judging the cake before it is baked, however, seems a bit premature.

  9. Steve Barry says:

    Equiv is 100% right (I posted similarly this morning on the B of A Shocker thread).

    Blodget writes: “No one put a gun to Ken’s head and said “You’ve got to buy Merrill.” There wasn’t some secret backroom Treasury deal where Hank Paulson forced him to take one for the team.”

    You can’t prove this Blodget…you can’t prove a negative.

    I don’t know why there is such a witch hunt now for Lewis. He was as deluded as every other CEO who constantly is fed lies by his underlings. But in this case, he did a smart thing. He got bigger…big enough to be “too big too fail.” And Blodget says B of A needs another bailout solely because of Lewis’ mistake…that doesn’t make any sense either…they would have had to bail out Merrill anyway.

    I believe B of A was as scared of every other bank at that time, wanted to be a survivor, needed to get a bailout and ingesting Merrill assured them they would eventually get one. Genius move if you ask me. if you want to argue he should be fired for everything leading up to this, then fire every financial CEO and regulator who let the securitization bubble grow. On the contrary, Paulson was given the Treasury job and now Geithner…And we need to go after Lewis?

  10. KidDynamite says:

    I’ll say it again… why isn’t anyone blaming HANK PAULSON!?!??!

    HE is the one who’s acting as an enabler for Ken Lewis! If you take away the child’s matches, he cannot burn the house down… so stop giving Lewis money for these crappy acquisitions!!!!

  11. johnbougearel says:

    No, no one pointed a gun to Lewis’ head, quite contrarily, Lewis squeezed the shit out of Merrill in Sept. The shotgun wedding of Merrill and Bank of America was a forced marriage as Bank of America “had its foot firmly on Merrill’s windpipe” noted Bloomberg News. Thain later explained to his employees how Bank of America had cut their “trading lines” for several days prior.

  12. johnbougearel says:

    If you want the truth of the matter, the fictitious need for taxpayers is to bailout BofA all points back to CEO Ken Lewis’s huge appetite to rope a bum steer going downhill. He simply likes to bet on losing horses, horses that are profusely bleeding. Horses that are dead on arrival.

    Think back to August 2007, when BAC announced an initial stake in CFC at $22 roughly. BofA spokesman Robert Stickler said they had examined the books and told the world that the market was undervaluing CFC’s assets and that they were getting a great deal: “we were able…to look at their operations and their books. We determined the value is greater than what the market was giving them credit for.” How stupid, I mean rigorous was the stress-test modeling BAC did on CFC

  13. johnbougearel says:

    BAC made their $22 offer in Aug 07 after CFC had drawn on all its available lines of credit in order to prepare for a nuclear winter.

    “When a company draws on its bank lines, it just basically gives off the impression that it has run out of options. Typically these bank lines are there but not really meant to be used,” said Christopher Wolfe at Fitch Ratings. By November, BAC’s assinine acquisition of CFC was beginning to look quite foolish and put company spokesman clearly on the defensive

    From Countrywide’s managing director of investor relations on Nov 28 2007, David Bigelow:

    “We said it back in August, we said it in September, we said it last week, we’ll say it until we turn blue in the face, but we have ample liquidity to fund our growth and operational needs.”

    Bigelow failed to consider was how Countrywide would fund their contracting growth and operational needs

  14. johnbougearel says:

    At the end of 2007, more than 7% of Countrywide’s $1.5 trillion mortgage servicing portfolio was more than 60 days past due. Taking note of that ominous figure, the once enthusiastic Dick Bove waved the white flag, noting that “there’s a rule of thumb that at the 5% level of delinquencies, you are finished.” But what Dick Bove did not know is that Countrywide had found its patsy in Ken Lewis.

    On January 8 2008, . Countrywide spokesman Rick Simon denied that CFC was finished: “There is no substance to the rumor that Countrywide is planning to file for bankruptcy. Two days later, news was announced that Ken Lewis wanted to buy out the rest of the company. “I hope Bank of America isn’t throwing good money after bad. They struck a deal that wasn’t very attractive. Hopefully they can get it right the second time around,” said Eric Schopf, at Hardesty Capital Management.

    Ken Lewis, in his hubris, had just doubled down on one of the biggest losers of the subprime crisis. Averaging down a loser is a bozo no-no from where I come from: the trading pits of Chicago. It’s a game of Russian roulette. Ken Lewis squeezed the trigger of his gun aimed at BofA. The slow motion bullet aimed at Ken Lewis> to BofA> to taxpayer just took oh say another 11 months to blow their brains out.

  15. DL says:

    It’s a no-brainer that Lewis should be fired. Not that the taxpayers will receive any tangible benefit from it, but it’s the least that Bush and Paulson can do.

    I would much rather that B of A be forced to sell off some prized assets, much like Citi was forced to do with their Smith Barney division. But firing Lewis would be a very small step in the right direction.

    Paulson, no doubt, has a very high paying job waiting for him at a large bank, and so no one should expect him to unduly “inconvenience” anyone in the banking sector. But Bush could do the right thing here (unless he’s on the take also).

  16. Mannwich says:

    We idiots who post on your blog daily (and work at neither firm) had the common sense to know (and call it) that BAC’s acquisition of MER was idiotic and that they vastly overpaid (they also vastly overpaid for U.S. Trust and Countrywide but I digress). How can BAC’s own CEO not know this?

    I said it before, and I’ll say it again, ’08 will forever be remembered as the year of the great obliteration of conventional wisdom pertaining to our so called “free markets” (e.g. corporate CEO’s deserve their millions because their brilliance and genius).

  17. Mannwich says:

    Maybe I’m wrong but from the start of this fiasco wouldn’t it have been far more effective to bail out the mortgage holders and other debt holders? Keep in mind, I’m not advocating for ANY bailouts per se and realize that this would have created problems as well (e.g. home prices would still be overpriced), but wouldn’t that strategy have gotten to the heart of this issue more effectively, at least temporarily?

    It would have shored up the problem from the “bottom-up”. Instead, they’re going with a “top-down” strategy and the problems at the bottom (e.g. people still losing jobs, defaulting on mortgages and other debt) still persist. There is NO CONFIDENCE out there right now and rightfully so. People who are eligible for more debt don’t want it and people are do want to take on more debt aren’t eligible. It’s been akin to throwing money down a black hole. Are they ever going to change course or will they keep doing this over and over again until the Mother of all Law of Unintended Consequences clobbers us all?

  18. DL says:

    Mannwich @ 1:44

    “…conventional wisdom pertaining to our [view that]… corporate CEO’s deserve their millions because their brilliance and genius”

    I don’t think many people had this view to begin with. It was clear long ago that corporations are run for the benefit of top managers far more than for the benefit of shareholders.

    (Carl Icahn has some ideas about how to change this).

  19. DL says:

    Mannwich @ 1:56

    “…wouldn’t it have been far more effective to bail out the mortgage holders and other debt holders?”

    As abhorrent as the bailouts of banks have been, the notion of simply giving taxpayer money to individuals who bought houses at the top of the market is a prospect more terrifying than I can comprehend.

  20. Mannwich says:

    @DL: Many so-called “conservatives” I know had been promoting this nonsense (e.g. “the free market sets corporate execs’ salaries, so it must be right”) over the years to try to justify CEO and other corp exec’s compensation, so they’re out there. They’re the Bowyer’s, Kneale’s, Kudlow’s and Luskin’s of the world and they’re still out there spouting this crap.

  21. Moss says:

    One big circle jerk…. where it ends nobody knows.

    I honestly don’ think any of these geniuses know what they have as assets.
    Looks more and more like we will end up with the good bank bad bank model of Citi.

    The idiots here also never bought into the numerous false calls for the bottom in financials.

  22. Mannwich says:

    @DL: I’m not advocating simply “giving money” to irresponsible people either but what I am saying is there has to have been a more effective way of fixing this mess than simply “giving money” to the so-called elite who fucked up our markets/economy/country beyond belief. That, to me, is definitely much, much worse, and arguably immoral.

  23. DL says:

    Mannwich @ 2:09

    I don’t know exactly what you’re proposing. But you’ve got to consider the politics as well as the economics.

    It’s bad enough that a small handful of bank CEO’s believe they are “entitled” to taxpayer money. But just imagine if we gave money to (or reduced the debt of) millions of ordinary people. That would then become an entitlement for the masses. Borrow money, get a check from the government to extinguish the debt. Our whole system would collapse.

  24. Mannwich says:

    @DL: I think our entire system is collapsing anyway, no? So you like rewarding the elite who fucked everything up? Seems a tad elitist to me.

  25. ottovbvs says:

    He’s got to go but it not for agreeing to buy Merrill in the first place which as Blodget says no one forced him to do. Clearly in the circumstances there wasn’t time to do proper due diligence so he can’t really be blamed if he got the sums wrong in the first place. No the problem arose between then and the shareholder sign off and the ultimate close on the deal. Basically he breached his fiduciary duty to the shareholders. He clearly had a fair idea by the shareholder vote on December 5 that there was a huge problem and by the mid December there was no doubt whatever because that when he blew the whistle to Paulson and Bernanke. And yet he didn’t make this information public or invoke the adverse material effects clause in the contract and pull the plug on the deal as he should have done. It’s deplorable. This is actionable by the stockholders against him personally and the govt.

  26. Mannwich says:

    @DL: Another thing – if the feds think that bailing out the rotten banks that got us into the mess will engender confidence again in them and the markets, they will be sadly mistaken. We are on a road to ruin with this strategy.

  27. Broken says:

    Wow. For all the scapegoating here, you’d think Lewis had caused the sub-prime collapse himself. If Lewis hadn’t taken Merrill, who would have? If Merrill had been allowed to implode like Lehman, wouldn’t the collateral damage been even worse? If the government alone had to unwind Merrill as per Citibank, wouldn’t the taxpayer cost be even higher?

    What exactly are you guys proposing that would be less costly than the BAC take-over?

    And if Lewis is such a greedy guy, profiting at tax-payer expense, why is nobody here smacking Warren Buffet for his Goldman deal?

  28. DL says:

    Mannwich @ 2:26

    “you like rewarding the elite who fucked everything up? Seems a tad elitist to me.”

    Not at all. I am very much opposed to the bank bailouts. I just think that, from a long run perspective, creating a sense of entitlement (for a bailout) on the part of everyone who borrows money is a recipe for an even bigger disaster than we now have.

    My own preference is to abstain from bailing out ANY corporation (of any kind), and to provide “bailouts” ONLY to people who are actually unemployed.

  29. Mannwich says:

    OK DL. I think we’re on the same page here. I just have an uneasy feeling in the pit of my stomach that this is not going to end well at all.

    If O doesn’t do anything to stem the tide of unemployment, then it’s all for naught. It’s time to help the little guy/business a little here, don’t you think? And, again, I don’t mean simply throwing money at them but do something that will help the unemployed and small businesses. If either don’t improve, we are up a creek without a paddle.

  30. johnbougearel says:

    Where was I, oh yes,
    At the end of 2007, more than 7% of Countrywide’s $1.5 trillion mortgage servicing portfolio was more than 60 days past due. Taking note of that ominous figure, the once enthusiastic Dick Bove waved the white flag, noting that “there’s a rule of thumb that at the 5% level of delinquencies, you are finished.” But what Dick Bove did not know is that Countrywide had found its patsy in Ken Lewis.

    On January 8 2008, . Countrywide spokesman Rick Simon denied that CFC was finished: “There is no substance to the rumor that Countrywide is planning to file for bankruptcy. Two days later, news was announced that Ken Lewis wanted to buy out the rest of the company. “I hope Bank of America isn’t throwing good money after bad. They struck a deal that wasn’t very attractive. Hopefully they can get it right the second time around,” said Eric Schopf, at Hardesty Capital Management.

  31. johnbougearel says:

    Ken Lewis, in his hubris, had just doubled down on one of the biggest losers of the subprime crisis. Averaging down a loser is a bozo no-no from where I come from: the trading pits of Chicago. It’s a game of Russian roulette. Ken Lewis squeezed the trigger of his gun aimed at BofA. The slow motion bullet aimed at Ken Lewis> to BofA> to taxpayer just took oh say another 11 months to blow their brains out.

    Lewis thought he was buying cheap stock (CFC and MEr) and not shaky collateral worth less than nothing. There is a colorful story dating back to 1932 that Jesse Jones had with his old cattleman friend Dick Coon:

    “Dick, I said, “why don’t we buy some of these cheap stocks?” “Hell no,” he said. “Never rope a steer going down hill: he’ll kill you every time.”

    Effectively, Ken Lewis was pulling a Stan O’Neal over at Merrill, who was an advocate of “concentrated risks.” Remember, O’Neal was the CEO who said the smartest thing he ever did for Merrill was make just a few big bets—“frees up time.” So, when Lewis bought CFC and then Merrill, he was concentrating his risks in the most dangerous securities market he possibly could do. So much for any emphasis on non-correlated risk exposures. Lewis wanted risk exposures to the worst securities in the world. And he is overdosing on the crap now and blaming MER.

  32. johnbougearel says:

    So where is the problem:

    Ken Lewis, in his hubris, had just doubled down on one of the biggest losers of the subprime crisis. Averaging down a loser is a bozo no-no from where I come from: the trading pits of Chicago. It’s a game of Russian roulette. Ken Lewis squeezed the trigger of his gun aimed at BofA. The slow motion bullet aimed at Ken Lewis> to BofA> to taxpayer just took oh say another 11 months to blow their brains out. Lewis thought he was buying cheap stock (CFC and MEr) and not shaky collateral worth less than nothing. There is a colorful story dating back to 1932 that Jesse Jones had with his old cattleman friend Dick Coon:

    “Dick, I said, “why don’t we buy some of these cheap stocks?” “Hell no,” he said. “Never rope a steer going down hill: he’ll kill you every time.”

  33. Blurtman says:

    Wow. For all the scapegoating here, you’d think Lewis had caused the sub-prime collapse himself. If Lewis hadn’t taken Merrill, who would have? If Merrill had been allowed to implode like Lehman, wouldn’t the collateral damage been even worse? If the government alone had to unwind Merrill as per Citibank, wouldn’t the taxpayer cost be even higher?

    …………………….
    Please help me understand why the government has to be involved in the dissolution of insolvent banks and investment banks? I understand the FDIC’s role, but why can’t the “free market” just take care of everything else?

  34. Broken says:

    @Blurtman:

    Like with Lehman? How did that work out?

    If BAC breaks $7, I’m buying. The current market cap (BAC CFC MER) of $36 Billion is 10% of what it was in 2005.

  35. Blurtman says:

    Like with Lehman? How did that work out?
    ………………………
    I dunno, how did it work out?

  36. DL says:

    As hard as it may be for bailout advocates to believe, human civilization has survived the failure of Lehman.

    We could similarly survive the failure of Merrill. In the long run, we would be much better off.

    Politicians think on a short-term basis because it is “convenient” for them to do so.

  37. Mannwich says:

    @Blurtman: “Please help me understand why the government has to be involved in the dissolution of insolvent banks and investment banks? I understand the FDIC’s role, but why can’t the “free market” just take care of everything else?”

    It’s simple actually – because the uber-wealthy, elite who run this country and the world don’t really believe in free markets. They just use that nice little, cute story as a trojan horse to get what they want when the gettin’ is good (e.g. get what you can while can folks! It’s the goodness of the free markets at work!). When the gettin’ turns bad, they show their real colors. They are ELITISTS who believe that they have RIGHT to be bailed out when things go sour by the peons of the world. After all, without our elite masters, we peons wouldn’t be able to run things as well as they’ve had over the years and this country would perish.

  38. Blurtman says:

    The stock market is not all about financial firms, is it?

    If insolvent investment banks go under, I think we will recover.

    Why throw good money after bad?

  39. Broken says:

    @ Blurtman:

    The credit markets completely froze over. Banks would not lend to each other even over-night for fear of getting Lehman-tainted collateral. CDS market collapsed and even money markets were failing. If Merrill had followed suite, we would be back to the barter system.

  40. DL says:

    Mannwich @ 3:21

    Socialism for the rich; free enterprise for everyone else.

  41. Blurtman says:

    Broken Says:

    January 17th, 2009 at 3:26 pm
    @ Blurtman:

    The credit markets completely froze over. Banks would not lend to each other even over-night for fear of getting Lehman-tainted collateral. CDS market collapsed and even money markets were failing. If Merrill had followed suite, we would be back to the barter system.
    ……………..
    OK. but if the whole system is covering up massive lies, and I know that you are lying as much as I am, and that Moody’s will say anything if you pay them enough, then…..

  42. Broken says:

    “The whole system” consists of human beings who are bound to behave, well, like human beings. A mix of ethical and unethical, rational and irrational, informed and ignorant behaviour.

    When you have the rating agencies like Moody’s and S&P financially benefiting from overly generous ratings, ratings will be overly generous.

  43. It’s time for a new system. Let the old one fail. Bernanke says he wants markets to get back to “normal”. What the fuck is normal? $600,000 per head profit at Goldman Sachs, like in ’07, solely for the value-added (snark) function of leveraged gate-keeping of money and credit?

    There is no such thing as normal. Chaos always reigns. Black Swans aren’t in danger of extinction. Merrill should have been allowed to die, along with the rest of them, and if that means going to a barter system, so much the better that would be than a currency subject to the manipulations and prevarications of idiots like Paulson and Bernanke. Got gold?

  44. Bob A says:

    “dahling I love you but gimme Park Avenue….”

    http://www.youtube.com/watch?v=DrbPAt1_vc4

    damn I love youtube

  45. JasRas says:

    I really think that if you believe that Ken Lewis and Jamie Dimon are actually making purchases the “want”, then you are grossly mistaken. This is a big game and the Fed is the pitcher. Someone has to play “The Catcher”—and so far, that roll has been shared by JPM, and BAC. The moves these two have done are not out of hubris- but for the good of the country if you believe that the systematic risk potential is a worse outcome than what we’ve experienced so far…

    I would go so far as to suggest that once things “normalize” (which I can’t define, exactly, since my whole adult life has been in a unreal world…welcome to the Matrix, Neo), the Fed/government will not allow these behemoths to exist as they are, but will force them to dis-assemble into the parts once more. Why do I think this? Because I think as analysis of the situation is made, it will be apparent the government doesn’t want these money centers to be huges “too big”… So, Merrill might emerge again, Countrywide, hell even Bear Stearns!

    Think of JPM and BAC as shelters from the storm. They are simply conduits that the Fed can exorcise the demons of excess.

    It’s all speculation, but that is my take… I do not think Ken Lewis is any dumber than Jamie Dimon, Jamie’s time will come if the commercial real estate collapses. Then all his lovers will be haters… It’s all part of the show we’ve paid for with our future.

  46. Andy Tabbo says:

    I tell you what…every single “big time” CEO out there needs an actual “real life” professional trader sitting in his office to remind them about what it takes to be a successful trader….

    i.e.

    “Don’t catch falling knives…”
    “Don’t ever double down on a loser…EVER.”
    “You can be Pig….just don’t be a HOG.”
    “Fade the Herd…don’t be a part of it…”

    This guy was a remarkably bad trader…..

    - AT

  47. Blurtman says:

    OK. Can someone tell me why taxpayers are paying out investment banks speculative CDS positions? Buying CDS’ for non-hedging purposes is pure gambling. If the bookmaker cannot pay off on these bets, why does the taxpayer? It is worse when you consider that the investment banks had inside information on which firms were going under, in part becasue they put them in that position through the sale of bogus paper.

    Geithner believes taxpayers should pay off these bets, since AIG cannot, and we taxpayers are now on the hook for billions to pay off the Wall Street speculators thanks to Timmy. And Obama is nominating Geithner for Treasury Secretary. What is that all about?

  48. rpickard says:

    Even if the Board does show Lewis the door, his severance package will probably be ginormous. In a righteous world, Lewis would have to stand in line at the unemployment office just like all the other poor slobs that lost their jobs due to his incompetence. As ridiculously out of line as executive compensation often is, the severance packages being handed out to incompetent CEO’s are ludicrous.

  49. crabsofsteel says:

    @Blurtman,

    Not sure it’s possible to explain anything these days, but the reason taxpayers got hit with losses on CDSs is that the Feds thought AIG was too big to fail. And they are.

    Investment banks had no inside information other than watching the news with a vengeance. I’ve worked for one for a long time and their information isn’t any better than yours, except they know where to look.

    Amd we don’t know what Geithner believes, other than that he was in favor of the initial TARP. I believe that was a big mistake, so you may be right after all.

  50. Blurtman says:

    crabsofsteel Says:

    As far as I can understand this, there are “legitimate reasons” for buying CDS’s, i.e., to hedge bond risk exposure, and then there is speculation, i.e. betting that the company will go under. The multitrillion dollard CDS monster is composed largely of speculative CDS positions as I understand it.

    One can imagine that it is important to support CDS positions that are established to hedge bond risk. But why must taxpayers be on the hook to pay off speculative CDS positions? This smacks of immorality and fraud.

    And as it seems that Geithner is supporting this looting of taxpayers to pay off speculators, what does that say about Obama?

  51. crabsofsteel says:

    @blurtman

    Hedging bond risk exposure is the same thing as speculation that a company will go under. If I own a Ford bond but am concerned about Ford as a credit, I will buy protection in the form of a CDS. That doesn’t make me a speculator. However, if I am buying this insurance from a counterparty who is unregulated thus does not maintain any reserves, it does make me an idiot. My protection is worthless and should be valued as such, but the consequences of doing that would be to close Goldman Sachs amongst other institutions, and would be catastrophic. The CDS market, to my knowledge, is unwinding on its own as the Feds go through the Aegean stables of AIG’s books, via auctions which are settling contracts usually at pennies on the dollar. In the meantime, AIG is selling off whatever it can as it winds down too. Frankly, I’m not sure there’s any alternative.

  52. coler says:

    It’s not only Mr. Lewis. Geithner should be fired as well! $34,000 he never paid in taxes!

    And he claims he never knew!?!? That’s contrary to everything the IMF has said.

    BR, here’s a little eye candy for those who are upset about this.

    http://www.covingtoncorner.org/?p=195

    I particularly like Bernanke’s “hood.”

  53. Blurtman says:

    @crabsofsteel:

    I think hedging bond risk exposure is a legitimate use of CDS’. But buying CDS, perhaps with leverage, beyond bond risk exposure is reckless and what I would call speculation.

    I think it is appropriate to step in to support holders of CDS purchased from undercapitalized (insolvent?)insurers. But I think it is criminal to use taxpayer dollars to support speculators who hold CDS positions that do not hedge bond risk exposure.

    In the transfer of taxpayer dollars via AIG to Goldman Sachs, Merrill Lymch, Morgan Stanley and others, where is the evidence that these considerable funds were provided to parties who held AIG CDS’ for hedging bond risk exposure only?

  54. crabsofsteel says:

    @ Blurtman

    Investment banks don’t have nice accounting like commercial banks do which segregate hedge instruments, held for sale, and held to maturity instruments. Rather, it’s by trading desk and Lord knows, each one had plenty of those, so you’ld really have to dig. You could find evidence that they held CDS for spec rather than as a hedge, but if asked, I’m sure Goldman could contrive an argument to show that at some point they had had the bond risk exposure even if they offloaded it. They can always claim they were unintentionally mismatched. You won’t find a smoking gun there.

  55. sst3d says:

    Just a Sunday afternoon musing: these central casting CEOs; the rock-jawed Ken Lewis types are akin to Warren G Harding. He got the job literally because he looked like a President. There is something in human nature that attributes certain skill sets to very specific facial characteristics. Anyway, where that leads my meandering mind is to Mitt Romney, a man who had he been the Republican nominee would have likely beaten Obama. The result of which would be a central casting CEO type with the same world view and skill set of a Ken Lewis running the country. That would have just plain sucked (squared and to the nth). So, we as a nation, dodged a bullet with the nomination of that cranky befuddled old man, John McCain. You can question whether Romney would have beaten Obama if you like, but given the economic/business climate leading up to the election, the Romney business acumen mythology would have made him hard to beat. Again, we got very lucky.

  56. Blurtman says:

    @ crabsofsteel:

    I appreciate your comments, but I think one can surmise by the below that taxpayers are bailing out both CDS’ holders who were hedging bond risk and also what I would call pure speculators. By the below reckoning, 44% of all CDS are held by speculators.

    Factoid: By the end of 2007, the CDS market had a notional value of $45 trillion, but the corporate bond, municipal bond, and structured investment vehicles market totaled less than $25 trillion. Therefore, a minimum of $20 trillion were speculative “bets” on the possibility of a credit event of a specific credit asset not owned by either party to the CDS contract.

    So this is the smoking gun.

    Here is another interesting perspective, from Mish:

    24. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

    25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.