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[U]With Feds, BofA's Lewis Met His Match[/B]


Kenneth D. Lewis never imagined his eight-year run as chief executive of Bank of America Corp. would end this way.

He had faced a year of headaches big and small. His mother nudged him about paying back the $45 billion of aid his bank got from the federal government. As he pondered his future during a Colorado vacation in August, a bear rummaged through the refrigerator in his mountain home. But what drove the banker out the door was his inability to get along with Uncle Sam.

ALL SMILES: Then-Merrill Lynch CEO John Thain and Bank of America CEO Ken Lewis in September 2008, when BofA agreed to acquire the securities firm. They haven't spoken since Thain left the company in January.

As early as last December, a Federal Reserve official emailed a colleague seeking ideas on getting a "pound of flesh" from Mr. Lewis, amid controversy over his then-pending acquisition of flailing Merrill Lynch & Co. By May, heat from regulators had become so intense the bank's board set up a special committee to deal with them.

In September, with a judge insisting that a spat with Washington regulators go to trial, and a state attorney general talking about filing fraud charges against the bank or some of its officers, Mr. Lewis found his days increasingly taken up by meetings with lawyers. In late September, he surprised the board -- newly reshaped, under government pressure -- by saying he would leave at the end of 2009, a year sooner than expected.

As the bank now hurriedly looks for a successor, Mr. Lewis hasn't been able to guide the process. He suggested options, such as elevating a longtime aide, only to learn later, say people familiar with the matter, that the board was planning a comprehensive search at the behest of the Federal Reserve. A decision on a new chief could come by Thanksgiving.

The situation the giant bank has been left in, of having to find a CEO on short notice, caps nearly a year of battles with regulators and investigators during which Mr. Lewis, 62 years old, gradually lost control of a bank he had worked at for 40 years. By this fall, Mr. Lewis had confided to an aide that he wasn't well-suited for a job that increasingly required him to kowtow to politicians and regulators.

•         BofA Board May Reject Lewis's Picks
Mr. Lewis's legacy now is perched between that of a man who helped bolster the U.S. financial system during a crisis -- by buying two ailing financial firms, Merrill and Countrywide Financial -- and one who pursued too many controversial deals and left an important American institution in the lurch. Mr. Lewis declined to be interviewed.

If there was a bank executive who seemed to have the mettle to withstand today's regulatory and market pressures, it was Ken Lewis. The Mississippi native clawed to the top of Bank of America. After succeeding his mentor, Hugh McColl Jr., as chairman and CEO in 2001, Mr. Lewis kept up a blistering pace of acquisitions and tight control of operations at the bank, which expanded to $2.3 trillion in assets from some $620 billion.

Just over a year ago, Bank of America was poised to be a white knight in the national financial emergency. Having closed its purchase of mortgage lender Countrywide in July 2008, the bank stepped up again two months later, at a critical time. On the September weekend when Lehman Brothers Holdings Inc. hurtled toward bankruptcy and American International Group Inc. teetered, Bank of America agreed to absorb another struggling firm, Merrill Lynch.

'What a Disaster!'
But by Dec. 3, two days before shareholders were to vote on the deal, Merrill's losses were ballooning. "What a disaster!" wrote a Merrill finance executive, Gary Carlin, in a Dec. 7 email to a member of the Bank of America liaison team, Neil Cotty. (The email was one of many later given to a House committee that looked into the deal.)

Mr. Lewis's grip on his board, once ironclad, began to weaken. Amid the mounting Merrill losses, one bank director who had agreed to the deal, Chad Gifford, told another, William Barnet, in a Dec. 10 email: "It's the way we approved acquisitions that tick me off the most!!!"

Mr. Barnet, who has since left the board, told Mr. Gifford on the same day that he sensed Mr. Lewis was struggling. "Much pressure...felt KL feeling it...." Messrs. Gifford and Barnet didn't return calls for comment.

By mid-December, after the shareholder vote, projections of Merrill's fourth-quarter loss reached $12.5 billion. Mr. Lewis alerted U.S. regulators to the mounting losses and raised the possibility of backing out of the acquisition, by citing a "material adverse change" clause.

Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson pressured the bank to complete the deal to avert a possible investor panic if it fell through, according to later testimony by Mr. Lewis. Mr. Paulson threatened to remove Mr. Lewis and the bank's board if he didn't comply, according to testimony of Mr. Lewis as well as Mr. Paulson's statements to Congress and New York's attorney general.

The bank did complete the Merrill deal, and, as promised if it did so, received another dose of federal aid. The government, which three months earlier had provided $25 billion under the Troubled Asset Relief Program, now supplied $20 billion more under TARP by buying preferred stock in Bank of America, carrying a rich 8% dividend. The government also gained oversight of the bank's expense policies and compensation.

A spokesman for the Federal Reserve declined to comment. A spokeswoman for Mr. Paulson didn't return a call and email.

What Mr. Lewis didn't know was that even as certain U.S. officials were pressing him to close the Merrill deal, supervisory Fed employees had growing concerns about Bank of America's own financial strength and were considering taking action. Moreover, the Merrill acquisition made those concerns greater, because it saddled the bank with soured securities.

On Dec. 20, Mac Alfriend, a senior supervisory official at the Federal Reserve Bank of Richmond, which oversees the bank, emailed a Fed official in Washington about "thoughts on getting a pound of flesh out of Lewis." The Washington Fed official, Deborah Bailey, responded that the Fed was considering steps, including a memorandum of understanding, or MOU, to force Bank of America to improve its operations and management. "It would be done with a series of actions including cutting drastically the dividend, some supervisory action (MOU) that covers management," wrote Ms. Bailey.

Federal Reserve and Richmond Fed officials declined to comment. Ms. Bailey, who has since left the Fed, declined to comment through her new employer, Deloitte & Touche LLP.

The word from Mr. Bernanke was more conciliatory. In a conversation with Mr. Lewis on New Year's Eve, the Fed chairman said, "We will not leave you in the lurch," according to notes Mr. Lewis took. His notes say Mr. Bernanke told him Bank of America was "a strong company that has acted very appropriately throughout very difficult circumstances."

Pressure on Mr. Lewis kept mounting. In January, say people familiar with the events, some of the bank's directors went behind the CEO's back and informally inquired whether former Bank of America Vice Chairman James Hance, whom Mr. Lewis had beaten out for the top spot in 2001, would be available to step in to replace Mr. Lewis if needed.

By February, the Fed crackdown was overlapping with an investigation by New York Attorney General Andrew Cuomo about, among other things, whether Bank of America shareholders and others had been misled about the losses at Merrill.

Mr. Lewis was growing increasingly frustrated and found he disliked dealing with politicians. During one awkward moment, at a March meeting at the White House with President Barack Obama and other bank chief executives, Mr. Lewis said publicly that he didn't plan to "suck up" to officials.

Investors and regulators were pressuring him to strengthen his board and to improve operations at the bank, whose stock sank to $3.14 a share on March 6 from over $33 shortly before the bank agreed to buy Merrill. At its annual meeting on April 29, shareholders voted to split the posts of CEO and chairman. A longtime director, Walter Massey, became chairman instead of Mr. Lewis.

A bombshell hit later that day at a board meeting at the bank's Charlotte, N.C., headquarters. Regulators, including those from the Fed, said they planned to file a confidential memorandum of understanding against the bank because of concerns about such things as governance and its ability to manage risk and fund operations in times of stress.

Directors were shocked Fed officials would slap the bank for its performance after other officials, from the Fed and Treasury, had pressured it to complete a deal it was wary of, the Merrill purchase. The sanction, issued soon after, required the bank to overhaul its board and fix risk-related issues.

Mr. Massey, formed a special board committee in May to deal directly with regulators. For Mr. Lewis, said a person familiar with this thinking, it was becoming clear that "this is not my company anymore and it's not my board."

The new chairman received directives from regulators on remaking the board, and a Fed governor, Kevin Warsh, told him the board had to get serious about finding an eventual Lewis successor. A Fed spokesman declined to comment.

After April, nine directors stepped down and six new ones joined. Mr. Lewis was left unsettled about how much he could trust his board and how much it trusted him, said an associate.

Behind the scenes, he himself began looking for a successor. He reached out to former Goldman Sachs Vice Chairman Robert Kaplan, now at Harvard Business School, without involving the board in the interview process, said people familiar with the situation.
'Get to the Other Side'

In late July, as Mr. Lewis's annual August vacation in Colorado neared, he privately told investors he would "like to see the company through this, until we get to the other side, including repaying" the TARP money.

He even faced heat from his mother, Byrdine, who reared him after his father left the family. Mr. Lewis told investors in the meeting she had pressed him about when the bank planned to pay back the government.

The bank did seek during the summer to repay TARP funds, but federal officials declined to give it permission to do so.

Meantime, legal issues swirled. In early August, the bank agreed to pay $33 million to settle Securities and Exchange Commission allegations that the proxy statement for the Merrill deal was misleading because it didn't say year-end bonuses would be paid at Merrill. The bank has said the proxy was legal and appropriate.

On vacation in Aspen, Mr. Lewis faced another issue. On Aug. 21, his wife filed a report with the Colorado Division of Wildlife saying a small, dark brown bear had broken into their vacation home the night before, through unlocked French doors in a bedroom connected to the backyard, and rummaged through the refrigerator and the cabinets. The report didn't say whether the Lewises were home.

Back in New York, federal Judge Jed Rakoff threw a wrench in the settlement with the SEC, noting that the alleged violation was that the bank, "through its management, effectively lied to its own shareholders."

Mr. Lewis returned from Colorado after Labor Day. Instead of being refreshed, he looked worn and sported a beard for a day.

He told Steele Alphin, the bank's chief administrative officer, he was ready to retire. Mr. Lewis chatted with Mr. Alphin, a longtime close associate, several times on his first day back, including a walk at lunch, according to a person familiar with the matter. That evening, Mr. Lewis told Mr. Alphin he would stick it out, possibly through the first quarter of 2010, to help find a successor, repay the federal aid and resolve the investigations, the person says.

The same day, Mr. Cuomo's office wrote to say it was considering whether to bring securities-fraud charges against the bank and bank officers. The letter cited four alleged "failures" in giving shareholders adequate information before and after their December vote approving the acquisition of Merrill.

Normally optimistic and energetic -- he often began days with a 5:45 a.m. exercise routine -- Mr. Lewis appeared distracted and preoccupied, a person close to him says. He turned down requests to film a bank leadership video for internal release, leaving other executives to fill in.

On Sept. 14, Judge Rakoff threw out the settlement with the SEC and ordered that a trial be held on the civil charges.
Calling It Quits

By Sept. 28, Mr. Lewis had decided to call its quits. He and Mr. Alphin flew to Boston to meet with three directors. He told them he would tell the other directors of his decision on Friday, Oct. 2. When asked if he might reconsider the timing or the decision itself, he said no, according to people familiar with the meeting.

He had planned to make the announcement in several days, but the script changed. Without his knowledge, the bank's chairman, Mr. Massey, began quietly calling directors to inform them of the decision, say people familiar with the matter. Mr. Massey didn't return calls seeking comment.

Word reached chief marketing officer Anne Finucane. Worried about a leak, she urged Messrs. Lewis and Massey to move up disclosure by two days, to Sept. 30. Directors were told to dial into a conference call, and Mr. Lewis's aides hurried to find executives so Mr. Lewis could break the news to them.

Mr. Lewis spoke to directors on the call without notes, seated at a white marble conference table in a Manhattan office. At one point, he ambled to a window and looked toward Central Park, saying nothing.

On Oct. 5, Mr. Lewis, aided by Mr. Alphin, presented to a board search committee three potential scenarios for hiring of a new chief, including naming a longtime Lewis aide, Gregory Curl, which he said would be the least-disruptive move. But directors, without informing Mr. Lewis, later hired a search firm to advise them on succession, after the Fed indicated it wanted the board to consider all alternatives.

Mr. Lewis now has had to get updates on the search through the backdoor, including from internal candidates, someone familiar with the search says. Once the dominant voice in board discussions, said a person close to the CEO, Mr. Lewis now sits passive and quiet in meetings.

—Liz Rappaport, Joann S. Lublin and Damian Paletta contributed to this article.
Write to Carrick Mollenkamp at and Dan Fitzpatrick at

Mr. Davet’s comments to the above article:

Having attended the annual shareholders meetings at BAC since Mr. Lewis was selected to lead the bank, it was abundantly clear that he was the wrong man for the job.

If you set aside the fact that I am a disgruntled shareholder and stakeholder for an instant, Mr. Lewis took a “lock and load” approach and tough guy image to mimic his predecessor in dealing with me at the bank’s expense. His mentor, Hugh McColl, fondled hand grenades in the front of bank examiners to bolster his image.

Mr. Lewis’ legacy and its affect on the bank is typified by my recent letter to the Board of Directors at Fannie Mae as follows:

October 30, 2009

Via E Mail:

Mr. Dennis Beresford
Fannie Mae
3900 Wisconsin Avenue, NW
Washington, DC 20016


Dear Mr. Beresford,

Pursuant to your fiduciary responsibilities to shareholders and stakeholders of Fannie Mae as a member of the Audit Committee of the Board of Directors, I am reporting to you the mischief of management for your immediate attention.

The mischief of Management of Fannie Mae includes, among other things, Fannie Mae’s extensive involvement in perpetrating a fraud on the court in being complicit with various Players in what has come to be known as Fannie Mae’s “Government Sponsored Business Model”. The complicity and the failure to do anything about it threatens FNMA’s very existence.

On March 1, 1996, an action for foreclosure relevant to my personal residence was filed against me by Nationsbanc Mortgage Corp. (“NMC”), nka Bank of America, see Exhibit A attached. In their suit, NMC fraudulently invoked the jurisdiction by claiming to be the “owner and holder” of my mortgage. NMC was not the owner and holder.

On May 19, 1999, more than three years after the lawsuit for foreclosure was filed, Fannie Mae purportedly sold my mortgage to NMC; see attached Exhibit B. Ohio law has always held that a party must be suris juris at the commencement of the foreclosure action to invoke the jurisdiction of the court. See Wells Fargo Bank, N.A. v. Jordan, 2009-Ohio-1092. The fact that NMC was not the owner and holder on the date that the foreclosure action was filed renders the judgment therein void ab initio.

I have been in contact with the Audit Committee of Fannie Mae since 1996 as well as the Boards of the other Players in FNMA’s GSE Business Model, specifically Bank of America and JP Morgan Chase Bank, relevant to the myriad of failures to abide by the Guidelines laid down by FNMA to protect the safety and soundness issues of MBSs, The Guidelines were proffered to Congress in exchange for the government’s guarantee placing the taxpayers at risk. Fannie Mae’s Management ignored the failure to comply with the Guidelines and the Board failed to hold Management accountable for this failure (KurtEggert, Housing Policy Debate Vol 15. No. 3 2007, Servicer Abuses & Predatory Lending).

For your information, I have attached an exchange that I had at a shareholder’s meeting with Mr. Kenneth Lewis of Bank of America, see Exhibit C, as well as an exchange with Mr. Jamie Dimon of JP Morgan Chase, and see Exhibit D, the gist of which both belie the fundamentals of the Guidelines. The flippant arrogance of the responses illustrate the disdain for the fundamental requirements of the Guides set down initially to protect the taxpayers with respect to the safety and soundness issues presented by the MBSs.

My saga for the past thirteen years has been chronicled by the national press, see attached Exhibit E. To put the matter in the proper perspective as to the egregious conduct, I attach a letter from NMC received a mere month before the foreclosure action was commenced, see Exhibit F. I have made requests of all three entities, Fannie Mae, Bank of America and JP Morgan Chase, specifically; I want my home of twenty nine years back as well as compensatory and punitive damages. My requests have been ignored. My case presents a classic set of precise facts and abuses for disgorgement and other sanctions from Players in the GSE Business Model under the contractual obligations inherent in the Guides. Today, both Players are at FNMA’s door to sell mortgages while ignoring the Guides which is a condition precedent. Debits are clearly in order for the wrongdoing.

I note that the current website of Fannie Mae leads with “Helping You”. I hope that the cliché is not just an image that FNMA wants to project and not mere puffery but that it has some substance in fact. With respect to this letter and the issues presented herein, I will follow up with you individually to determine your course of action pursuant to your fiduciary duty.

Sincerely yours,


Richard Davet

Cc: Mr. Timothy Mayopolous
Mr. Edward DeMarco, Acting Director, FHFA
Mr. John C. Dougan, Comptroller of the Currency
Ms. Mary L. Shapiro, Chairman SEC
Mr. Neil Barofsky, U.S. Treas
Interested Parties

P.S. As a business person, I might suggest a page out of the Johnson & Johnson crisis management book when they found their Tylenol business model tainted by poison. Prolonging the inevitable does not do the company any good.

The exhibits (Pay special attention to page 25.)
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