Can BofA save itself?


A few months ago, mighty Bank of America Corp. and its chairman and chief executive, Kenneth D. Lewis, looked like the saviors of the financial system.

Now the giant is foundering, and Lewis could be fighting to keep his job.

The company’s stock price has plunged 66% since Jan. 1 and slipped below $5 a share this week, hitting a 25-year low. The precipitous decline has industry analysts speculating about a government takeover, which could wipe out shareholders, including Gene Corbin of Santa Maria, Calif.

The bank’s swoon “has crippled us financially,” said Corbin, 67, a retired hospital maintenance supervisor. The stock he and his wife own, once worth $50,000, has shriveled to $5,000. He fears a federal takeover or shutdown could vaporize their remaining holdings, which happened last year to shareholders when IndyMac Bancorp and Washington Mutual Inc. failed.


“It’d be a total wipeout, with just micro-pennies left to the dollar for investors,” Corbin said. “Our shares would be worth absolutely zilch.”

“This morning, we had considered selling what we had left,” he said. “But we’ve rode this horse this long, and we’ve already lost 95% of what we had, that we’re just going to take a chance on the bank recovering. That’s all we can really do.”

Lewis spokesman Robert Stickler contends the bank -- the nation’s No. 1 in deposits, mortgage lending and credit cards -- is fundamentally strong, with reserves to protect against loan losses and pay its debts over the coming years.

Just a few months ago, Lewis was winding down an extraordinary year of deal-making with an acquisition of troubled investment bank Merrill Lynch & Co., giving Bank of America a prominent perch on Wall Street.

The Merrill deal, initially valued at $50 billion, had followed the bank’s $21-billion purchase of Chicago-based LaSalle Bank Corp. and its $4-billion takeover of Countrywide Financial Corp., the nation’s largest mortgage lender.

Combined, the acquisitions looked to make BofA even more dominant in retail financial services. Instead, they have saddled the company with huge mortgage-related losses.


The deep recession is adding losses on credit cards and, increasingly, business loans to stacks of decaying bubble-era home loans from Countrywide and the exotic securities that Merrill carved out of risky mortgages.

Questions about Lewis’ leadership mounted last month, when Merrill reported a horrific, $15.3-billion quarterly loss. Some analysts predicted Lewis would be fired for failing to foresee the depth of the securities firm’s problems and letting the takeover, hastily arranged in September, go through.

But one person familiar with the situation said Thursday that Lewis, aware of Merrill’s troubles, had told federal officials in December that he planned to cancel the deal on grounds that there had been a “material adverse change.”

The officials, including Federal Reserve Chairman Ben S. Bernanke, insisted that Lewis not back out, said this person, who was briefed on the exchanges but not authorized to speak about them publicly.

It would have been practically impossible for Lewis and his board to defy the government in a time of such crisis, said independent bank analyst Nancy Bush of NAB Research, one of those who had forecast Lewis’ ouster.

“I’m basically neutral about him staying now,” Bush said. “He’s going to spend the last two years, or five years, or whatever it is of his tenure cleaning up this mess.”

Some analysts said Thursday that the government, which already has propped up Bank of America with $45 billion in cash and an agreement to share losses on $118 billion in toxic assets, should simply step in and nationalize it and other foundering banks to stabilize the nation’s battered financial system.

“They are insolvent, and if we do nothing we have no economic growth in the system,” said Friedman, Billings, Ramsey & Co. analyst Paul Miller, who has loudly urged that Lewis depart.

Stickler retorted that Miller “doesn’t understand banking.” Bank of America is “very well-capitalized,” he said, with enough cash and liquid assets for the parent company to meet its obligations for 23 months without taking funds from the bank itself, Stickler said.

Bank of America expects to continue to suffer loan losses, but it is also generating plenty of income from its operations to cover them, he added.

“We’ve only had one losing quarter in the past 17 years, and that was not a big one,” Stickler said.

That was a reference to the company’s reporting a $1.8-billion loss for the quarter that ended Dec. 31, just before its books were merged with Merrill’s.

The comments of Miller and others, rocketing around the globe in news stories Thursday, drove Bank of America stock to a 25-year low of $3.77 early in the day, as owners of the common stock feared they’d be wiped out by a government takeover.

The Treasury Department already owns $25 billion in Bank of America preferred stock, on which the bank is paying a 5% annual dividend, and an additional $20 billion in preferred stock with an 8% dividend.

But after Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, said Thursday that he was not in favor of nationalization, the stock reversed course, closing up 14 cents, or 3%, at $4.84 and helping trigger a rally in financial shares.

Lewis was not available for comment. But a Securities and Exchange Commission filing Thursday showed he had cast a vote of confidence in his company by buying 200,000 shares a day earlier at $4.78 to $4.81 each, boosting his holdings to 1.66 million shares. He also bought 200,000 shares Jan. 20, after the price had dropped for nine consecutive days.

The company’s regulatory filings show his total compensation was $16.4 million in 2007, the latest year available, and $25.6 million in 2006.

In a memo this week to employees, Lewis said he was encouraged by the bank’s January results and urged them to hang in with him despite the sharp cuts in bonus payouts, including nothing for him and other top executives. He also noted that during what he called the longest board meeting in the company’s history, his directors “unanimously endorsed our business model, strategic direction and the team.”

As the nation’s largest retail bank, Bank of America epitomizes the “too big to fail” institutions that the government has spent the last year propping up or pushing into the arms of more solid institutions. (Until recently, Bank of America was regarded as being in the savior category itself.)

Gigantic banks such as JPMorgan Chase & Co. and Wells Fargo & Co. took over Washington Mutual and Wachovia Corp. with the government’s encouragement. But should Bank of America weaken significantly, analysts say, only the government would be able to step in and take control.

The prospect of having a federal backstop appeared to reassure depositors at a Bank of America branch in downtown Los Angeles.

A software project manager who identified herself as M. Harris said she would stay put if BofA was taken over, keeping several thousand dollars in a checking account.

“I no longer know what I should be concerned about, with everything that’s happened in this crisis,” she said. “If the government does take Bank of America over, then it would just be another example of a company that was mismanaged and made poor decisions.”

Bank analyst Bart Narter of Celent, a financial research firm, said Bank of America’s takeover of LaSalle went well in 2007. And in taking over the Calabasas mortgage giant Countrywide, BofA, a major player in home loans itself, knew “more or less” what it was buying, Narter added.

But he said the Merrill purchase was a grave error because the Bank of America chief knew little about the securities business.

“It’s when you start buying stuff you don’t know anything about that I have a problem,” Narter said. “Banc of America Securities is not a world-class investment bank. Their purchase of Merrill was a big -- and expensive -- learning experience.”




Bank of America

Headquarters: Charlotte, N.C.

Chief executive: Kenneth D. Lewis

Formed: 1998 from a merger of California-based BankAmerica Corp. and NationsBank Corp. of North Carolina.

Employees: 308,000 (including Merrill Lynch & Co.)

U.S. branches: 6,139

Deposits: $883 billion