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Bank of America's Most Toxic Asset

In: Social Issues

Submitted By naaman14
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Table of Contents Case Summary 2 Affected Stakeholders 3 Ethical Dilemma 4 Why would a $500,000 salary cap prompt personnel to leave for other banks? 5 Was stripping of Lewis’ chairmanship a significant move on the part of BoA shareholders? 6 How could Thain justify spending $1.2 million on his office when Merrill Lynch was on the verge of bankruptcy? 7 What did Ken Lewis hope to gain by claiming that he was “pressured” into completing the Merrill Lynch deal? 9 Of all decisions made by Ken Lewis in this case study, which one do you think did the most damage to his reputation? And why? 10 What should Lewis have done? 12 Conclusion 13 References 14

Case Summary

Bank of America (BoA), founded in 1998 is an American multinational banking and financial services corporation. They were notably a key player in the global financial crisis that struck in 2008. Ken Lewis, a former CEO acquired Countrywide Financial and Merrill Lynch. To his dismay, the acquisitions turned out to be disastrous as the first week of January 2009 enlightened the problems that existed within Countrywide Financial and Merrill Lynch; they were bankrupt with assets in their balance sheet that set a new mark for toxicity in the financial market. This required attention and direct aid from the Federal Government itself. However, following this month BoA fell by 65 percent. Just a month after the first quarter of 2009, Ken Lewis was made CEO and stripped off chairmanship by the shareholders’ consent. (Tanoh, 2013)

The aftermath of the two acquisitions of Countrywide and Merrill Lynch allowed BoA to become a dominant mortgage provider as well as the biggest financial services company in the world at that time.

Amid the weekend of the 13th and 14th of September 2008, auditors and other staff from the Bank of America performed due diligence preceding a potential merger. A merger understanding was publically reported on the 15th of September, with Bank of America acquiring Merrill Lynch & Co. for $50 billion in stock. However, right after the deal had been signed; it didn’t take long for the actual state of the acquired companies to show its true colors as BoA revealed immense losses at Merril Lynch. Ken Lewis claimed that the bank wanted to opt out of the deal due to the revelations of the extent of Merrill’s trading losses. Howbeit, on December 21st, Lewis was cautioned that the administration would consider supplanting the top managerial staff and administration if Bank of America retreat from the deal. The authorities additionally recommended that if Lewis vacated, then any future government help would be a great deal harder to acquire. Right now, Lewis surrendered in his endeavors to vacate the deal. This led to a record low in 17 years for the bank in terms of its stock price.
Affected Stakeholders

Stakeholders can be defined as anyone who is in direct affect by business decisions. In the case of BoA, considering its global stance, one can determine the affect of business decisions that it has on its stakeholders. The affects of the decisions made were not just limited to the board of directors or the CEO; they had an adverse effect on the US economy, the company’s shareholders, and the government particularly but also globally. (Sienkiewicz, 2014)

Another debacle from a Wall Street corporation would sequel inexorable crisis in an unstable financial climate. This would consequently jeopardize the health of the US economy that could lead to distress resulting in untold damage to the civilians. In addition, the taxpayers would consequently face financial obligations of a declining Merrill Lynch no matter the severity of the collapse. On the other hand, millions of shareholders had a major part to play in decisions Lewis had to face. The interests of about 200,000 employees and contractors were to be taken into consideration by the CEO.

Ethical Dilemma

Ken Lewis’ decision to acquire Countrywide and Merrill Lynch were rather ambitious as their crises were inevitable and obvious to many. Misrepresentation of key information was crucial.

Although the shareholders approved the decision, Ken had hidden the Merrill losses prior to the approval. In addition, shareholders should have been made aware of the possible losses that could incur and that could have a devastating affect on the shareholders’ equity in the case of further financial assistance by the government.

On the other hand, Thain misrepresented the actual performance of Merrill Lynch as the bonuses were approved for the executives despite the company being in a critical position. Ken Lewis and John Thain failed to disclose vital information to key individuals before the acquisition that led to a travesty economically.
Why would a $500,000 salary cap prompt personnel to leave for other banks?

Obama administration issued a 500,000 salary cap for bank executives causing many to leave and find employment elsewhere such as other banks that didn’t receive bailout orders. This rule also stated that the bonuses could not exceed 50% of the salaries i.e. $250,000 in this case. (Ahrens, 2009)

Banks overseas that were unaffected by the US financial meltdown in 2008 and willing to pay more than $500,000 could also be potential opportunities for the CEO’s affected by the salary cap. The main reason behind the potential switches would be the fear to lose their highly styled life. Ken Lewis earned $16.4 million in 2007 that consisted of just $1.5 million salary payments. This could mean CEO’s that have their expenses settled according to their lifestyles would be exposed to a huge dip in their disposable income that could immensely affect their psychological state. A huge income dip could be shattering an individual’s self esteem. CEO’s at much midtier and much littler banks are paid significantly more than what did the White House set, or the reward top of 33% of aggregate remuneration set by the revision. (News, gogoi and today, 2009)

A $500,000 salary is subject to tax, in the US at that time; the tax for this particular income group was at 36-37% accumulated of a few types of taxes. Not only the taxes, the CEO’s had other expenses such as social security etc. However the taxes alone brought down the $500,000 to a disposable amount of $308,000. For such talented individuals, the income is not attractive and not enough, as they have seen and been in a different stage prior to the salary cap. (Asbery, 2013)

Was stripping of Lewis’ chairmanship a significant move on the part of BoA shareholders?

Ken Lewis was removed as Chairman but remained the CEO in April 2009. It isn’t a significant move from the shareholders’ end in this case because he remained CEO. However, Ken Lewis had blundered due to his non-ethical approach to the matter; the fact that he failed to provide the shareholder’s with accurate financial statements prior to the acquisition potentially raised questions. (Tanoh, 2013)

The downfall of both Countrywide and Merrill Lynch was imminent but Lewis’ misrepresentations to shareholders led to an approval for the acquisition. He misrepresented Countrywide and Merrill Lynch as financially stable firms, operationally efficient and forecasted a stable growth rate. However within a few months, the companies were bankrupt. Consequently the obvious outcome would have been dismissal for Lewis altogether from the company but that wasn’t the case although Lewis resigned himself 5 months later. (Currier, 2012)

Although Lewis might claim that he was not only the culprit; it was obvious that Countrywide and Merrill Lynch were not in a stable condition as their assets had no or little value in the market. Despite the fact that Lewis had misrepresented the financial health of the firms, the shareholders and other concerned personnel believed Lewis and approved the acquisition. Lastly, Lewis also claimed that he was pressured by government officials to not back out of the deal considering the overall economy and not just the firm itself.

However, as the leader of one of the biggest financial institutions, Lewis was additionally obligated to the global financial system. Interestingly enough, the shareholders are a subset of the global obligations.
How could Thain justify spending $1.2 million on his office when Merrill Lynch was on the verge of bankruptcy?

Thain spent lavishly on his office, this was unjustifiable considering the fact that Merrill’s was in an unhealthy state. As Merrill’s acquisition by BoA allowed Thain to become the bank’s wealth manager and head the investment banking divisions. Thain had an obligation to manage the firm in good faith, guarding his decisions and actions that will not serve his ambition but consider the consequences on a larger scale i.e. the US economy as a whole (Tanoh, 2013)

The refurbishment of his office revealed his self-centeredness as the firm was firing employees at that time. Amy Borus, deputy director of the Council of Institutional Investors said, “Spending company money on a lavish re-do at a time when Merrill’s finances were rocky sends the wrong message, also Thain was compensated well enough to foot the bill himself if he wanted such an upscale redecoration.” Also president Obama without naming the company pointed out at Thain by saying “the government should give more scrutiny to companies “that have received taxpayer assistance then going out and renovating bathrooms or offices or in other ways not managing those dollars appropriately.” (Green, 2009)

Thain had also overspent in cases such as paying $837,000 to Michael Smith who was also chosen by the Obama family to decorate the White House for just $100,000. (Weisenthal, 2009)

The items bought were of huge value; consisting of antiques that are seldom encouraged to be had in offices. Some of the items were a 19th Century Credenza worth $68,000, a pair of guest chairs worth $87,784 and an area rug for $87,784 to name a few major items. (Weisenthal, 2009)

To sum it up, his actions were unethical as Thain spent lavishly when the company was in a critical stage firing employees, suffering humungous losses and losing shareholder’s stock equity value tremendously when a turnaround in the company’s future was unforeseeable in at least the short run.
What did Ken Lewis hope to gain by claiming that he was “pressured” into completing the Merrill Lynch deal?

Considering the experience and success Lewis had in his past years, he had considerably great reputation. Before the congress, Lewis had testified that he was reluctant to commit to the deal for any longer but was pressured by the federal officials to proceed with the deal. Not only that, he claimed that his job was endangered and also the bank’s relationship with the federal regulators if he backed out. His sayings were supported by internal emails. (Tanoh, 2013)

In this case, Lewis is looking for public sympathy and seeking to share the blame. If he had admitted that he only let the deal through due to his ambition would solely put the blame on him that he did not want to happen that would also endanger his already well-built reputation. His ambition to become a giant was evident and he was aware of the consequences in one way or another. Although Merrill’s losses were far greater than expected but highly inevitable; hence claiming pressure was just to divide the blame and involving the government in his argument. Also, Lewis had enough experience to avoid such a disaster prior to signing the deal. Consequently, the situation he got himself into was nevertheless due to his ambitious approach to the acquisition. Lewis also argued that Paulson, The Treasury Department at that time did not want public disclosure of Merrill’s losses as government and the firm were in negotiation of possibly further provision of direct aids. (Clark, 2009) (Rappaport, 2009)

Lewis was put into this situation due to his own actions as every action has a reaction. In this case, Lewis’ ambition led to bad decision-making that were unethical initially i.e. misrepresentation to stakeholders
Of all decisions made by Ken Lewis in this case study, which one do you think did the most damage to his reputation? And why?

Decisions and integrity are vital for any CEO, they are the determinant of success and failures of any company regardless the size. Lewis made various choices that led to his downfall but the crucial one proved to be the nondisclosure of the actual state of Merrill Lynch to the shareholders. As a leader, his statements later on highlighted his shortcomings and inability to perform ethically. He failed to take responsibility for his own actions that not only hindered his reputation but also shattered the stakeholders’ trust in him.

His ambition and success was unquestionable as he had his good days behind him but dishonesty led to his downfall. Despite his successful mergers, takeovers and acquisitions in his career, he needed to be much more thoughtful prior to stepping into the deal. He allowed his ambition and his egoistical personality get the best of him. Baltasar Gracian once said, “A single lie destroys a whole reputation of integrity”. In this case, his lies that led to the acquisition were vital for his reputation. It may have been a different story if Merrill had been able to do well but Lewis failed to see and realize the ugly side of the picture. The acquisition of Merrill Lynch was unlikely to take place if Lewis had shown the actual financial position of Merrill Lynch but since he opted not to, the situation only points to him to take the blame.

For example, if Merrill had been acquired by BoA and faced the same travesty but the difference would be that Lewis had revealed the actual state of Merrill Lynch prior to the acquisition; he would not solely be blamed for the disaster.

What should Lewis have done?

The vital factor that led to Lewis’ downfall were the choices he made prior to the acquisition such as overpaying for Merrill Lynch, lack of research and control over his ambition, and even the nondisclosure scenario.

Prior to the purchases, Lewis should have been considerate and responsible and carry out effective analysis of both Countrywide and Merrill Lynch rather than being inconvertible and taking over companies due to his own motives and beliefs. Furthermore, Lewis should have thoroughly considered the economic situation as a whole before making the decisions and their potential outcomes. Also, a good manager offers enough protection to its shareholders and the company itself by protecting them through his actions whether monetarily or socially. His failure to forecast and reveal the originality of the financial statements of Merrill Lynch proved to be devastating to both himself as a person, his job position and his career. In addition, it would have also been much more appropriate to resign from his position at the time of accusations. He should’ve not accused other individuals for the results of his own actions. Being a CEO of the company, it was his responsibility to do everything possible to protect the shareholders and the company regardless of severity or outcome.

Dishonesty and lack of ethics are evidently seen in this case, as Lewis not only hid financial statements of Merrill Lynch, he also approved bonuses for individuals in the top management despite their troubles. Lewis should have shown integrity prior to the acquisition, as it would have not only saved his reputation; it would have also somehow played a lesser active role in the economic crisis. Lack of integrity was the root cause of the collapse.
Conclusion

No matter how big or small the firm; having integrity, thoughtfulness and the ability to forecast the consequences of your actions are vital for any manager in this globalization era. Despite the outcome, integrity can benefits your job and your career although problems may arise in the short run but the truth is never hidden just like the lies cannot be hidden either. Hence choosing what’s right over your personal motives can give you a brighter future in the long run.

As a result of the Lewis’ and Thain’s actions, it evident that they played a detrimental role not only in the US economy but also across the globe. Hence, to conclude; every action has its consequences, considering your future, your company’s and doing what’s right leads to greater heights than one can imagine.

References

‘A Merger of Corruption | Let’s Get Ethical on WordPress.com’ (2013). Let’s Get Ethical. Available at: http://bizgovsoc9.wordpress.com/2013/11/17/a-merger-of-corruption/#more-1290 (Accessed: 17 April 2015).

Ahrens, F. (2009) ‘Economy Watch - Bank Of America’s Lewis Opposes $500,000 Executive Pay Cap’, Bank Of America’s Lewis Opposes $500,000 Executive Pay Cap. Available at: http://voices.washingtonpost.com/economy-watch/2009/02/bank_of_americas_lewis_opposes.html (Accessed: 15 April 2015).

Asbery, N. (2013) ‘The Assault on CEO Compensation.’ Newsmax. Available at: http://www.newsmax.com/Finance/NealAsbury/CEO-pay-Switzerland-jobs/2013/11/21/id/537840/ (Accessed: 16 April 2015).

Clark, A. (2009) ‘Bank of America chief “told to buy Merrill or face sack”’, The Guardian, 23 April. Available at: http://www.theguardian.com/business/2009/apr/23/us-government-threatened-bank-board-on-merrill (Accessed: 17 April 2015).

Currier, C. (2012) ‘How Bank of America Execs Hid Losses—In Their Own Words.’ ProPublica. Available at: http://www.propublica.org/article/how-bank-of-america-execs-hid-losses-in-their-own-words (Accessed: 16 April 2015).

Green, P. (2009) - Bloomberg. Available at: http://www.bloomberg.com/apps/news?pid=newsarchive (Accessed: 15 April 2015).
News, A., gogoi, pallavi and today, usa (2009) ‘Stimulus bill’s CEO salary caps affect small banks, too.’ ABC News. Available at: http://abcnews.go.com/Business/story?id=6892884 (Accessed: 17 April 2015).

Patel, P. (no date) ‘Merrill Lynch Takeover by Bank of America.’ Seven Pillars Institute. Available at: http://sevenpillarsinstitute.org/case-studies/bank-of-americas-takeover-of-merrill-lynch (Accessed: 17 April 2015).

Rappaport, L. (2009) ‘Lewis Testifies U.S. Urged Silence on Deal.’ WSJ. Available at: http://www.wsj.com/articles/SB124045610029046349 (Accessed: 16 April 2015).
Sienkiewicz, J. (2014) Businesss Ethics Case Analyses: Bank Against America (2014). Available at: http://businessethicscases.blogspot.com/2014/11/bank-against-america-2014.html (Accessed: 16 April 2015).

Tanoh, S. (2013) ‘The Bank Of Americas Most Toxic Asset.’ Available at: http://www.businessteacher.org.uk/essays/finance/the-bank-of-americas-most-toxic-asset.php (Accessed: 15 April 2015).

The Bank of America and Merrill Lynch Merger: Ken Lewis’ Moral Dilemma (2009). Available at: http://www.fundamentalfinance.com/opinion/bank-of-america-merrill-lynch-ken-lewis.php (Accessed: 15 April 2015).
Weisenthal, J. (2009) ‘$1.2 Million Spent To Redecorate Thain’s Office’, Business Insider. Business Insider. Available at: http://www.businessinsider.com/2009/1/12-million-spent-to-redecorate-thains-office?IR=T (Accessed: 15 April 2015).…...

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...EXECUTIVE SUMMARY The most important problem that the Indian banks are facing is the problem of their NPAs. It is only since a couple of years that this particular aspect has been given so much importance. The banks have to overcome these difficulties properly in order to effectively counter the competition faced by the foreign banks. With the framing of laws as per international standards and setting up of Debt recovery tribunal we can say that steps have been taken in this direction. Banks in India have traditionally been saddled with very high Non-Performing Assets. Banks burdened with huge NPA’s faced uphill tasks in recovering then due to archaic laws and procedures. Realizing the gravity of the situation the government was quick to implement the recommendations of the Narsimham Committee leading to the enactment of the SARFAESI ACT 2002. (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act). This Act gave the banks the much needed teeth to curb the menace of NPA’s. The non performing assets (NPAs) of banks have at last begun shrinking. As reported from surveys, it is understood that there has been substantial improvements in non performing assets and this has been because of several measures such as formation of asset reconstruction companies, debt restructuring norms, securitization, provisioning norms and prudential norms for income recognition. We also give our suggestions as to how NPA retrieval can be made......

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The Troubled Asset Relief Program

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