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Catch 22

22 January 2009 By Antony Currie

Ken Lewis must be hoping that he has done enough to assuage the growing wrath of his shareholders. The Bank of America boss has offered them John Thain as the sacrificial lamb for the increasingly disastrous-looking takeover of Merrill Lynch. But Lewis s problems are far from over.

He has, at least, retained the services of trading chief Thomas Montag and has replaced Thain quickly. But his choice of successor highlights the current dearth of executives with suitable Wall Street DNA at the combined firm. Brian Moynihan may well be an accomplished business manager, but he has little more than a year s experience in investment banking: he was parachuted in from wealth management to slim down BofA s securities unit in 2007 after Lewis famously declared that he d had enough fun in investment banking.

That cost-cutting experience will doubtless come in handy this year. But BofA also needs to keep as many of Merrill s deal makers as possible. Arguably that might have been easier if Lewis were able to lure back a popular banker like former president Greg Fleming, who resigned earlier this month or even persuade a big-name outsider like former Goldman Sachs exec John Thornton.

What s more, Thain s departure doesn t exonerate Lewis of his own mistakes. Paying a 70% premium for Merrill in the midst of a market rout of investment banks was punchy. Another $15bn of Merrill losses then sent Lewis cap in hand to the US government for help and combined with Merrill s whopping $15bn compensation pool for 2008 made a mockery of BofA s due diligence.

But that was just the latest in a slew of often pricey deals since 2006 that cost shareholders $80bn and used up $24bn of now-precious cash. As markets tanked, Lewis s largesse has contributed to wiping out some $150bn of shareholder value far more than suffered by less acquisitive rivals like JPMorgan and Wells Fargo.

Forcing out Thain might remove some of the immediate pressure on Lewis. But if there s little improvement soon, he could soon find his shareholders baying for more blood his.


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