In all the Wall Street scandals of recent times, the public has required a target—a pinata that can be pummelled to vent the popular, and regulatory, rage. Lehman Brothers’ Dick Fuld has performed ably in that role so far. But now he’s being replaced by the ever-unpopular Kenneth D. Lewis, outgoing CEO of Bank of America.
The speed at which Lewis has descended into pinata-dom is remarkable. Just a year ago, he was the saviour of Merrill Lynch, that icon of Wall Street. From his perch at Bank of America, Lewis oversaw the bailout of the company that had been run aground by John Thain, an insider’s insider and former president and chief operating officer of Goldman Sachs
Thain’s carefully nurtured facade of down-home, Midwestern integrity began to crumble shortly after the rescue deal, when his lavish office furnishings, worse-than-forecast losses from toxic derivatives, and payment of absurdly large bonuses to Merrill executives finally came to light. A furor promptly arose about whether the bonuses and losses had been properly disclosed to Bank of America shareholders. Thain successfully fought back in the media, and the focus of blame shifted to Lewis.
There’s no question that Lewis is getting the worst of the thrashing, more so than Thain—who was actually at the helm of Merrill when those bonuses were being paid and those losses were being incurred. While Thain emerges in the media as an honest guy, his successor is left twisting in the wind, subject to gobs of investigations.
But, as is often the case in times like these, the wrong person may become the public target. Could Lewis be a case in point? He has sought to de-pinatacize himself, by refusing compensation for 2009. But it doesn’t seem to be working. In addition to horrid timing—blundering through the worst financial crisis in modern times—Lewis has also had some old-fashioned bad luck. Take what happened to a settlement that the SEC cut with Bank of America. Usually SEC investigations are settled through what are known as “consent decrees,” in which a sum of money is paid and there is no admission of guilt, even as the defendant pledges never to do again what he has just neither admitted nor denied doing. It’s a charade, but that is usually how regulation works on Wall Street.
Bank of America agreed to pay $33 million (U.S.) to settle its SEC charges, in which Lewis was not named. The case went to the judge for what is typically a rubber-stamp approval. Then, things went off the rails. The case just happened to be assigned to a U.S. district judge named Jed S. Rakoff. This is not a judge you want to hear a case if you are a regulator who might not be as tough as Rakoff would like.
In the 1980s, Rakoff was a noted white-collar defence attorney, defending Wall Street’s worst. I remember him telling me at the time how proud he was to defend guilty clients—it’s all part of the system, after all, which requires that all defendants receive a vigorous defence. But here is no bleeding heart. As a judge, Rakoff is only too happy to speak out when he feels regulators are not doing their job. In 1999, for instance, he expressed amazement with the New York Stock Exchange’s permissive attitude toward trading by floor brokers for personal profit.
So it was not totally surprising that the judge gleefully refused to rubber-stamp the Bank of America settlement, saying it provided the SEC with “the facade of enforcement, and the management of the bank with a quick resolution to an embarrassing inquiry.” So now the SEC has to go back to the drawing board, and you can bet that Lewis won’t fare as well this time around.
Lewis has similarly been tarred on the issue of the Merrill bonuses. These payouts—approved by Thain—have come to the fore at a time when Main Street has had enough of enormous payments to executives at firms that have received public money. Lewis didn’t initiate the allowances; he simply inherited them from his predecessor.
None of this is to say that Lewis is blame-free. He did buy Countrywide, the single worst purveyor of dodgy home loans, and his zeal to become a dealmaking macher likely blinded him to the risks. The point is this: Of all the miscreants who got us into this mess, it’s hard to argue that he should be Public Enemy No. 1. Still, there he goes, heading into an uneasy retirement, one that appears to leave him facing far more legal troubles—and certainly far more public humiliation—than the man he fired.
