Feds Teach Corporate Governance to Bank of America

So, the Feds are pressuring Bank of America to reconfigure their board so someone actually knows what they are doing. OK, they didn't say that exactly, but the point remains. The BofA board is lacking in financial talent. While there is room for improvement, I think the key is for the board - regardless of who sits in the seats - to actually do their jobs. They've sat by for far too long, especially in their continuous support for CEO Ken Lewis after each major multi-billion dollar gaffe. If it takes the Feds to bring better corporate governance to Bank of America, so be it. We can't be happy with this unprecedented involvement of the federal government in how companies are run, but what does it say about corporate governance in America if boards won't fix themselves?

One final point - if the board can't move off of Ken Lewis, perhaps the Feds can help there too...

Will Fiat be the New GM?

Let’s hope Fiat CEO Sergio Marchionne is a student of history. His apparent strategy of combining Fiat and Chrysler with whatever GM assets he can find around the world, including Germany and South America, will create a global behemoth. With such diverse operations and assets, it seems like a classic generalist strategy, trying to win on the basis of scale and scope. Of course the modern architect of this very same strategy is none other than General Motors! Takeaway lesson: you can’t win on size alone.

But the jury is still very much out on this one, especially given that no crime has yet to be committed. And, if Sergio can actually take advantage of the massive assets he is hoping to assemble to create a series of world cars that rely on the same basic skeleton in different markets, perhaps there is something good that can come out of it. Unfortunately, the automobile industry has not been good to empire builders in the past …

Monday Morning Stress Test Update

While the fundamentals of many banks are still open to question, the Treasury has provided nothing short of a government guarantee that the top 19 banks are going to be just fine. These banks will survive; the financial system will not collapse. This is a big public service to be sure. And unremarkably, investors have taken up their cues and bid up even Bank of America and Citi, let along JP Morgan Chase and Goldman Sachs. I have three quick observations to make:

1. People evaluate their worlds on a relative, and not an absolute, scale. Compared to where we were, life is good. It may not be all that good, but relative to the recent past, we’re flying. This is a reality of how people think in many walks of life. Are you happy with your pay? Depends on what your coworkers and friends are getting. People who are generally happy with their lives have managed to create a comparison group of others that give them a chance to stand out. Are you a good tennis player? Well, you wouldn’t win a point from Rafael Nadal, or probably Chris Evert for that matter, but if you can beat some of your regular playing partners, you’re happy. So it is with the banks. Compared to where we were, we’re doing fine, just fine.

2. The race is on to return TARP money and return to some semblance of the “open market” days that enabled huge compensation packages and unfettered innovation. Sounds a little like where we’ve been again, but isn’t that how things work? From LTCM to Enron to Bear Stearns, we have an incredible ability to forget the past as soon as possible. And then repeat it.

3. There are thousands of banks in this country, but only 19 have had stress tests. The commercial real estate market is hemorrhaging, new regulations on credit cards that are sure to put a crimp in that long-time bank cash cow are on the way, and of course those bad mortgages everyone used to talk about may be forgotten, but they are not gone. There will be blood.

Memo to the Obama Administration: Has Bank of America CEO Ken Lewis Stressed You Out Enough Already? There’s an Easy, and Long Overdue, Solution.

Stress test results are about to be released. The Wall Street Journal is reporting that as many as ten banks will fail the test, and will need to raise more capital. One of these banks is Bank of America, and this morning's reports indicate that BAC will need an incredible $35 billion to shape up. CEO Ken Lewis has been saying for more than two months that the firm he leads will not need any more government money. Oops.

If today's reports are correct, Ken Lewis will have been wrong, very wrong, once again. While shareholders couldn’t muster the votes needed to push Ken to Pebble Beach full-time, what are we to make of a CEO who has a remarkable record of being wrong? It’s actually worse than that. Ken seems to think that he is absolutely right (to buy Countrywide, to buy Merrill Lynch, to fire John Thain) when in fact he is terribly wrong. And now yet another insult to shareholders. Bank of America is still in trouble, BAC is failing the Fed’s stress test, BAC is unlikely to soon pay back the money it has already received from the government, and BAC will need more capital to weather the financial storm. Capital that almost certainly will need to come from the government, again, whether in the form of a preferred-to-common stock swap, or new money entirely.

The big question is whether the Treasury will insist that Ken Lewis must go if the bank is to move forward. There can be no fathomable reason to keep him in the top job at this point. Even Vikram Pandit at Citi has done a better job than Ken Lewis. Or at least it wasn’t Pandit that put Citi into the mess it’s in. But it was Ken that put BAC into the mess that it is in. If Rick Wagoner had to walk the plank, how in the world can the Feds keep Ken Lewis in the corner office? It’s time.

Stress Tests: Raising Capital at Citi, BofA, et al. the New-Fashioned Way

Have you ever had a real stress test? You get wired with electrodes that monitor your heart, and then start moving on a treadmill to see how much you can stand. Hopefully, you make it (there's a doc in the room in case you have trouble). Stress tests are a standard diagnostic device to assess our cardiovascular health.

Stress tests from the Treasury, however, seem to be of a somewhat different ilk. Yes, there is a test of your financial health, and there are doctors in the room (mostly Ph.D.s in economics from Harvard). But that's where the similarity ends. While a clean bill of (physical) health lets you live longer, stress tests that demonstrate you are in trouble only lead to more money from the government.

Treasury stress tests will require failing banks to raise money, but where is this going to come from? Independent investors are not exactly rushing in. Banks will need to sell assets to raise capital, but there are only so many Japanese businesses for Citi to sell before they come up against those toxic assets that nobody wants. So that leaves the federal government. For banks that are already in hock to the government, there's not much more downside to taking a little more cash. So, we have the topsy-turvy world of modern finance. Banks are better off if they fail their stress tests than if they don't! You fail the stress test on your heart, you die. You fail the bank stress test on your finances, you get to live longer.

Perhaps a slight exaggeration, but perhaps not.