breaking the bank

Ken Lewis


He's the CEO of Bank of America. Under him, it became one of the world's largest banks. In April 2009, shareholders ousted him as chairman of the board because of the Merrill Lynch merger and how it damaged BofA. This is an edited transcript of an interview conducted on April 6, 2009.

Let's start at the beginning: Smallish bank in Charlotte, [N.C.,] decides to become a very big bank. What was the big idea behind the creation of Bank of America?

Well, it goes back several generations of CEOs. ... The first CEO that I came across in my time with NCNB at the time, North Carolina National Bank, was a person named Addison Reese, and he said that we will not survive if we don't escape the boundaries of North Carolina. ... So we began to build on our base in North Carolina so that it would be strong to go elsewhere, and then began to look at South Carolina, Florida, places like that.

And then Tom Storrs came along and actually took us one step further, and we went into Florida at that time. ... He actually had a vision of allowing us to get to a size that would allow us to compete with the New York and Chicago and West Coast banks. And it was called the Southeastern pact [the Southeastern Regional Banking Compact], and the idea was to grow in that region for a period of time and then open the barriers nationwide for everybody. And in fact, that's actually what happened over the years.

So then after that, we had built a fairly formidable operation, and then Hugh McColl took over as my predecessor. And from there, we went to Texas, to Baltimore, to Georgia with C&S/Sovran and then finally, in Hugh's last few years, to the West Coast. We were NationsBank at the time and actually bought the old BankAmerica and renamed it Bank of America and moved the headquarters to Charlotte, N.C.

Editor's Note: Click here for more on the growth of Bank of America.

The amazing thing about Bank of America ... -- and surely this was the idea of a big bank: checking, savings, mortgage, insurance -- is how it's a kind of one-stop shop. Talk about that.

Actually, our bank started out as a commercial bank, and it was probably only when we bought [Texas bank] First Republic in 1988 that we had a better balance between consumer and commercial. And so it was at that point that we had that view toward the consumer as trying to serve him in a very full way. ...

“It just seemed to me that the conservative, right thing to do was take the [TARP] money. Little did I know the pain that would invokeā€¦”

At some point, you got to a market share within your markets that getting that incremental customer was important, but just as important was selling that next product to your existing customer.

Who are you? How did you get here?

Well, I'm really nobody when you look at my background. I came from a very modest beginning. My mother raised my sister and I, so a one-parent family. And she was a nurse and worked double shifts a lot to give us what we needed to have.

Went to a public university, Georgia State University. Was a finance major. Worked both part-time and full-time, and then went to Georgia State because Atlanta, I thought, would offer more meaningful jobs than, say, going to a more rural environment of University of Georgia, places like that.

And it did; it gave me some very meaningful jobs. I was a reservations agent. I was an accountant for a bond firm. And so I had some good experience that actually served me well when I then, in 1969, went to work for what was then called NCNB. And my first job was as a credit analyst, and they, appropriately, put us in the basement. So we were starting from the very bottom.

And the climb? ... How did you get all the way up here on the -- wherever you are?

I'm on the 60th floor, yeah. I think I was very fortunate to be able to take some career risks during my time with the company. And I was asked to go to different places, usually to fix something. Fortunately, the teammates that I had and brought in as a group allowed us to fix virtually anything that we needed to fix. And I think that's the way I distinguished myself.

And then the willingness to move -- we moved from Charlotte to New York and then back to Charlotte, then to Florida, then to Texas, then back to Charlotte, then to Atlanta, then back to Charlotte, then to San Francisco, then back to Charlotte. So some probably wouldn't have been willing to do that, and I think that helped as well.

How much is the Southern culture important to this bank as an organization?

We do have one, and we're not ashamed of it; in fact, we're very proud of it. On the other hand, we do think of ourselves as an inclusive meritocracy, and so where you came from, where you went to school, who your parents were really doesn't matter. ...

... There were bigger banks that you guys joined with that theoretically could have gobbled you up at times, but it didn't turn out that way. Why not?

I think we were fortunate by having branch banking in North Carolina before a lot of other places. ... So, to your point, you would think that would be a reason for us to have been gobbled up by some of the others.

On the other hand, we also wanted to escape the boundaries of North Carolina as a strategic imperative, so we got very good at acquiring companies, assimilating them and becoming one company, one culture. And I think over the years, that was our huge advantage over ones that had not done that. ...

I think an underlying theme with the company was that we wanted to be a coast-to-coast bank. We had seen as a regional player the fact that you can be subject to regional recessions, things of that nature, that can really put you in jeopardy. ... And so we do think there's beauty in diversity of people, of geography and products, and that's an underlying premise with us.

How big is the bank?

It's about $2.4 trillion in assets.

Biggest in the world?

Biggest, I don't know, in the world. I think maybe there's a Chinese bank that's larger, but it's the biggest in the United States in assets.

[What has been] your single most salient contribution to that growth?

I think I have been there as a leader in critical times as we bought other companies. ...

... I've watched this moment on Sept. 15, where you and [CEO of Merrill Lynch] John Thain are shaking hands at the building up in New York. ... Seemed like you were on top of the world in so many ways. Were you that way?

I felt like we had put in place the last piece of the puzzle, ... that we don't have to do one other thing in terms of an acquisition. All we had to do is execute now, and we've got the best franchise in the world. And so yes, I was very happy and pleased that we were going to be on a new phase that I had waited for [for] a long time.

Were you worried about anything right there?

You always worry about the execution around your transition, and an investment bank is a higher degree of difficulty than, say, melding a commercial bank. So I was worried but still confident that we could get it done, and still am. ...

... Did you know [back in early 2008 that the investment banks] were flying too high with the real estate stuff, especially the subprime? Were you worried about it on their behalf?

I was worried about it on our behalf by then. ... So yes, I felt like they were going to have bigger issues because they had less diverse revenue streams inside the commercial banks, and they were bigger in those particular businesses who were being hit the hardest.

What were you guys doing [to deal with the losses]?

We were cutting expenses where we could, ... but there's a certain point when ... there's not much you can do except not do any more and monitor it as carefully as you can. And if you see any opportunities to sell, then sell. But it was truly a case of, sell to whom at that particular time? There were no buyers. ...

... In the midst of this, you buy Countrywide -- very big in the mortgage market. And you chase, or at least you flirt with, back in '07, Merrill Lynch.



In the early 2000s, we looked at ... holes in our franchise, and we clearly saw that mortgage was a very important product, but relative to our other businesses, we were very small. ... Secondly, when we looked at our investment banking model and wealth management model, we clearly saw that we needed more international capability to follow our customer flows, and we needed more of an equity platform. We were getting better, but we still needed a bigger one. And [Merrill Lynch] would do it.

So we saw those two entities as very logical additions to the franchise if they ever became available. And one other thing about Merrill Lynch is, they shared a core value of teamwork, we thought, more so than the other institutions who were more with the one person being the superstar. ...

... And Countrywide and Merrill in this real estate market, ... are you worried at all about their exposure yet in those worlds?

In terms of Countrywide we were. And we had gotten out of subprime as the first thing that I did in 2001 as CEO. So we didn't like the business, but we kept on hearing that they have the best technology and they have a really good sales force. ... And we knew that at some point you'd be in a refi [refinancing] boom again, and they did that better than anybody else. So they had a lot of attractive things. So the issue [was], can you get your mark correct so that you can get rid of some of the exposure to the real estate markets? ...

... Let's go to the horrible week in September. ... You are interested in Lehman Brothers. I know that [Secretary of the Treasury Henry] Paulson is pushing [Lehman CEO] [Dick] Fuld all through the summer, on the phone at least: "Sell the company, Dick." Are you one of the suitors from the very beginning?

We joined it very late. We were asked if we had an interest, and we said, well, we always want to make a conscious decision. And so we began looking at the books that week before that weekend. ... And sometime on Friday, I called Secretary Paulson and said we would not be able to do this deal without some government support, or at least taking some assets off their books and having the government take them. ...

... [Did] you feel any give on Paulson about the government stepping in and helping out on Lehman? ...

No. Hank had made some statements on Friday basically saying that there would not be a government bailout. And that's when I actually called him and said, "If in fact that's your position, then we're kind of wasting your time, because there's no way we're going to be able to do this without cordoning off these assets." ...

... How bad was it?

It was pretty bad. As I recall, $60 billion was the number that we would need support on to make it work. ...

... Did you want them personally, all things being equal?

Lehman was more, could we find a financial transaction that would just make sense for the shareholder? And they would add some things to ours, but in some ways, they were too much a mirror of ours to really call it a strategic addition. It would have been more financial.

And culturally, they were not Merrill.

They were not. ... They didn't have the brand, and then secondly, they didn't have both pieces. They didn't have the huge financial advisory force and the investment banking piece. ...

... How do you know that Merrill is next? ...

I got a call that said that John would be calling me. And so around 10:30 or so, 11:00, John called and said, "I think we should talk." And I said, "Fine, I can be there around" -- I think it was 2:00. And so, "I'll meet you at our apartment." ...

... Had you been following him at Merrill? ... It felt like it was becoming that one-man show that you said you didn't like about some of these houses, that Thain was starting to be the go-to guy on everything they were doing.

... I was following Merrill, but I didn't have any kind of perspective on John as to what was happening within the company. I did see that when there was publicity, it was publicity around him, of course.

So he comes over to the apartment. ... What does he say?

He says, "I would like to explore a situation where Bank of America would invest 9 or 10 percent in us, and then we see where it goes from there." And I responded to John: ... "That's not really what I have envisioned here. Let me first tell you how I see the strategic benefits of these two companies coming together."

And so we talked about that. And it's so hard to argue the strategic benefits and the fit. Nobody, in fact, that I've talked to actually has ever refuted that. They can refute the price or the timing, but the fit is just so good.

And so [we] went through that and agreed that it made all the sense in the world. And I said, "As a result, if we're going to do something, I want to buy the whole company, not invest 9 to 10 percent." ...

... So when do you know you're going to do it, or try to do it anyway?

We knew sometime that night that it was a possibility, and we began the due diligence, etc. And then sometime on Sunday, we came to grips with a price that we thought we could live with. And so sometime in midafternoon Sunday, we felt like we could get this thing done. ...

... I've heard stories ... that it gets down to late at night, and there's some back-and-forth about bonuses and about Thain's role. ... How much of that is accurate?

Fortunately, I was shielded from the bonus issues and things of that nature, and I usually don't get involved in things like that. ... But never did I hear about a role for John being an issue. It may have been around compensation, but I never heard anything about a role. To his credit, he trusted us on that one.

Someone told me that champagne was going flat and everybody was waiting to do the toast at the end, and yet there were these sort of bumpy things at the end. ...

Well, it's probably more the norm than not to have ... petty kind of things and selfish things start to crop up at the very end. And frankly, it extends things to the point that I have never really been real happy by the time that champagne pours. Usually you're mad at each other by then, and you drink it politely and then leave because you've got a big next morning, obviously, with the announcement, etc. And that was about how I felt with this one, but again, not that different from some others.

... No deep-seated worries about this? Your guys hadn't found plutonium inside the books?

No. We had both our people look at the books, and we had [buyout expert] Chris Flowers' group look at the books. His group had looked at them several months before, were very impressed with some of the markdowns they had taken under John Thain's leadership. And so we felt pretty good about the markdowns. ... We did not anticipate, however, the credit meltdown of epic proportions that happened later in the next quarter.

... Do you call Paulson and tell him, "I think we've got a deal"? ... I've heard people say that he was just elated, thinking that this was a bulwark against what was going to happen when Lehman goes down. ...

I think the secretary was happy for several reasons; one, that you take a potential problem off the list. And I think he was happy for John that John didn't have to go through something that Dick Fuld did have to go through. And so he had several reasons to be happy that this deal got done. ...

You've got this grand moment, ... and by Wednesday, AIG [American International Group] has almost collapsed, and the Fed has put $85 billion in there. ... From your perspective down here, how bad was it?

I don't think we felt like from the company perspective that it was that dire. But I would guess from the perspective of Secretary Paulson and Chairman [of the Federal Reserve Board Ben] Bernanke, you feel like you're losing control and that things are just taking a life of their own. ...

... People look back now [at the $700 billion TARP (Troubled Asset Relief Program) bill] ... saying: "Congress panicked. Bernanke and Paulson panicked. It was going to melt down by Monday -- that's hyperbole beyond all belief." What do you think when you look back on it? Was it a moment of panic? ...

I don't think it was a moment of panic. I think when you weigh the risk/reward of doing something ... versus the downside of it being as bad as it might could have been, I would have done something. I would have done something quickly. ...

... It goes from this idea of buying toxic assets to this idea of capital injection fast after the bill's passage, over the weekend basically. From where you were sitting as it was happening, what were you thinking about the two schemes?

To this day, I don't know exactly what changed Secretary Paulson's mind -- and Chairman Bernanke's, for that matter -- and so I really don't have that perspective. However, it seems like the issue around the toxic assets is pricing the toxic assets. And even to this day, we're still talking about that one issue. ...

And then secondly, I think as they got into the issue of the complications around pricing, they found that they couldn't wait long enough to get that done. I suspect also at least one if not more than one bank may have been having issues with capital or with whatever that they were worried about, and felt like they needed to take another route because they did not have time to get to the pricing of the assets.

So that causes the Oct. 13 meeting [with the heads of the major banks]. You get the phone call on the Sunday from Paulson. ... What did he say?

I got a phone call on Sunday from Secretary Paulson, and he basically said, "Ken, I need you to be in Washington ... Monday." And he said: "I really can't tell you a lot about it, but I think you will like the solution. Look forward to seeing you." And I said, "Look forward to seeing you as well." ...

... Are you surprised to see who's there, or was it not a surprise? Had you talked to those guys before about where they were going?

No, I wasn't as surprised at the people that were there, although I was a little bit surprised that, say, the clearing banks would be there -- the State Streets and the Bank of New York Mellon. I didn't know quite how to take that.

But I was surprised by the representation that you have. You have [Federal Deposit Insurance Corp. (FDIC) Chair] Sheila Bair. You have [Comptroller of the Currency] John Dugan. You have Chairman Bernanke. You have Secretary Paulson. You have [Federal Reserve Bank of New York] President [Timothy] Geithner, at the time. You have Kevin Warsh, another person from the Fed, across from you.

The extent to which they brought that many people told me this was going to be a very serious meeting. ...

... You're sitting alphabetically, the way they say it.

Correct. ... At first, I wondered why I was down toward the end. And then it hit me, obviously, that was in alphabetical order. And how else would you do it? ...

... And what does Paulson say to you guys?

Secretary Paulson basically said that he thought it was in all of our best interest and the country's best interest to take certain levels of preferred stock, and he gave each person that was on his side of the table a chance to say something. And the thing basically was, things could get a lot worse, and we need to make sure the financial system is solid and that the banks can lend at a time like this. And so that was just kind of the theme, that there's worse things to come than what you see at the moment.

Editor's Note: Read Paulson's talking points from the meeting.

[Did that] give you pause?

It did. In fact, later, when I was summing up my feelings about what our reaction should be, I actually said, "It probably is incumbent upon us to have a healthy fear of the unknown." And Secretary Paulson actually repeated it. He said: "Yes, I think that's correct. We should have a healthy fear of the unknown."

What did you mean by that?

That the economy could get a lot worse, and there was no way that we could predict something going the other way. In fact, virtually everybody that had been an optimist to that point, and maybe to this point, has been wrong; that things have in fact gotten worse.

And so I thought that was a small price to pay, to go ahead and take the preferred. We did not need the preferred. We had raised tens of billions of dollars of preferred that year, and the week before we had just raised $10 billion in common equity.

But at the same time, given the lengths they had gone to say what they had said, with the people who were saying it, it just seemed to me that the conservative and right thing to do was to take the money. Little did I know the pain that would invoke, with the Congress giving us the whipping that day, the constant articles in the paper about how bad we are, and then things around compensation and how you run your bank. It was a clear example of no good deed goes unpunished. ...

And then later, as our board reacted to it, we had some people that really didn't react very well at the government telling us we had to take certain kinds of equity. And I basically finally said: "We are so intertwined with the U.S. that it's hard to separate what's good for the United States and what's good for Bank of America. So don't do it on the basis of us being told; do it on the basis that things could get a lot worse in America and therefore for us. And they're almost one and the same."

This point that that was the first step of nationalization, how do you react to that statement?

Well, I think it was a clear example of [how] things like that can get on a slippery slope and get worse and worse. Certainly we never thought of it as being that way, because we thought we were doing somebody a favor, or the country a favor for that matter.

But it certainly took on elements of nationalization as we saw the controls that were being put on the banks, and making no difference between who needed it and who didn't at that time. That's why so many banks want to pay it back as soon as possible. Additionally, investors are now saying ratios are not nearly as important as getting that government money out of your companies.

The thing that happens in December, when you know about the Merrill losses [and approach the government about walking away from the deal], ... is that another example of the government in your business? ...

No. I can't say a lot about the negotiations, ... but what I would say is, we went to them and told them what we were considering, and they had their view of both what that would do to Bank of America and what that would do to the financial system. And after a lot of discussions back and forth, we came to the conclusion that it was in our best interest -- forget for a second also in the national best interest -- but it was in Bank of America's best interest ... for us to go forward.

At that time, they were very, very cooperative in saying, "We will assist you in making this deal work, because you are doing some things for the greater good as well." ...

Nobody from the government threatened you and said: "We can remove your board. We can manage your company"?

We knew they could do that.

So they did threaten you?

There was a time where that discussion was held, but we in fact decided on our own, not anything to do with that, that it was [in] the best interest of all involved to go ahead, to go forward. ...

Editor's Note: On June 10, 2009, Lewis testified before the House Government Oversight and Reform Committee about the government's role in the Merrill Lynch deal. Read his testimony [PDF] and e-mails from the Fed employees [PDF] that were subpoenaed by Congress.

... Something is happening throughout the fall with Merrill. People tell us there's a kind of culture shock. One person described Bank of America as the Holiday Inn and Merrill as the Ritz-Carlton, and trying to put Ritz-Carlton together with Holiday Inn is not the perfect match. What do you say about that?

I think the issue of that large of a disparity between the two cultures is overdone. We had an investment bank with people from various investment banks, ... including Merrill Lynch for that matter, and were running just fine. So to make that kind of contrast, again, is overblown.

[And what about] the bonus matters?

Again, I can't say a lot about the issue of bonuses other than ... that we had the right to review [PDF] their bonuses; we had the right to advise on them; we did, in fact, advise them down [PDF]. But at the end of the day, they were a separate public company with a separate compensation committee, and they had to make the final decision.

A lot of people tell us that Thain believed that he was the heir apparent [at Bank of America]. ... Did that ever come up between the two of you?

What I told John was that ... if he would come and produce and get results and become a member of the team, that he had a shot at succeeding me, along with several others. And I could promise him nothing other than a shot equal to the several others that we had in mind.

And how did he do earning that place? How did he perform?

... We came to the conclusion that he would not have that chance because of the way that several things were handled prior to his coming onboard as a full team member in the fourth quarter. So that never happened. And that's one of the frustrating things, by the way, in the judgment of this deal. We're being judged that this is a bad deal before we even report first-quarter profits. This would be a deal to be judged over three to five years, not two to three months. ...

... So it's now late January, and the fourth-quarter earnings come out, the word of [the aid] from the government to Bank of America and other things to keep the Merrill deal together ... -- it seems like just this horrible moment for you guys. Was it?

We announced earnings and the Merrill [deal] also at the same time. Unfortunately, we had our first quarterly loss in 17 years, which is a pretty incredible run. ... We made a profit for the year, but that quarter we did not, and so we were disappointed.

And then the magnitude of the loss, obviously, at Merrill Lynch really stunned people. And so it was a bad day, and ... it did shock a lot of people and disappointed a lot of people. ...

... When was your first inkling that the fourth quarter was going to be bad for those guys?

We could hear rumors in the marketplace that a lot of companies were having bad quarters. And we had that meltdown; that really was surprising [to] all of us. And so it wasn't just at Merrill; we were seeing it in our own numbers. It seemed to get worse at Merrill toward mid-December, and the projections at least got worse.

That's when you started to hear about it?

No, we had seen numbers before then, but they didn't seem out of line until more toward the middle of December. ... I think I had a lot of focus on our own issues, and then had others looking at the Merrill situation, because it more and more looked like that the economy was deteriorating at such a rapid rate, ... that, was it really anybody's best interest to keep the dividend where it was?

And so I was dealing with that, coming to the realization hey, we're going to have a loss, and there's no use kidding about it. ... And then others were dealing with the Merrill Lynch situation. ...

... Now at the same time, that Thain thing hits about the office and the rugs and all of that. How shocking is that for you? When did you hear about that?

I heard it on that day that it was announced, not before then. And it did shock me, because I didn't think John even cared that much about such things. And I don't know if he'd just gotten some poor advice or just used poor judgment in one particular instance, but it just didn't seem to reflect John Thain's values as I knew him.

Did you call him and ask him about it?

No. ... I was actually physically getting to his office as this thing about the office was breaking. I don't know if I heard about it before or after the meeting. I knew I heard about it that day, but it may have been even after I talked to John.

How was the firing moment?

Not good. I just said, "John, it's not going to work out, and I'm sorry, and I wish you the very best." And then I left. It wasn't a very long conversation. ...

... How was he about it?

He was pretty stoic and basically said, "I understand." And that was about it.

The amazing thing is, it's on television. You're flying up. [CNBC's] Charlie Gasparino is reporting that you're coming to fire Thain. Thain is watching it on television as you're coming in. Surreal, yes?

Yeah, that was very disappointing. ... And that's sad, in a way, that a person would have to learn about it that way.

And as to the allegation [that] the stuff about his commode and his expenses was leaked by Bank of America to get him on the ropes?

That is highly unlikely that anybody at Bank of America would have leaked something like that. I don't know where you would go to find out something like that.

Feb. 11, you're in front of the Congress [PDF]. Take me there. Why are you there? What does it feel like? ...

Well, I was certainly glad I had others with me. That was some solace. And it was clear we were there to take a public whipping, and we did. I just tried to think of it that way and think of it as, this too will pass, and just get through it.

This is yet another moment [of] what it's like to have the government in your business.

Right, it was. And appearing that way, whether you have company or not, is not fun. And it again says, get the TARP money paid as fast as you can. It serves nobody well for us to be dealing with the issues that we're dealing with and having degrees of difficulty above that by having to go to Congress and being whipped up on.

You could have written them a check, given them back the money?

We probably couldn't now with the whole amount, but we could over a short period of time, yeah.

How short?

Well, first of all, the president made it pretty clear when he talked to us ... that we've got to see that the financial system is sound. ... But in any event, I would hope that at some point this year we see things start to stabilize and we can at least begin paying some back. But it's probably going to be into next year, I would guess, before we get to have the opportunity to fully pay it back. ...

Editor's Note: On June 9, 2009, the Federal Reserve gave 10 banks permission to begin repaying the TARP money. Bank of America, however, was not one of them.

... The meeting with the president where you're all called in, [Senior Adviser David] Axelrod and others have been polling and telling him there's nothing more hated ... [than] the bankers now, those bonus-hungry, voracious, horrible people. How does that feel? ...

Well, the public reaction to all of this, the bonuses and compensation in general, is understandable. And I said in mid-September that the golden era of banking and compensation is over, that everybody is going to make less money, starting with CEOs. But it is disheartening, because what people are forgetting is that commercial banks are the very fabric of every community in which they operate.

You know, what industry company has a $1.5 trillion, 10-year commitment to its communities like Bank of America has? What industrial company allows the employees two hours a week off to take part in community involvement? It's on and on and on as to the things that we do, philanthropic activities like no other industry. And so we can't forget that. And you know, the community groups need to stand up and say that. ...

When he calls you in to sit ... in the Roosevelt Room, what are you there for? What is it like to go in there? And what do you think you're there for?

I interpreted it as kind of a watershed time, that we've been beaten up enough, that yeah, things have gone on that shouldn't have gone on and mistakes were made, but that banks are the catalyst to get us out of this recession, and that you can talk so long about the past, but at some point you've got to look at the present and the future. And I felt that's what he was saying.

How would you describe how he came in that room and what happened?

Very calm, very knowledgeable of the issues. When there's pushback about compensation, it's not a political, trying-to-get-elected response. Basically saying, "You have to have some patience on a lot of issues," and, "We're between you and the pitchforks, guys, and you need to just acknowledge that."

So I would say it was pleasant, but he wasn't saying yes to everything that we were wanting to do. In fact, [there was] pushback ... on the issue of when you can pay the TARP money back pretty hard.

I have a sense that the government response all the way along has been a kind of pillar-to-post, back-and-forth. And then there's this moment where Tim Geithner goes out and gives that first speech, where he kind of falls flat. ... How do you rate how the government has been and what the government has been doing? ...

You could make the case that in retrospect, there was a speech given too soon on solving some of the problems. But on the other hand, there have been a number of things that have been well thought out. The [mortgage] modification program looks like it will really have an effect. We think this week [Bank of America] will be the first bank to actually participate in the president's modification program.

At least the aspects that we know of the ability to [sell] toxic assets seems to be pretty well thought out. What we're missing is the pricing mechanism. So I'm pretty optimistic that once they've got their sea legs that things have been pretty well thought out. And the combination of [National Economic Council Director] Larry Summers and Secretary Geithner, that's a pretty powerful combination.

And the stress tests and all that's happening -- some people say painting bull's-eyes on certain banks -- what [do you think] about it?

Well, my first reaction was, what do they think we're in the middle of if not a stress test? And there was a bad aspect and a good aspect. ... The bad aspect is that it created uncertainty in the market. The good aspect is that if we have the chance now to get clarity and finality about it, then we can get on with things because we're past that. And we're probably only a few weeks from getting there now, and so I think that will be a good thing.

Editor's Note: On May 7, the government announced the results of the stress tests. Bank of America was told it would have to raise another $33.9 billion to meet capital requirements. In his June 11 testimony [PDF] before Congress, Lewis announced the company had succeeded in raising the capital required under the stress test.

There is a mood out there that ... the era of "too big to fail" is over. Time to break up Bank of America. Time to stop Ken Lewis' and Hugh McColl's and others' vision and break it back down. It's all too big, too unwieldy, too impossible to manage. Your response to that?

I think if you're scattered all over the world and unimportant in a lot of places, that's one thing. But when you have core businesses where you have dominant positions, ... then it's different. And that's what we have.

We're important to places in which we operate. We like large market shares. We do think there's beauty [in] diversity in people and geography and product. And we think, for the most part, that really protects your earning streams in times of stress and in certain geographies or certain product lines.

And don't forget, there is something in scale, and you in fact can be a low-cost producer when you have the kind of scale that we have. And so I don't believe for a minute that you can't manage a company our size and do it better than, say, a midsize company.

... Has this crisis broken the banks, broken our idea of banks as they existed? Certainly the Wall Street investment banks, but beyond that?

No. I think if you think about what banks really do, they help people realize their dreams. And that's still the core of our activities; that's the reason we exist. And that may be for some middle-size company to be able to expand and do what they want to do. Or it may be that consumer getting their first home. But banks still provide a huge benefit to our economy, and they're not going to go away soon. And I'm still proud to be a banker.

Some people in Washington say there's another shoe to drop: commercial real estate loans and credit cards. [What's] your attitude about that?

Well, I think we're in the midst of seeing that our credit card losses are going up. In our particular case, the rule of thumb is you're going to have losses about 100 basis points [1 percent] above the unemployment rate. We're getting up in the 9 percent kind of ranges, and so that's going to be an issue for us or anybody that has a credit card portfolio for the next six to nine months, more than likely. And we can deal with that, of course, because we've got this diverse earnings stream, but that's happening as we speak.

With regard to commercial real estate, that probably is another shoe to drop. But I think it would be differentiated in terms of how you've underwritten, what you've underwritten. We feel pretty good about our commercial real estate portfolio because we've stayed upscale. We've not underwritten loan to value, but to cash flow. ...

I know Dick Cheney writes notes to his grandchildren to tell them about crises he's faced and whatever. When you look back on the last year, just a year ago Bear Stearns was gone. If you were talking to your grandchildren about what you've seen, what has happened in just the last 12 months in the American economy that you grew up in, that you helped make the most powerful engine of capitalism in the world, what do you say? How do you tell the story? What have you learned? What should we know now? How is the world different?

Well, I think you always have to be very careful about excess. And clearly, the last 18 months was about probably the previous 18 years of excess building. And I would want them to really stay grounded and not get too caught up in any kind of good life or things that are material beyond some parameters.

Is that what happened to us?

I think so. I think the world in fact, not just Americans, got too caught up in excesses of all sorts, and I think that's why it's so hard to predict what this world is going to look like going forward. Have we really learned a lesson, or have we not?

And the world of Bank of America, in whatever is left with the rest of your career, you'll take it where, if you can?

I'd like to do two things during the last part of my career: One, pay back the TARP money and get government involvement out of the company; and then secondly, I'd like to see at least the beginnings of the potential being realized of this company. And the easiest way to describe it is when this company is either making, or I can see us on the way to making, $30 billion after tax.

posted june 16, 2009

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