Sunday, April 5, 2009

Bank of America Shareholders - Vote Out Management!

The Bank of America Proxy statement just came in the mail.

Don’t bother reading the impenetrable 192 pages. You already know what to do.

Vote out Chairman of the Board Kenneth D. Lewis and the rest of the Board of Directors. They took our stock selling at $54.90 in 2006 and drove it down to $3 just a few weeks ago. Any board that can drive its stock down 95% should be tossed. Rick Wagoner of GM needed almost a decade to take GM from 70 to 3. Now he and most of the Directors have been given the boot. The compliant directors at the Bank of America have earned no less.

They diluted existing shareholders by selling 455 million shares below book value @$22 in October 2008. That was before the ill-advised acquisition of Merrill Lynch.

The dividend is quite a work of corporate mismanagement. The bank just paid $713 million in preferred dividends to the federal government on $45 billion in TARP funds. The quarterly dividend rate for common shares was $.64 a share a year ago. The Board cut it in half in October, but that’s just the starter. In January they lowered it to $.01/share.
Assuming you hold a thousand shares, that’s barely enough for a six pack to drown your sorrows as the directors rode the dividend down 98%.

The Board broke the record of raising the dividend every year since 1977.

Buying Countrywide followed the tradition of A.P. Giannini during the Great Depression of buying distressed banks in California and adding them to the Bank of America family.

But why Lewis impulsively jumped in to buy Merrill Lynch at a grossly inflated price, 70% above its traded price, as Lehman Brothers was collapsing is inexplicable.

Nations Bank, FleetBoston, and the older Bank of America had all tried their hands earlier in investment banking by acquiring investment banks with abysmal results. These three banks form the foundation of today’s Bank of America.

The older Bank of America acquired Robertson Stephens in 1997 for $540 million. BofA in 1998 merged with Nations Bank, which had acquired Montgomery Securities in 1997. Robertson Stephens was sold to BankBoston in 1998 for $800 million, and was closed in 2002. BankBoston merged with Fleet and is now part of the new Bank of America. One of BofA’s directors is Charles Gifford, the former Chair of Bank Boston. Obviously he learnt nothing from his prior experience.

The directors received not only annual salaries of $80,000, but also substantial stock awards, which is not bad for a few days a year of work.

The best was yet to come. Lewis claimed he was shocked to learn of the failing conditions of Merrill and its $3.6 billion in bonuses just before the merger was consummated on January 1, 2009.

Merrill Lynch lost $13.8 billion in the last three months of 2008.

However, Lewis either misspoke or was blindly ignorant of Merrill’s travails. Unlike his predecessor, Lewis is an intense on-hands manager. Bank of America was aware of the bonuses and deteriorating financial condition. The merger was announced on September 15, at which point a BofA team of 200 descended on Merrill Lynch and a top exec at the bank was closely monitoring conditions at the brokerage firm.

Lewis was sufficiently concerned that he told the Federal Reserve Bank and Treasury he wanted to cancel the merger. The Treasury responded on December 17 that the merger had to go forward, but threw in another $20 billion in TARP funds (on which it is earning 8%) and $100 billion in guarantees to reduce the risks. Unwilling to say no to the federal officials who can make life difficult for any bank, he proceeded with the merger without changing any of the terms and conditions of the merger.

The shareholders of both companies approved the merger on December 5. At no point were the shareholders informed of Merrill’s declining economic condition prior to the votes. Such intentional non-disclosure of a material fact can give rise to substantial shareholder litigation.

Lewis forgot that he worked for the shareholders – not the government. A banker may have to answer to both, but he only works for one.

Lewis and his fellow directors breached their duties to the shareholders.

Vote them out!

No comments: