Buffett praises BofA's Ken Lewis -- not!
The Berkshire Hathaway chief notes the 'irony' in the BofA chief having saved
the system -- by overpaying for Merrill Lynch just hours before it would have
failed.
By Colin Barr, senior writer CNNmoney.com - September 17, 2009
NEW YORK (Fortune) -- Warren Buffett came to bury Ken Lewis, not to praise him.
Buffett, the billionaire investor who runs Berkshire Hathaway (BRKA, Fortune
500), said Tuesday at Fortune's Most Powerful Women Summit in San Diego that
Lewis -- the embattled Bank of America (BAC, Fortune 500) chief executive
officer -- was the "ironic hero" of last September's economic meltdown.
But make no mistake, the emphasis was on ironic. Buffett's comments portray
Lewis as a sort of Mr. Magoo of global finance, bumbling into trouble in
stubborn pursuit of banking greatness -- and unintentionally saving the world
in the process.
Lewis may have "inadvertently saved" the financial system by agreeing to buy
Merrill Lynch in a stock swap that was initially worth $45 billion, Buffett
told Fortune's Carol Loomis in an on-stage interview.
Buffett said Lewis' hasty decision to buy Merrill on Sept. 14 -- the day before
Lehman Brothers collapsed in the biggest-ever U.S. bankruptcy and threw the
global financial system into chaos -- may have helped avert a total meltdown.
"If you think Lehman Brothers was bad, imagine Lehman compounded by Merrill
Lynch," Buffett said. "I don't know what [the authorities] would have done."
If the Merrill deal solved one imminent crisis for policymakers, it only
intensified the criticism of Lewis as an empire builder who hurt shareholders
by turning BofA into a risk-laden colossus.
Buffett alluded to that view in his comments Tuesday. As regulators pressured
Wall Street leaders over the weekend of Sept. 13-14 to find a private sector
solution for Lehman's insolvency, Lewis was rushing to cinch a takeover that
would give him control of Merrill's top-notch wealth management and investment
banking franchises.
And even though it was understood that Merrill Lynch would have trouble
surviving once Lehman went down, Buffett noted that Lewis seemed to have
inexplicably adopted the view that price was no object.
"Why pay X for Merrill Sunday when you could have had it for pennies on
Monday?" Buffett said. "When Lehman failed, Merrill would have gone about five
seconds later."
Lewis has emphasized the strategic advantages of the Merrill deal, and indeed
the bank's trading unit has turned a nice profit in this year's bounceback
rally in the stock market.
Lewis also said last October that he chose to buy Merrill that Sunday because a
bankruptcy filing would have left "a tarnished brand." But the pristine Merrill
brand ended up carrying quite a price tag.
Barclays (BCS) -- the British bank whose efforts to buy Lehman earlier in the
weekend were scotched by British banking regulators concerned about the risks
of an acquisition -- ended up following Buffett's wait-it-out game plan in the
days after Lehman's implosion. Barclays bought Lehman's investment banking
operations and its midtown Manhattan headquarters last year for less than $2
billion.
By contrast, BofA ended up paying $19 billion in stock for Merrill. The lower
figure reflects the 58% plunge in the value of BofA shares between the
announcement of the deal and its closing Jan. 1.
BofA investors haven't forgotten. They stripped Lewis of his chairmanship in
April. Lewis now finds himself at the center of controversies in New York and
Washington over the bank's disclosures and the role of regulators in pushing
the deal to completion.
Buffett also made light of the fairness opinions that BofA got that weekend
from a pair of investment bankers for the low price of just $10 million each
for 24 hours of work. He noted that in buying a firm the size of Merrill, it
would take months for BofA to appreciate what it was really getting.
That judgment is borne out by January's second bailout of BofA -- which the
bank, in another bit of irony, now claims it didn't need.
Of course, Buffett has a bit of a vested interest in criticizing BofA and
Lewis. Berkshire has big stakes in three major BofA competitors -- Wells Fargo
(WFC, Fortune 500), U.S. Bancorp (USB, Fortune 500) and Goldman Sachs (GS,
Fortune 500).
But Buffett's far from alone in wondering why Lewis couldn't wait a day to
scoop up Merrill. In the understatement of the crisis, analyst Brad Hintz last
September called BofA's offer price "favorable" for Merrill, given the paucity
of other acquirers and the problems on Merrill's balance sheet.
So why pay up for a bank on the brink in the midst of a global bank run?
"That is a puzzler," Buffett said at the Fortune conference Tuesday. "That one
we'll leave for somebody else."
