That question occurred to me when reading William Cohan's evisceration of Bank of America CEO Ken Lewis in yesterday's Financial Times ("The tattered strategy of the banker of the year"). In that piece Cohan wrote,
[W]hen he announced the Merrill deal, Mr Lewis boasted that he was able to move so quickly because his adviser, the ubiquitous private equity expert, Chris Flowers, had already done the due diligence on Merrill’s books and pronounced them much improved since John Thain, Merrill chief executive, took over at the company a year ago. With Mr Flowers’ apparent blessing, Mr Lewis agreed to pay billions of his shareholders’ money for Merrill’s worthless equity and in the process absorbed billions of dollars more of its debt on to his balance sheet at par. While Barclays was buying Lehman Brothers’ US assets for pennies on the dollar and Jamie Dimon at JPMorgan Chase had done pretty much the same in his acquisitions of Bear Stearns and Washington Mutual, Mr Lewis was paying retail prices for companies that had already been remaindered.
Now, not surprisingly, Bank of America’s shareholders are paying the price. Since Mr Lewis agreed to the Merrill deal during the fateful weekend of September 15, Bank of America’s stock has crashed to about $7 per share, down a whopping 80 per cent from the $34 a share the stock was trading at the day before the Merrill deal was announced, and 40 per cent so far in 2009. Bank of America’s total market value is now less than the $50bn it offered for Merrill’s stock last September.
Perhaps because Goldman Sachs alumni are ubiquitous in high finance, Cohan didn't note that J. Christopher Flowers is a Goldman Sachs alumnus, as of course is John Thain. One would think that, as an adviser to Bank of America, Flowers had a fiduciary responsibility to objectively conduct his due diligence on Merrill's books; perhaps Flowers did, and the math whiz was simply off by a wide margin. In any case, the result is that one Goldman Sachs alumnus (Thain) got to sell his new firm for what appears now to be an inflated valuation, thanks to an analysis done by another Goldman Sachs alumnus (Flowers).
Back to Cohan on Lewis:
Mr Lewis’s end cannot come quickly enough. There really is no excuse for his decision to do these ego-driven deals at the prices he did them. It is one thing to feel the need to do one’s patriotic duty; it is quite another to miss the mark so completely at the expense of your shareholders. It was probably just a matter of time, anyway, before he joined the other former “bankers of the year” such as Ken Thompson (2005), former chief of Wachovia, and Kerry Killinger (2001), former chief of Washington Mutual, on the junk heap of history.
The photo of Flowers above comes from Cityfile.