Friday, January 16, 2009

Bin of America

“I do think we were doing the right thing for the country.” -- Ken Lewis, Bank of America CEO, on why he purchased Merrill Lynch, which has now destroyed his company.

This is one of the one outrageous things any executive of a publicly traded company can say, and should expose him to massive litigation from shareholders. I am not an expert in corporate law, but I don't think it says anything about serving the good of the country. Even if it's called Bank of America, it still belongs to shareholders. As their fiduciary agent, the CEO is legally bound to serve them -- even if it means hurting the national interest. (God knows that for the last 10 years few executives cited the "patriotism clause" when they shipped millions of jobs overseas.) Lewis's abdication of this duty for some vague sense of public good is a disgrace, and it should cost him the position of CEO.


I am increasingly worried by the growing number of business decisions, such as this one, that are made for altruistic purposes rather than self-interested ones. Despite some holes in her "philosophy," the libertarian writer Ayn Rand addressed this issue powerfully:

The irreducible primary of altruism, the basic absolute, is self-sacrifice—which means; self-immolation, self-abnegation, self-denial, self-destruction—which means: the self as a standard of evil, the selfless as a standard of the good.
... The issue is whether the need of others is the first mortgage on your life and the moral purpose of your existence. The issue is whether man is to be regarded as a sacrificial animal. Any man of self-esteem will answer: “No.” Altruism says: “Yes.” (Source)

Self-interest was also the driving force behind Adam Smith's concept of the "Invisible Hand." This was the idea that more wealth is generated when everyone serves his or her own interest rather than trying to help a larger group. As long as individuals are free, and their rights are respected, they are more productive when they can profit. The result is more and better food, clothing, technology, healthcare, etc.

The superiority of private enterprise has been proven repeatedly throughout history ... Perhaps most tellingly by Soviet Leader Vladimir Lenin, who embraced free enterprise under his "New Economic Policy" after an altruism-based system had driven agriculture and industry to the brink of collapse. The earliest experiences of Pilgrims in Massachusetts also highlight the failure altruism as an economic model: They originally shared all wealth, but quickly switched to private ownership after this system resulted in shortages and starvation.

While most people with any life experience understand free enterprise, Ken Lewis apparently missed that lecture in college. He either willfully ignored the lessons of Economics 101, didn't understand them, or didn't care. Maybe he's just a nice guy, and really wanted to "do the right thing for the country."

After all, he owned less than 0.5% of Bank of America, so why not be compassionate with it. Just like a politician, it's easy to be a nice guy when you're spending someone else's money. . As of Sept. 30, four huge mutual-fund companies combined owned 378 times more Bank of America stock than did Lewis: Barclays, State Street, Fidelity and Vanguard.

Now, these are clearly for-profit institutions, so maybe they deserved to lose money under the code of altruism. But, they were largely holding those funds for individuals, unions and state pension funds.

In the end, that's who will pay the price for Ken Lewis' magnaminity and kindness. They will be forced to reduce benefits and, in some cases, go bankrupt. If they are state pension funds, they'll have to raise taxes. I can't wait until we get a nationalized health system based on the same principles.

It was 234 years ago that Samuel Johnson famously said "Patriotism is the last refuge of scoundrels." I will not call Ken Lewis a scoundrel, because I am not saying he deliberately did anything wrong. In this case: "Patriotism is the last refuge of idiots." The media abounds with people who cheered deregulation and excessive risk-taking over the last 10 years as banks leveraged themselves to the hilt and polluted the financial system with toxic mortgages. Now they applaud patriotic bailouts and stimulus plans to make the demons go away.


While Ken Lewis didn't know what he was doing, John Thain did. He was the slick New York banker who unloaded the steaming pile of garbage known as Merrill Lynch on the half-witted Lewis.

A key detail in the entire affair is that John Thain almost recieved a $10 million bonus for successfully selling his company. He backed down for political reasons, but it was probably well deserved because, unlike Lewis, Thain actually did his job as CEO by getting top dollar for Merrill Lynch shareholders. Without him, they would have surely lost billions more.

One might argue that he merely passed the buck to Bank of America, which is true. But it cannot be denied he fulfilled his fiduciary responsibilities -- unlike Lewis.

Banks like Lehman Brothers and Merrill Lynch were doomed before the credit crunch began, while Bank of America was one of the country's most solid institutions. Starting in a position of strength, Lewis proceeded to squander it in a short time by purchasing Countrywide Financial and Merrill Lynch. Those two moves have now devastated B of A's balance sheet and driven it to the verge of failure.

You can say lots of bad things about people like Chuck Prince at Citi or Angelo Mozilo at Countrywide for creating the mortgage bubble -- but at least they were making money in the process. The problems at Bank of America result from investments Lewis has made once the financial meltdown was in full force. Ignoring examples of credit contagions throughout history, Lewis turned his company into the rubbish bin where others could dump their problems. Was he trying to grow his company? Help the country? Or just do something? In the end, I don't think even he knows the answer to those questions.

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