Bank of America Must Remove Ghost of Hugh McColl from Board

By Eric Jackson, Senior Contributor

12/02/09 - 01:02 PM EST

Stock quotes in this article: BAC

NEW YORK (TheStreet) --

Reports are out today that several of the candidates under consideration for the top job at Bank of America(BAC Quote) have called on the board to consider breaking up the bank. They are having none of it. As a result, the CEO search for Ken Lewis' replacement continues.

All in all, you would have to give the board of Bank of America an "F" for how they've monitored management and succession planning since a firestorm enveloped the company last Fall.

Primarily blame for the lack of preparedness the board has shown to having a successor for Ken Lewis waiting in the wings lies at the feet of Hugh McColl, Lewis' predecessor. McColl has really shaped what Bank of America has grown into. It won't change until his ghost leaves the board by having directors he appointed step down.

On a "Frontline" episode from last year describing the financial meltdown, McColl, who is still the bank's chairman, recounted how he'd masterminded turning the small NCNB National Bank of North Carolina into the Bank of America juggernaut. He said that, as a company, "you're either growing or you're dying."

He took that advice to heart and did a series of acquisitions of companies to create a national titan in banking. And that's why it's unlikely this bank will break itself up now or while McColl is still around. It's just not in their corporate DNA.

Bank of America is the house the Hugh built. He hand-picked his board to be his lapdogs. He hand-picked his successor, Lewis, to carry on exactly in the fashion he had led the bank.

Lewis didn't miss a beat. In fact, he took it up a notch, making increasingly bigger acquisitions. Lewis' tenure as CEO will be defined by his acquisitions of MBNA, Fleet Bank, Countrywide, and Merrill Lynch. The bank is now enormous.

Yet, Lewis didn't like how he was treated by the government and the press. He was used to being seen as Ken the Conqueror, not a lightning rod for criticism. So, he decided to take his ball and go home. His decision to quit after the summer left the board completely flat-footed.

Succession planning is only something a company is judged on when they do it badly. The fact that Bank of America is now having such a hard time filling the top spot signals how poorly equipped this board was to do scenario planning.

It's a pretty basic question that every board must always think about: what would we do tomorrow if the CEO got hit by a bus? Most of the time, there are two to three internal candidates' names which easily come to mind. Nine times out of 10, a board would rather select an internal candidate for the knowledge of the company, industry, customers, and employees who will be able to take the company forward.

All of the largest banks in America appear to have done a poor job of internal talent development, but Bank of America is by far the worst. Why?

At the end of the day, the bank's directors were charter members of the "Friends of Hugh" club. Their primary job as a director was to rubber-stamp whatever Hugh wanted to do. If Hugh didn't bring up the issue of succession planning, it didn't need to be considered.

That's why, starting after the spring shareholders' meeting (at which there were several directors who received large numbers of "against" votes) the Federal Reserve has started reassembling the board of directors. That's something we first started mentioning here over the summer.

This revamped board was still not able to get an effective succession process in place to prepare for Lewis' surprise departure. They should entertain all kinds of scenarios such as breaking up the bank. In my view, it epitomizes a "too-big-to-fail" financial institution and hasn't demonstrated that it can manage the disparity and scope of so many businesses.

If the Fed really wants to see the company change though, it should remove all directors who have ties to Hugh McColl. Once that happens, this board will start to rethink how this bank should be run from a truly fresh perspective. And they’ll probably conclude it does need to be broken up.

At the time of publication, Jackson did not have any position in the stock mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Fortune: Is BofA ready to free itself from TARP?

Skeptics say it's too early for Bank of America, which was on life support as recently as January, to declare itself healthy enough to go it alone

By Colin Barr, senior writer

Last Updated: September 1, 2009: 3:34 PM ET

NEW YORK (Fortune) -- Is Bank of America really doing well enough to get off the government dole?

The Charlotte, N.C., bank is talking with regulators about repaying some of its $45 billion of Troubled Asset Relief Program debts, the Wall Street Journal reported Tuesday.

BofA (BAC, Fortune 500) wouldn't comment about the report. But it's no secret why the nation's biggest bank by assets might want to start wriggling out from under TARP.

Rivals, including JPMorgan Chase (JPM, Fortune 500), repaid the government in June, freeing them from congressional scrutiny. With that backdrop, the mere suggestion that BofA may be ready to write a check to the Treasury was well received by some analysts.

"We think that an initial payment signifies that [Bank of America] is not facing any major setbacks since reporting solid Q2 results," Standard & Poor's equity analysts wrote Tuesday, referring to the bank's better-than-expected profit in the second quarter.

Wall Street was skeptical, though. The stock was down 5% in midday trading Tuesday, a day when bank stocks broadly were leading a market sell-off. And whether BofA is really healthy enough to follow in the footsteps of its peers is an open question.

Though the economy has shown signs of recovering, skeptics contend it's too early for banks such as BofA -- which in January was under such financial stress that it was forced to announce it had lined up $138 billion in federal support -- to give money back to the government.

Whitney Tilson, a fund manager who is betting BofA stock will fall, said he believes the government shouldn't accept TARP repayment from big banks until the economic recovery is further advanced and the possibility of another downturn -- a so-called double-dip recession -- can be ruled out.

"The last thing you want is for banks to pay back money now and then need it later," he said. "You need to show you're really out of the woods. To me, that hurdle is a very, very high one."

To that end, Tilson questions the strength of the summer rebound in housing. He said he believes home prices nationwide aren't likely to hit bottom until next spring at the earliest -- which means more losses for banks such as BofA, which has $590 billion of consumer loans on its books.

There are other signs Bank of America could still be vulnerable should the market optimism that took the broader market up almost 50% fade.

While the bank has been setting aside more reserves for credit losses, problem loans have been growing even faster.

Since the second quarter of 2008, BofA has set aside $47.5 billion to cover credit losses, and its loan loss reserve has doubled. Yet its coverage ratio -- comparing the size of the loan loss reserve to the amount of nonperforming assets -- has dropped to 116% from 187% a year earlier.

And with unemployment at its highest level since the early 1980s, losses on credit card, commercial and residential loans are expected to keep rolling in through next year.

"It would be unwise for people to forget about the problems in their loan book," said Tilson. "They've got an awful lot of exposure."

To be sure, the bank -- like the rest of the economy -- looks a lot healthier than it did six months ago, when its shares traded at multidecade lows. Since then, BofA shares have risen sixfold, fueled in part by the bank's $7.5 billion first-half profit.

The rally has helped BofA raise nearly $40 billion in new capital, more than filling the hole noted in the government's stress test and seemingly bracing the institution against further problems.

Analysts at R.W. Baird wrote in June that the capital raise "should be adequate to enable the company to earn through the current cycle with a low likelihood of needing additional government capital."

Still, Bank of America shares fetch barely half the price they traded for a year ago -- which helps to explain another reason why Lewis might like to start repaying BofA's loans.

A partial TARP repayment would be a feather for Lewis to put in his cap after two unpopular and costly acquisitions, of the Countrywide mortgage and Merrill Lynch brokerage franchises. Shareholders stripped him of his chairmanship in April, largely out of frustration with his handling of the Merrill deal.

"In his mind, this is a good way to resuscitate his legacy," said Eric Jackson, an activist investor who runs hedge fund Ironfire Capital and has no position in Bank of America stock. "He wants people to say the Merrill Lynch deal did work out, the Countrywide merger is producing -- that's where his head is now."

First Published: September 1, 2009: 3:23 PM ET

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