The choice that regulators gave Bank of America chief Kenneth Lewis could not have been clearer: Harm your shareholders or lose your job. Lewis chose to keep his job.
Rarely does the divide between corporate managers and the owners they're supposed to represent become so obvious.
Lewis' sworn testimony, made available this week, shows he reversed his decision to scrap a disastrous merger with Merrill Lynch after then-Treasury Secretary Henry Paulson threatened to fire him if the bank refused the deal.
The Merrill merger delivered $15 billion in losses to Bank of America's books and helped drag the stock price of the country's biggest bank from $15 to $9.
"We believe we acted legally and appropriately with regard to the Merrill Lynch transaction," Bank of America spokesman Scott Silvestri said via e-mail Friday.
John Bogle isn't surprised by all this. The founder and retired chairman of big money manager Vanguard Group, Bogle has long argued that managers often look after themselves first and investors later.
This disconnect is a huge factor in the financial disaster, he believes. If pension managers had looked closer at banks' balance sheets, he says, they would have forced the banks to reduce risk. Mutual funds should have crusaded against lavish pay packages that lured CEOs to make crazy bets.
These institutional shareholders - which own most of corporate America on behalf of investors and beneficiaries - "failed to exercise their power," Bogle said in an interview. "There was an abject failure to participate in corporate governance - to make corporations operate in the interests of their shareholders rather than their managers."
Many of us have been let down by our representatives. We work with middlemen - investment managers, mortgage originators, insurance salesmen, real estate agents, corporate managers - who should have our interests at heart but often don't.
Mortgage originators focused on commissions and not on unsophisticated borrowers who couldn't afford the loans. Investment managers pulled punches on banks because they wanted some of their business. Executives sit on each other's boards and bid up each other's pay.
Bogle calls it our "agency society." He thinks Congress should pass stricter laws to make sure the agents go back to working for us instead of themselves.
"You would think an agent would always act on behalf of his principal," he said. "But that isn't happening. Somebody needs to stand up and say, 'We have a systemic problem, and the world has changed.' "
Lewis is the agent for the people who own Bank of America. He agreed to buy Merrill Lynch in September. But by mid-December it was clear Merrill's losses from bad mortgages and other soured bets would be much, much larger than what he or anybody else at Bank of America's Charlotte, N.C., headquarters had imagined. "A staggering amount of deterioration," Lewis later called it.
He and the board believed the damage was bad enough to constitute a "materially adverse change" that would legally allow them to walk away from the deal.
But when he told Paulson, the Treasury secretary threatened to "remove the board and management" of Bank of America, or words to that effect, Lewis said in testimony given to New York Attorney General Andrew Cuomo.
(Cuomo is investigating the distribution of billions in bonuses to Merrill executives while taxpayers helped support the company.)
"Hank, let's de-escalate this for a while," Lewis replied, according to his deposition. "Let me talk to our board."
It's true that he had other constituencies to consider besides shareholders. Corporate law gives CEOs latitude to consider the interests of employees and the community as well. Paulson and Fed Chairman Ben Bernanke were arguing that a collapse of the Merrill buyout would plunge the financial system and the country back into chaos.
Lewis "became convinced that they were right," he testified, and he believed the Merrill acquisition would benefit shareholders over the long term. Those sentiments, however, were produced only after his job and its millions in pay and perks were threatened.
"But you could have said 'no' and resigned, correct?" one of the lawyers asked him.
Lewis: "I could have said 'no' and resigned."
"Did you ever consider that?"
"No, I didn't," Lewis replied. "I thought it was in the best interest to go forward as had been instructed."
It certainly was in his best interest. Shareholders who got stuck with billions in Merrill losses and are suing Bank of America seem to feel differently. They might have something to say about it at Wednesday's annual meeting in Charlotte.
"There are worse things," Bogle said of Lewis, "than putting your career at risk for doing what's right."