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.' "
