The Case For Dismantling Giant Banks

03/18/2010 05:12 am ET | Updated May 25, 2011

The long awaited resignation of Bank of America's CEO Ken Lewis finally arrived this week, but I guess we'll still have to wait until January to see it come to its full, well deserved conclusion. Ken is "retiring" at the "end of the year." Since the news broke I've seen a collection of old school bankers rush to poor Ken's defense. Ken's old buddy, Bank of America Board Member Don Powell included.

After writing my new book, A Colossal Failure of Common Sense, the Inside Story of the Collapse of Lehman Brothers and watching this charade I was struck by the similarities of Richard Fuld and Ken Lewis.

As many people know, Richard Fuld was CEO and Chairman of the board of Lehman Brothers. Like Ken he enjoyed the perks of having constructed a board of directors of old pals and cronies. Richard Fuld was as close to a banking Monarch as anything we've ever seen in modern capitalism. During his almost 18-year reign at Lehman Brothers, Goldman Sachs had four different CEOs, Whitehead, Rubin, Paulson and Blankfein. There have been no Kings over on 85 Broad Street in recent years; maybe that's one of the reasons Goldman has survived this desperate credit crunch.

While Ken was certainly no King, his CEO and Chairman of the board stint will have lasted just under 10 years if he finally retires in January. Ken was stripped of his Chairman role in April. A look at the Bank of America Board reveals some interesting similarities with the Lehman Board.

While the average age of the Lehman Board, 70 will go down in the record books as the most outrageous, Bank of America's 64 is not far behind. Of the 10 member Lehman board only one spent his life in finance -- and he was 82! Of the 15 member BOFA board, only 2 had investment banking experience, 6 were from outside the world of finance and 7 were just like Ken Lewis ... old school regional and commercial bankers. Not one member of his board is younger than 56 years of age.

Now I don't opine in this regard to be mean, we must get the best people into the important positions as soon as possible. I worked on the trading floor at Lehman Brothers ... right in the trenches, where the rubber meets the road, so to speak. I saw firsthand the design and construction of what Warren Buffett calls financial Weapons of Mass Destruction -- credit derivatives.

These 21st century banks have become deadly systemically risky dominoes that can crush us all if they fail, or can bankrupt us all with debt if we have to bail them out. These are not country clubs. With the demise of Glass Steagall at the turn of the century, banking was placed in a new, modern, neutron era while the makeup boards of directors are back in the Ozzie and Harriet days of the 1950's. This is a mistake fraught with peril. In our government's quest to save our system last fall, their main line of defense was to make banks bigger and more deadly. It's the golden rule; he who has the gold makes all the rules. Shot gun marriages had never been more common at the US Treasury, Wells Fargo / Wachovia ... JP Morgan / Bear Stearns and Washington Mutual, Bank of America / Countrywide and Merrill Lynch. Risk is more concentrated than ever. The dominoes are much bigger and closer together than ever before.

These banks are not too big to fail, they're too big to succeed ... too big to manage. There's no transparency of risk. They're much too big. Years ago when banks failed, say Continental Illinois or Drexel Burnham, they didn't crush the entire global economy and require trillions of government borrowed bail out dollars.

I hate to be the bearer of bad news, but these boards do not have modern risk takers and sophisticated 21st century financial thinkers on them. Bank of America lost billions and billions of dollars and put innocent depositor's money at risk when Ken Lewis allowed his company to get up to their neck in off balance sheet SIVs, CDOs, CMBS, CLOs. Many people argue she was insolvent before Uncle Sam saved them with $50 billion. You cannot underestimate the difference between a commercial / regional bank and an investment bank / hedge fund in the 21st century. We cannot allow regional bankers to oversee 21st century risks. The stakes are just too high now.

I've laid out some solutions. Going forward we must do a few simple things that will go a long way in making sure a disaster like this never happens again.

  1. Abolish CEO and Chairman of the Board rolls in any systemically risky financial institution. That's an institution that can potentially obliterate the world's economy. The fox should never be watching the chicken coup. Make Boards indepenant of CEO influence.

  • Put financial experts on boards of these big banks, 21st century experts. Can we have one member of BOFAs board in his or her 40s? Maybe two. Eliminate the retirement country club.
  • Pay Board members more. Paying them more will bring in the right talent with experience in modern financial products. It makes no sense to have traders and investment bankers on Wall Street making $5 to $10 million a year and some board member, overseeing all their risk, only making $140k?
  • These boards shouldn't meet quarterly or monthly, pay them and have them meet three times a month. The stakes are just too high now. Boards must be more involved. Get them down on the trading floors talking to traders and risk takers on a regular basis. At Lehman, our board had zero interaction with the best risk takers and traders. That's wrong.
  • Term Limits for CEOs and Boards or Directors. If the President of the United States is limited to 8 years I say that's good enough for CEOs of giant banks. Power corrupts and the bottom line is the longer a CEO is in power the greater the number of his old pals seem to end up on Boards of Directors.
  • We simply cannot allow tradition and the status quo to get in the way of sound risk management. We must make changes soon as our financial system is no more safe today than it was on the eve of Lehman's collapse. The same troubling issues that placed us all on the doorstep of disaster are still there. Capitalism cannot work without transparency and there is no transparency of risk and the people overseeing those risks are not the best people for the monumental task at hand.

    Lawrence McDonald is the bestselling author of A Colossal Failure of Common Sense, and is now spending his time on the lecture circuit, making sure the world learns the great lessons of this financial crisis. To contact his booking agent, click here.