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Days Could Be...

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The chief executives of Bank of America Corp and Citigroup Inc may be shown the door if the US government decides the $90 billion of capital it has already injected isn't enough to restore the banks' health.

Kenneth Lewis and Vikram Pandit face renewed pressure after The Wall Street Journal said the banks may need to raise more capital based on the government's "stress tests" of large lenders, citing people familiar with the situation.

Analysts and investors have expected a few large regional banks would need more capital, but the government's findings suggest the sector's capital shortfalls are deeper.

They also suggest that Lewis' and Pandit's assessment about their banks' ability to weather a deep recession is wrong, cutting into their credibility as leaders and perhaps giving their boards reason to hunt for replacements.

"I would guess both of them are gone by summer," said Charles Geisst, the author of "Wall Street: A History" and a finance professor at Manhattan College. "They're caught between a rock and a hard place. They have to try paint a rosy picture for investors, but on the other hand, maybe what we need in the world is more forthright comments about the state of affairs at the banks, and they're not making those."

Citigroup declined to comment on the stress test, but said it is making progress on streamlining its business.

The bank may raise money without new government capital by augmenting a planned exchange of up to $52.5 billion of preferred stock into common stock, people familiar with but not authorized to speak about the matter said.

Bank of America declined to comment. The bank is holding its annual meeting Wednesday in its Charlotte, North Carolina, hometown, and shareholders are to vote whether Lewis should stay on the board, or at least give up his job as chairman.

Much of the opposition to Lewis' reelection focuses on the bank's troubled purchase of Merrill Lynch & Co. On Tuesday, the California Public Employees' Retirement System (CalPERS), the largest US pension fund, said it opposes Lewis' reelection as a director.

Greater Peril

While the 19 banks are not expected to "fail" the stress tests, investors may consider those ordered to raise capital within six months as having failed. Results had been due May 4 but now may be released later that week.

Analysts and investors are split over whether Lewis' or Pandit's job is most in jeopardy.

Vikram Pandit, CEO, Citibank

Pandit, who took over Citigroup in December 2007, inherited many of its problems, while Lewis is the architect of much of Bank of America, having been chief executive since 2001.

"Lewis is in much more trouble than Pandit, because he was at the helm for so much of this, while Pandit came in late," said Ralph Cole, who invests $2 billion at Ferguson, Wellman Capital Management in Portland, Oregon.

The government has already shown a willingness to oust chief executives of companies getting government aid, having replaced General Motors Corp's Rick Wagoner and American International Group Inc's Robert Willumstad -- the latter, after just three months in the job.

Walter Todd, a portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina, said that because the government has already shown a strong willingness to make changes at Citigroup, "there's a bigger case to be made for them being able to force the resignation of Vikram Pandit, but they can certainly force pressure on Ken Lewis."

Since October, the government has injected $45 billion into each of Bank of America and Citigroup, and agreed to cover most losses on a respective $118 billion and $301 billion of troubled assets. Citigroup's preferred share exchange could leave taxpayers with a 36 per cent stake.

Seeing It Through

Pandit last week told shareholders at Citigroup's annual meeting that the bank would rebound and repay every dollar to the government, adding, "I intend to see this through."

Lewis, meanwhile, has said his bank did not need half of the $20 billion of capital it took in a January bailout.

Both banks could bolster capital by selling assets. Bank of America is selling its First Republic Bank unit, while Citigroup is near a sale of Japanese investment banking and brokerage operations for more than $5.2 billion.

But capital raising remains difficult, especially for troubled banks where the government can, and will, unilaterally assume more influence, and dilute existing shareholdings.

Many lawyers and investors believe Lewis erred when, in testimony before New York Attorney General Andrew Cuomo, he appeared to suggest that Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson cajoled him into closing the Merrill merger and not disclosing Merrill losses, so as to protect the financial system.

"The bank has to boot him as chairman, but that could put him at a more perilous position as CEO, because he would still be seen as baggage," said Michael Mullaney, who helps invest $9 billion at Fiduciary Trust Co in Boston.


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