The demands for the head of Citigroup (C) CEO Vikram Pandit have not ended and may rise to a crescendo again if the bank receives poor “stress test” ratings from the federal government.  The drumbeat of dissatisfaction about Ken Lewis, head of Bank of America (BAC), has gone on for months. Recently, proxy advisory RiskMetrics/ISS Governance Services recommended that the financial firm’s shareholders vote Lewis out.

Firing bank CEOs poses significant risk and is unlikely to help shareholders or the government.

The first rationale for allowing executives like Lewis and Pandit to remain where they are is that the series of financial company CEO firings which took place less than two years ago was not effective. The results of the turnover were, by almost any measure, a failure. Chuck Prince at Citi was replaced by Pandit, who is considered a well-meaning dolt by most people. Stan O’Neal of Merrill Lynch was replaced by former NYSE CEO John Thain.  Thain made the error on more than one occasion of saying the worst was behind Merrill only to end up selling the company to Bank of America (BAC). Thain became enmeshed in the controversy over whether he properly disclosed Merrill’s fourth quarter financial condition and if he was involved in paying Merrill executives bonuses which should not have been paid without Bank of America’s consent. AIG (AIG) may be the example that best makes the case. As the company, which has been the world’s premier insurance firm posted greater and greater losses on its derivative investments, the board pushed out Martin Sullivan in favor of Robert Willumstad in June 2008. Willumstad was clearly at least partially responsible for the trouble at AIG since he was the non-executive chairman before being made CEO. He made a further mess of the AIG problems because he was s slow to address them and was himself fired in September. His replacement, who holds the job now, is Edward Liddy, former head of Allstate. Liddy’s most notable accomplishment since moving into the corner office was his ability to stand up to a withering cross examination in March about AIG’s collapse. The roasting may have been entertaining, but Liddy had nothing to do with the issues that caused AIG’s demise, or the pay packages that some of its executives received while the company rolled over and sank into the dark waters.

The most significant risk in replacing the current bank CEOs is that the new people coming in may or may not be better selections than the people whom they replace. In many quarters this is considered a sort of governance recidivism. But, that does not mean that the argument is entirely flawed. Pandit, Thain, and Willumstad did not do any better than their predecessors. As a matter of fact, they probably did much worse. They were given the specific tasks of ferreting out problems in the companies which they were picked to operate and fix them. Each one expressed optimism about accomplishing their goals only to face the need for government intervention to prevent collapse. Not one of the three simply acknowledged that his company was too badly broken to be fixed by its own devices.

The most convincing argument for keeping Lewis in his job is that he is now recognized as the Emperor without any clothes. Whatever hubris he had about the success of his tenure running Bank of America has been removed. He may be the most focused large company chief executive in the country facing crushing pressure from his board, shareholders, and the federal government. His actions are confined by all of these groups monitoring his decisions 24 hours a day. If his board can keep him from media appearances where he always talks about how much he regrets taking TARP money, he will probably end up being a reasonable steward because he is so tightly shackled.

It is tempting to say that no executive, no matter how accomplished, can fix the nation’s largest banks. They can only be fixed when the credit markets themselves are repaired. Antagonists to that way of thinking would refer to Jamie Dimon of JPMorgan (JPM) who they claim can fix anything in the financial world. That point of view fails to admit that he did not break his bank in the first place.

Douglas A. McIntyre

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