BofA’s Lewis: Feds urged quiet on Merrill
Former Treasury Secretary Henry M. Paulson and Federal Reserve Chairman Ben S. Bernanke threatened to oust Bank of America Corp.’s board and its chief executive, Kenneth Lewis, if the bank called off its purchase of Merrill Lynch & Co., Lewis said in sworn testimony released Thursday.
Under questioning by New York state authorities, Lewis said the nation’s most powerful economic officials told him the entire financial system would be crippled if he backed out of the deal in December, allowing Merrill to fail.
Lewis said they told him to wait more than three weeks before disclosing that Merrill’s losses were mounting by billions of dollars, until it could be announced that the bank was getting a second infusion of federal bailout funds.
“I was instructed that ‘We do not want a public disclosure,’ ” Lewis said of the events in December, after BofA shareholders had voted to approve the $50-billion Merrill takeover but before the deal became final Jan. 1.
At the time, Bank of America already had accepted $25 billion in bailout funds from the U.S. Treasury. In the end, Lewis and his board went along with Paulson’s and Bernanke’s alleged demands, but only after Paulson pledged to deliver an additional $20 billion in bailout money and backstop $118 billion in toxic assets on Merrill’s books.
Lewis said that with the extra government assistance, he was persuaded that the deal within two or three years would still benefit his bank as well as the country.
The highly criticized deal, which contributed to a sharp decline in Bank of America’s stock, has led to numerous shareholder lawsuits and threats from some investors to try to oust Lewis from the bank’s board at the annual meeting next week.
The events, during the waning days of the Bush administration, illustrate the remarkable degree to which the government, fearing an economic meltdown, intervened in the affairs of banks and other financial firms.
But its aggressive efforts, which have continued under President Obama, have proved costly for Bank of America -- and could cost the bank even more in the end.
Mark Molumphy, one of a number of lawyers who have filed suits on behalf of Bank of America shareholders who contend the company improperly withheld information, was gleeful at Thursday’s revelations. He said the material was “a remarkable revelation that frankly confirms everything that the shareholders have been alleging in their complaints.”
“Behind closed doors the shareholders of Bank of America were being disregarded by those who were entrusted to protect them,” said Molumphy, an attorney with Cotchett, Pitre & McCarthy in Burlingame. “Their spin is that they were being patriotic. If being a patriot means doing something that’s not in the best interest of Bank of America, then I think it’s kind of a hollow explanation.”
A statement issued Thursday by a Bernanke spokeswoman denied that the Fed told Lewis what he could or could not disclose. But the statement didn’t address whether the central bank had threatened to replace Lewis and BofA’s board.
A Paulson spokeswoman said Paulson had delivered a message from the Fed that the contract to buy Merrill was unbreakable, warning that it was “unthinkable that Bank of America take this action for which there was no reasonable legal basis and which would show a lack of judgment.”
The bank declined to comment Thursday except to say it had acted “legally and appropriately.”
Like many Wall Street firms, Merrill Lynch ran into trouble creating complex investments tied to subprime mortgages and other high-risk debt. As mortgage defaults spiked last summer, these assets became virtually worthless. On Sept. 15, when Lewis agreed to take over Merrill after only a weekend of discussions, the Wall Street firm was within a week of collapse, according to New York Atty. Gen. Andrew Cuomo, whose lawyers investigated the case and interviewed Lewis, Paulson and others involved. (Bernanke refused to testify, citing a bank regulator privilege.)
To call off the Merrill deal after it was approved by shareholders would have meant declaring that a “material adverse change” had occurred at Merrill. Depositions released by Cuomo showed the Fed maintained that no such event had occurred despite the discovery of losses that had reached $12 billion as of Dec. 14.
Cuomo forwarded the testimony Thursday to the House and Senate banking committees, a congressional panel overseeing the government’s financial bailout plan, and the Securities and Exchange Commission -- the federal watchdog for shareholders, which was absent from the government’s emergency efforts.
“Indeed,” Cuomo wrote in a cover letter, “Secretary Paulson informed this office that he did not keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.”
The events appeared to underscore a schism between the SEC and bank regulators, two goliath regulatory regimes with markedly different concerns and methods.
While the SEC’s mission is to encourage corporations to disclose important events, banking regulators “sweep problems under the rug,” said Columbia University securities law professor John C. Coffee.
“The worst outcome from their point of view is that adverse information reaches shareholders, who may panic” and cause banks to collapse, Coffee said.
He predicted the failure to disclose Merrill’s problems would multiply the amount Bank of America will have to pay to settle shareholder litigation over the acquisition.
Steve Adamske, an aide to House Financial Services Committee Chairman Barney Frank (D-Mass.), said the disclosures underscore the need to empower the Federal Deposit Insurance Corp. or some other regulatory body to move in early to seize and “wind down” failing non-bank financial institutions like Merrill Lynch, as the FDIC can do with failing banks and thrifts that take deposits.
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william.heisel@latimes.com
