U.S. government threatened BoA’s management if it did not continue Merrill merger

April 24th, 2009 - 2:13 am ICT by admin  

Washington, D.C. (BNO NEWS) – A report by New York Attorney General Cuomo released on Thursday sheds a new light on the events surrounding the Bank of America’s merger with Merrill Lynch. “While the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America, Cuomo said in a letter addressed to overseers and regulators of TARP, the Treasury Department and the banking industry.

On September 15, 2008, Merrill Lynch entered into a merger agreement with Bank of America which was negotiated over the course of a tumultuous September 13 and 14 weekend as Merrill Lynch was not expected to survive another week without a merger. On December 5, shareholders approved the merger and it subsequently became effective on January 1st of this year.

However, a week after the shareholder vote in December and just days after setting bonuses, Merrill Lynch “quickly and quietly” booked billions of dollars of additional losses, according to the New York Attorney General’s investigation. “Merrill Lynch’s fourth quarter 2008 losses turned out to be $7 billion worse than it had projected prior to the merger vote and finalizing its bonuses,” Cuomo said. Further, the additional losses were not disclosed to shareholders until mid-January.

When Ken Lewis, Bank of America’s CEO, learned on December 14 that Merrill Lynch lost billions of dollars in just a couple of days, Lewis immediately conferred with counsel to determine if the company had grounds to rescind its merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (”MAC”) occurred. Lewis described the developments as a “staggering amount of deterioration” at Merrill Lynch. Records show that Merrill Lynch’s projected fourth quarter losses skyrocketed from $9 billion to $12 billion in just 6 days. Fourth quarter losses ultimately exceeded $15 billion.

On December 17, Lewis informed then-Treasury Secretary Henry Paulson that he was “seriously” considering invoking the MAC clause. A meeting was held on the request of Paulson to discuss the matter. Federal Reserve Chairman Ben Bernanke and other officials were also present.

During follow-up calls with officials, including Treasury Secretary Paulson and Chairman Bernanke, the Bank of America was “pressured not to seek to rescind the merger agreement,” Cuomo stated. He also said that he does not yet have a complete picture of the Federal Reserve’s role in the matters because the Federal Reserve has invoked the bank examination privilege.

On December 21, Lewis informed Secretary Paulson that the Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson advised him that if Bank of America invoked the MAC, its management and Board would be replaced. “I’m going to be very blunt, we’re very supportive on Bank of America and we want to be of help but the government does not feel it’s in your best interest for you to call a MAC,” Paulson told Lewis during the meeting. “We would remove the board and management if you called it (or intended to),” Paulson told Lewis. Lewis said he did not remember if Paulson used the called or intended phrase. After the meeting, the Bank of America halted its attempt to exit the merger.

During a meeting with the New York Attorney General’s Office, Secretary Paulson indicated that he told Lewis that if the Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Paulson said the Bank of America’s invocation of the MAC would create a “systemic risk” and claimed the Bank of America did not have a legal basis to invoke the MAC. Lewis told Cuomo that Paulson’s threat “changed his mind” about terminating the deal.

Paulson also informed Cuomo that he made the threat to remove Bank of America’s Board and management at the request of Chairman Bernanke.

Later, during a Board meeting on December 30, Lewis said he would have invoked the MAC clause in its merger agreement with Merrill Lynch if he did not have such serious concerns regarding the status of the U.S. financial services system.

“Despite the fact that Bank of America had determined that Merrill Lynch’s financial condition was so grave that it justified termination of the deal pursuant to the MAC clause, Bank of America did not publicly disclose Merrill Lynch’s devastating losses or the impact it would have on the merger,” Cuomo wrote in his letter. The Bank of America did also not disclose the fact that it was prepared to invoke the MAC clause if the Treasury Department and the Federal Reserve had not threatened the company.

Lewis testified that the question of disclosure was not up to him and that his decision not to disclose was based on direction from Paulson and Bernanke, the letter revealed. “I was instructed that. ‘We do not want a public disclosure,” Lewis said.

Lewis also requested Paulson to provide a written agreement to provide additional TARP funding before the close of the Merrill Lynch/Bank of America merger. However, Paulson advised him that a written agreement could not be provided. On the night of December 22, Lewis emailed the Bank of America’s Board and said: “I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want.”

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