Bank of America CEO Says He Was Pressured Into Merrill Rescue
Ken Lewis says former Treasury Secretary Paulson threatened to remove board.
April 23, 2009— -- The CEO and Chairman of Bank of America says he was threatened by the Bush Administration's Secretary of Treasury when he tried to back out of a deal to rescue Merrill Lynch, according to testimony he gave to New York Attorney General Andrew Cuomo .
The stunning disclosures of a behind the scenes power play by top government officials are the talk of Wall Street and Washington today.
In his testimony, Bank of America CEO Ken Lewis told New York's Attorney General that then-Treasury Secretary Henry Paulson threatened him on December 21st with the prospect of removing the management and Board of Directors of the bank if Lewis refused to complete the merger with Merrill Lynch even though Merrill was hemorrhaging money.
Just a few days earlier, on December 14th, Lewis's Chief Financial Officer had told him that Merrill's projected fourth quarter losses had "skyrocketed" from $9 billion to $12 billion in just six days, according to a cover letter Cuomo sent along with the testimony and other documents to senior government officials overseeing the bank bailout.
The letter and the testimony was sent to the Chairman of the Senate Banking Committee, the Chairman of the House Financial Services Committee, the Chairman of the Securities and Exchange Commission and the Chair of the Congressional Oversight Panel.
Senator Chris Dodd (D-CT), chairman of the Senate Banking Committee is "deeply concerned about these troubling allegations," according to his office. "He has talked today with Attorney General Cuomo about his findings and will carefully assess the documents provided to him by the Attorney General. He will decide on next steps soon," said Dodd's spokesperson, Justine Sessions.
The Congressional Oversight Panel would not comment on the letter, saying they have yet to 'formally' receive it.
Cuomo said he sent the information because of serious concerns about the transparency with which the Troubled Assets Relief Program and other elements of the federal bailout plan are being run, because of his office's responsibility to enforce the securities laws, and because of the "unprecedented circumstances" in which the Merrill – Bank of America merger took place.
Docs Show Regulators and Bank Officials Agreed Not to Alert Shareholders
The documents lay out in detail a troubling set of conversations, emails, and meetings in which federal regulators and senior bank officials admit that they agreed not to alert shareholders at Bank of America to circumstances that could materially affect their investments, admitted not having alerted the Securities and Exchange Commission to discussions which came within its regulatory scope, and in which Lewis, the Chief Executive Officer of a bank, admits he went forward with a deal knowing full well that it could have a negative impact on a large number of shareholders.
The Federal Reserve released a statement late Wednesday denying any allegations that officials there were involved in any decisions over disclosure. "No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure. It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities, said spokesperson Michelle Smith.
Former Secretary Paulson's spokesperson also released a statement late Wednesday saying that issues of disclosure were left to Bank of America and that Paulson's role was to ensure that no important financial institution be allowed to fail
"By referring to the Fed's supervisory powers, Paulson intended to deliver a strong message reinforcing the view that had been consistently expressed by the Fed, as Bank of America's regulator, and shared by the Treasury that it would be unthinkable that Bank of America take this action for which there was no reasonable legal basis and which would show a lack of judgment," said Paulson's spokesperson.
Lewis' Deposition with the Attorney General's Office
In his deposition, Lewis attempts to explain why he did the deal in this exchange with Benjamin Lawsky of the Attorney General's office:
Q. Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?
A. (Lewis) What he was doing was trying to stem a financial disaster in the financial markets, from his perspective.
Q. From your perspective, wasn't that one of the effects of what he was doing?
A. (Lewis) Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over the long term would still be an interest to the shareholders.
Q. What do you mean by "short term"?
A. (Lewis) Two to three years.
Q. So isn't that something that any shareholder at Bank of America who had less than a three-year time horizon would want to know?
A. (Lewis) The situation was that everyone felt like the deal needed to be completed and to be able to say that, or that they would impose a big risk to the financial system if it would not.
This was "an extraordinary use of government power" in "unprecedented circumstances', according to Bob Mintz, former federal prosecutor specializing in financial cases. The government was "breaking new ground in terms of the level of government involvement in the marketplace," said Mintz, "making it up as they went along."
According to the Cuomo letter, when Lewis first learned of the "staggering amount of deterioration" at Merrill on December 14th and had decided it might warrant cancelling the deal, he notified Paulson and the Treasury Secretary asked him to fly to Washington that night.
There he met with Paulson and senior officials including Chairman of the Federal Reserve Ben Bernanke, and was asked "to not seek to rescind the merger agreement."
But his bank came under pressure from the government in a series of follow-ups to the meeting and Lewis after attempting to resist, appears to have caved.
Bank of America Says It Acted Legally
On December 21st, when Lewis still considered using a "material adverse event" clause to squash the deal, he told Cuomo, according to the letter, that Paulson threatened to remove the management and Board of Directors of Bank of America. That ended Bank of America's attempts to exit the deal, the letter stated.
"There's no question that this was an extremely heavy handed threat, and there may have been advice here to forget about disclosure obligation which could be seen as aiding and abetting a federal securities law violation," said Professor John Coffee of the Law School at Columbia University.
The letter was sent the day a Wall Street Journal banner headline announced that "Lewis testifies U.S. Urged Silence on the Deal." The Journal account stated that both Paulson and Bernanke barred Lewis disclosure of Merrill's woes because of the potential danger to the financial system. The letter states that Paulson largely corroborated Lewis's account of the threat, and went on to say he made the threat at the behest of the Chairman of the Federal Reserve.
"In an interview with this Office, Secretary Paulson largely corroborated Lewis's account," the letter states. Cuomo alleges that Paulson told his office he made the threat at the behest of Federal Reserve Chairman Paul Bernanke. "According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, 'that makes this simple. Let's deescalate.' "
In a series of statements, a spokesperson for Paulson largely corroborated Lewis's account to Cuomo but fell short of confirming that Bernanke instructed him to make the threat.
"His prediction of what could happen to Lewis and the Board was his language, but based on what he knew to be the Fed's strong opposition to Bank of America attempting to renounce the deal," said Paulson's spokesperson.
A previous statement said that "Chairman Bernanke did not instruct him [Paulson] to indicate any specific action the Fed might take," said the spokesperson.
Were Laws Broken?
"The point is this: you have to disclose material information to shareholders. You can't violate the law. And that is in effect what appears to come out of this," said Charles Elson Director, of the John Weinberg Center for Corporate Governance.
Bank of America spokesman Scott Silvestri issued a statement saying, "We believe we acted legally and appropriately with regard to the Merrill Lynch transaction."
But Elson said this latest disclosure is quite problematic. "Think of it this way, people bought and sold Bank of America stock for a period, a long period, without being aware of the true state of affairs in the company. The problems with this acquisition were clearly a material event," he said.
This post has been updated.