BofA chief reveals gov’t intervention

Bloomberg

Bank of America Chief Executive Officer Kenneth D. Lewis failed to tell shareholders about mounting losses at Merrill Lynch because of pressure from federal regulators to complete the takeover, according to New York State Attorney General Andrew Cuomo.

Henry Paulson, who was Treasury secretary last December, may have threatened to remove the management and directors of bank if they didn’t comply, Cuomo wrote in a letter to Congress that was released Thursday.

Lewis also was told not to disclose his opposition to the Merrill deal because of "staggering" deterioration at the brokerage, or the regulator’s action, according to Cuomo. Lewis and the board of the biggest U.S. bank by assets are under fire for not telling shareholders that Merrill’s fourth-quarter loss was spiraling toward $15.8 billion before they voted to approve the deal in December. Shareholders cast ballots April 29 on whether to re-elect directors including Lewis and split his roles as chairman and CEO. Some investors are calling for the 62-year-old Lewis, CEO since 2001, to resign.

Paulson kept the Securities and Exchange Commission, which is responsible for making sure companies disclose material information to their investors, in the dark, according to Cuomo.

"Questions of Bank of America’s disclosures were left up to Bank of America," Paulson said in a statement. Paulson said his discussions with Lewis "centered on the Fed lawyers’ opinion that the merger contract was binding, and the U.S. Treasury’s commitment to ensuring that no systemically important financial institution would be allowed to fail."

The allegations in Cuomo’s letter suggest Paulson and other policymakers may have resorted to breaking securities laws in order to protect the financial system, according to Peter Sorrentino, a portfolio manager at Huntington Asset Advisors.

"Everyone involved knew that was a clear violation, that’s material non-public information, so basically we just closed the rule book during the crisis and said we don’t care, we need to keep the lights on, and we’ll deal with that manana," Sorrentino said. "Logic went out the window and they were just acting out of fear," he said. It was "completely panic mode."

Testimony
Lewis testified for four hours in Cuomo’s New York offices on Feb. 26 as part of an investigation by Cuomo of $3.6 billion in bonuses paid at Merrill just before it merged with the bank. Cuomo’s letter was based on recollections by Lewis of a Dec. 21 conversation with Paulson. The letter, addressed to lawmakers, said Paulson "largely corroborated Lewis’s account."

Lewis said he was instructed by federal officials not to disclose Merrill’s losses, his desire to back out of the merger or about the intervention of regulators, Cuomo’s letter said. Regulators were concerned about "systemic risk" that might lead to the collapse of financial markets, the letter said.

"The Treasury didn’t make them decide to buy Merrill Lynch and Treasury didn’t tell them how much to pay," Jonathan Finger, whose family owns 1.5 million Bank of America shares, said in an interview. "They are the only financial institution that painted themselves into a corner where it had to sacrifice shareholders." Finger and his father, Jerry, are leading a campaign opposing Lewis’s re-election to the bank’s board.

Request from Bernanke
Lewis testified that he asked Federal Reserve Chairman Ben S. Bernanke to "put something in writing" regarding the U.S. government’s plan to support Bank of America’s acquisition in view of Merrill’s mounting losses.

After Bernanke said he would consider the idea, Paulson called Lewis and said, according to Lewis, "First it would be so watered down, it wouldn’t be as strong as what we were going to say to you verbally, and secondly, this would be a disclosable event and we do not want a disclosable event."

Attached to Cuomo’s letter Thursday was a Dec. 22 e-mail from Lewis to his board. "I just talked with Hank Paulson," the e-mail says. "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."

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," said Fed spokeswoman Michelle Smith in a statement. "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."