It’s clear New York Attorney General Andrew Cuomo’s probe into the taxpayer-supported Bank of America-Merrill Lynch merger has widened considerably since he began digging into Merrill’s accelerated payout of $3.6 billion in bonuses before the disclosure of a devastating fourth quarter loss. But where is it all headed?
Yesterday Cuomo wrote a letter to Congress, the SEC and TARP Oversight chair Elizabeth Warren disclosing a few findings “that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America.” But as former Treasury Secretary Hank Paulson once said about such disclosures, the carefully-worded, heavily redacted documents “create more questions than they answer.” The most headline-grabbing detail was Paulson’s threat to fire Bank of America CEO Ken Lewis if he backed out of the bank’s agreement to buy Merrill Lynch at the agreed upon $10 a share; the second was the revelation that the Fed and Treasury had left the SEC “in the dark” throughout the entire process.
The immediate question at hand is whether Lewis broke securities laws or violated his fiduciary duty to protect his shareholders when he went along with Paulson. Certainly many Bank of America shareholders believe so; the news was met with a statement from CtW, the shareholder group campaigning to oust Lewis in a proxy battle declaring that Lewis “violated their legal duties to shareholders in order to protect their own employment interests” when he decided not to invoke the deal’s Material Adverse Change clause, which allows companies to get out of merger agreements under some circumstances. Bank of America shares have lost about two-thirds their value since the Lewis announced it was buying the investment bank.
But in a February deposition with Eric Corngold, Cuomo’s executive deputy for economic justice, Lewis depicted Paulson’s threat as less of an appeal to his own self-interest than a strongly-worded “Texas-style” rebuke of it, according to portions of the transcript released with yesterday’s letter:
Lewis: As I recall, we, actually, had not agreed not to call a MAC after the conversation that we had, and so I tried to get in touch with Hank, and, as I recall, I got a number that was somebody at the Treasury kind of guard-like thing. He had a number for Hank, and Hank was out, I think, on his bike, and he — this is vague; I won’t get the words exactly right — and he said, “I’m going to be very blunt, we’re very supportive of Bank of America and we want to be of help, but” — I recall him saying “the government,” but that may or may not be the case — “does not feel it’s in your best interest for you to call a MAC, and that we feel so strongly,” — I can’t recall if he said “we would remove the board and management if you called it” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for awhile. Let me talk to our board.” And the board’s reaction was one of “That threat, okay, do it. That would be systemic risk.”
Corngold: Did you have an understanding of what powers the Treasury Department had to remove the board and/or the management of the bank?
Lewis: It was my understanding he said it — that’s why I think he said ‘the government.’ I think — my impression is, that was the language the Fed used to use in Texas, basically saying, Don’t do something.
Corngold: And at the time, did you sort of have that preexisting understanding of the Texas Fed way of communicating?
Lewis: I had heard that at some point. I don’t know why that’s in my mind, but I’ve heard ofthat before that that’s a way of telling you not to do something.
Corngold: And did you view it as a threat?
Lewis: I viewed it — actually, I viewed it as just how strongly they felt about the issue. I also viewed it that it wasn’t just about us; that he wouldn’t say something that strong if he didn’t feel like it was a systemic risk, as well…I took this as, actually, in good faith that’s what they felt.
When Corngold later pressed Lewis as to whether he felt he was violating his shareholders’ interests by going ahead with the deal at Paulson’s behest, Lewis pointed out that “it’s kind of circular because it’s kind of systemic.” If Lewis’ story holds up — and Paulson is basically backing it up, even though Fox Business News says the wording of the MAC would have barred Lewis from walking away anyway — the Merrill debacle is characterized more by sins of omission than commission. In Lewis’ case, it was a failure of due diligence and scrutiny of an acquisition that by all accounts had gorged on risky mortgage-backed CDOs long after even AIG had gotten out of the business.
And for Paulson, the sin of omission was (bad pun alert) the omission of the commission — the SEC — which wasn’t privy to any of the ongoing talks between Lewis, Paulson and Bernanke. This is no surprise — former SEC chairman Chris Cox was famously on a family vacation in the Bahamas throughout the entirety of the March bailout of Bear Stearns.
Bear Stearns, of course, was another government-brokered last-minute deal in which the Treasury and the Fed are accused of arbitrarily favoring the shareholders of one bank — in that case J.P. Morgan, which bought Bear on the cheap in March with $30 billion in Fed funding — over another (Bear Stearns.) The circumstances of the Bank of America-Merrill merger are murkier: Bank of America kept control and management, while Merrill shareholders cashed out. But as with the government’s disastrous decision to let Lehman Brothers even as it propped up such a malfeasance-ridden corporation as AIG, it raises serious questions about whether the banks were treated fairly; and if they weren’t, who is to blame.
Certainly, that seems to be where Cuomo’s investigation is ultimately headed: earlier this week TARP watchdog Neil Barofsky, who has been probing the bonuses in coordination with Cuomo since January, wrote in his progress report that the Merrill bonus investigation had “expanded to examine broadly Treasury’s decision making regarding the first nine institutions to be considered for funding under TARP.”
