Storm erupts over BofA’s Merrill takeover/Paulson and Bernanke pressed on BofA deal

Storm erupts over BofA’s Merrill takeover
Copyright The Financial Times Limited 2009
Published: April 24 2009 01:13 | Last updated: April 24 2009 02:33
http://www.ft.com/cms/s/0/da336e3e-305d-11de-88e3-00144feabdc0.html


The circumstances surrounding Bank of America’s controversial takeover of Merrill Lynch on Thursday sparked an unprecedented public dispute involving the bank’s embattled chief executive, Ken Lewis, and top officials past and present.

The furore – which adds to the pressure on Mr Lewis’s position atop the bank – erupted when Andrew Cuomo, New York attorney-general, released documents raising fresh questions over Mr Lewis’s failure to tell investors about huge losses at Merrill before completing the acquisition.

Mr Cuomo said Mr Lewis told his officials that he was forced to complete the deal after then-Treasury Secretary Hank Paulson – citing fears about systemic risk – threatened to have him and his board fired if they pulled out.

In a letter to congressional leaders and the Securities and Exchange Commission, Mr Cuomo quoted the BofA chief as testifying under oath that Mr Paulson told him “we feel so strongly that we would remove the board and management” of BofA if it tried to renege on the deal.

Mr Cuomo said Mr Paulson had told investigators in an interview that he had made the threat “at the request” of Ben Bernanke, chairman of the Federal Reserve.

However, the former Treasury chief denied that he said this. A spokeswoman for Mr Paulson said: “Secretary Paulson’s words were his own. Chairman Bernanke did not instruct him to indicate any specific action the Fed might take.”

Later Mr Paulson clarified his comments, saying 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”

Meanwhile, both Mr Bernanke and Mr Paulson insisted that they had not advised Mr Lewis to conceal Merrill’s mounting losses from his shareholders.

“Questions of BofA’s disclosures were left up to Bank of America,” Mr Paulson’s spokeswoman said. The Fed said: “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.”

Mr Cuomo said in his letter that Mr Bernanke refused to give a deposition to his inquiry, citing bank examiner privilege.

The decision by Mr Cuomo to disclose sensitive details less than a week before BofA’s annual shareholder meeting could galvanise opposition against Mr Lewis and the board.

“This is a symptom of their mismanagement of the entire process,” said Jon Finger, whose family owns 1.5m BofA shares.

“Bank of America is the only financial institution to get itself into this kind of mess with an acquisition.”

In an interview with Mr Cuomo’s office, Mr Paulson said he brought up the subject of a management change at “the request” of Ben Bernanke, the Federal Reserve chairman, the letter said. Mr Bernanke did not give a deposition, citing bank examiner privilege. The Federal Reserve refused to comment.Mr Paulson quoted Mr Lewis as responding to his comments on management change by saying: “That makes it simple. Let’s de-escalate”.According to minutes from its December 22 meeting, the BofA board agreed to proceed with the deal after Mr Paulson and Mr Bernanke pledged to provide financial assistance, which eventually totalled $20bn. The minutes also say the board “was not persuaded or influenced” by the threat of removal.

Mr Lewis said there was no discussion with his board about whether his concerns about the Merrill deal should be disclosed to shareholders. But Mr Cuomo attached an e-mail from Mr Lewis to his board on December 22 saying the Treasury could not guarantee its support in writing because such a letter would trigger disclosure requirements, which, Mr Lewis wrote, “we do not want”. BofA said: “We believe we acted legally and appropriately with regard to the Merrill Lynch transaction.”

Reporting by Greg Farrell in London, Francesco Guerrera and Saskia Scholtes in New York, and Krishna Guha in Washington





Paulson and Bernanke pressed on BofA deal
By Krishna Guha in Washington
Copyright The Financial Times Limited 2009
Published: April 24 2009 20:18 | Last updated: April 24 2009 20:18
http://www.ft.com/cms/s/0/ee1ca728-3100-11de-8196-00144feabdc0.html


Hank Paulson, former US Treasury secretary, and Ben Bernanke, Federal Reserve chairman, were under scrutiny on Friday following disclosures about their alleged roles in putting pressure on Bank of America to complete its acquisition of Merrill Lynch, the troubled investment bank.

According to Andrew Cuomo, New York state attorney-general, Ken Lewis, the chief of BofA, told investigators under oath that his decision not to tell shareholders about the deterioration in Merrill assets before the takeover was completed was the result of pressure from Mr Paulson and Mr Bernanke. “I was instructed that: we do not want a public disclosure,” he allegedly said.

Mr Lewis is also said to have claimed Mr Paulson threatened that the entire board and management of BofA would be fired if it tried to renege on the deal. Mr Cuomo said on Thursday that Mr Lewis’s testimony and other findings “raises fundamental questions about the interaction of regulators and those they regulate”.

Mr Paulson does not dispute that his warning to Mr Lewis about what would happen if BofA tried to back out would have been seen as a threat. But he contradicts Mr Cuomo’s claim that he told investigators he acted “at the request” of Mr Bernanke, BofA’s chief regulator.

Mr Bernanke and Mr Paulson deny telling Mr Lewis not to disclose information about the deterioration in Merrill’s assets before the completion of the deal. Mr Paulson’s spokeswoman said he took a firm line, based on advice from Fed lawyers, that BofA did not have legal grounds to exercise a “material adverse change” clause that might have provided it with an escape route.

Hal Scott, a professor of law at Harvard, said it could be reasonable for federal officials – acting in the national interest at a time of crisis – “to point out to people that you have certain powers you may exercise if they don’t do what you think is appropriate”.

He said the disclosure question was the more important one in legal terms. However, he said the “primary responsibility to disclose material information is always with the chief executive.” Mr Scott said that even if Mr Paulson had urged Mr Lewis not to disclose, he would be “troubled” if Mr Lewis saw that as grounds for not disclosing.