Bank of America shareholders are still stunned by the losses at Merrill Lynch, demanding to know why they paid tens of billions for an investment bank that appears to be a blackhole of value. Why weren’t they told about the huge hole in Merrill balance sheet?
Could the government have asked Bank of America and Merrill Lynch executives to keep quiet about the size of Merrill problems? Officially, of course, the answer is “no, absolutely not.” And it’s probably true that no one directly told Bank of America chief executive Ken Lewis not to disclose the losses to shareholders. But a few winks and nods can go a long way. We’re betting that Lewis, at least, believed he was sticking to the script when he went quiet about Merrill.
Dennis Berman raises the possibility that we are in the midst of developing a “national interest” exception to rules requiring corporations to disclose material information. It would permit, or even require, financial firms to not disclose key pieces of information if officials believe that information would cause investor panic or undermine emergency rescue plans. The main problem with this idea: it creates even more uncertainty in the markets by undermining investor confidence. Now they have to worry what the government and the management of their company might be keeping from them.
Did Mr. Lewis stay quiet on his own or at the request — subtle or explicit — of Messrs. Bernanke and Paulson? A person close to the Fed said no such request was made. Divining the government’s intentions, however, still are murky. In a conference call last week Mr. Lewis said that “we spoke to and were in close coordination with officials from both the Treasury and the Federal Reserve,” adding that “the government was firmly of the view that terminating or delaying the closing…could result in serious systemic harm.”
Investors understand the markets are in a state of emergency. But they can quickly lose confidence when they suspect that the building block of investing, quick and thorough disclosure, may be subject to government fiat. That breeds more conspiracy theories and fear over the long term.
“It’s bizarre. Is the government complicit in nondisclosure? If any other party were involved, there could be [Securities and Exchange Commission] enforcement action and all sorts of problems,” said one Delaware lawyer.
Corporate-law observers said the Merrill deal puts the federal government on an inevitable crash course with shareholders-rights attorneys. By Delaware laws, board directors’ loyalties are to shareholders, not to the federal government or a vague national interest.
“If it’s harmful to your company, I don’t believe Mr. Paulson could impose his will on you to act against your shareholder interest,” said Jerry Silk, an attorney at plaintiffs firm Bernstein Litowitz Berger & Grossmann LLP. Lawyers said that it is possible a new legal standard could eventually emerge from transactions like Merrill: that of a “national-interest” doctrine, absolving companies of governance actions that may be potentially harmful, but are important to an economic or defence emergency.
Until then, the patchwork of federal bailouts may be essential short-term fixes. But without developing a consistent set of rescue principles, we may find that we have saved the system only to have destroyed what it stands for.