In his testimony to Andrew Cuomo, Bank of America CEO Ken Lewis said that the reason he did not tell Bank of America shareholders about Merrill Lynch’s “devastating” losses prior to the closing of the Merrill acquisition was that Hank Paulson and Ben Bernanke instructed him not to.
Bernanke flat out denied this. Hank Paulson, meanwhile, told Cuomo that the Treasury just wanted to avoid promising something to Lewis that would require the Treasury to make a public disclosure.
The Fed’s emails reviewed by the Wall Street Journal in preparation for Lewis’s Congressional testimony make no mention of the Fed urging Lewis to keep the losses secret. This does not mean that the Fed did not, in fact, order Lewis to deceive his shareholders, but it certainly does not support his contention that it did.
The Fed emails do, meanwhile, suggest that Lewis was quite aware that not disclosing the losses would likely lead to shareholder lawsuits: Bernanke told colleagues about Lewis’s concern about these lawsuits and asked a Fed lawyer whether the Fed might help Bank of America defend itself against them. The lawyer advised against this.
The Fed emails also make clear that Bernanke supported the idea of threatening to fire Lewis if he invoked the Material Adverse Change clause to kill the deal. And, at the same time, they suggest that the decision to proceed with the Merrill deal should be Lewis’s and Lewis’s alone:
WSJ: Around this time, the transcript indicates, Fed officials started realising that the responsibility for the decision about whether to buy Merrill had to be Mr. Lewis’s, and that the Fed shouldn’t force him to do the deal. Mr. Bernanke asked the Fed’s attorneys whether the central bank could help Mr. Lewis if he were to be sued, by letting him cite the Fed’s position that invoking the MAC “is not in the best interest of his company.”
Fed General Counsel Scott Alvarez advised against doing that. The next day, he wrote: “Making hard decisions is what he gets paid for and only he has the information needed to make the decision — so we shouldn’t take him off the hook by appearing to take the decision out of his hands.”
Based on these emails, was Bank of America “pressured” to go forward with the Merrill deal, as Ken Lewis has contended? Yes. But it certainly wasn’t ordered to.
Was Ken Lewis ordered to keep the losses secret from his shareholders, as Ken Lewis has contended? No.
Were the losses material information that Bank of America shareholders should have been informed of prior to the closing of the transaction? Yes.
Did the undisclosed losses have a material impact on Bank of America’s stock price after they were disclosed? Yes.
Is it a miracle that Ken Lewis is still the CEO of Bank of America after all this? Yes.