Pressure builds on BofA's
Blaming Hank Paulson for
being forced to keep details about the Merrill deal secret won't help the
Bank of America CEO in a struggle with shareholders.
Barr, senior writer
Last Updated: April
23, 2009: 9:42 PM ET
Ken Lewis will
face a potentially contentious shareholder meeting next
NEW YORK (Fortune) -- Questions
about whether Bank of America breached its duties to shareholders come at an
inconvenient time for embattled CEO Ken Lewis.
documents released Thursday by a top state prosecutor, the BofA (BAC,
Fortune 500) chief met repeatedly late last year with federal regulators
and the bank's board to discuss the deteriorating condition of Merrill
Lynch, the struggling brokerage BofA had agreed to acquire in September.
At one point,
according to an account released by New York Attorney General Andrew Cuomo,
Lewis told then-Treasury Secretary Henry Paulson that BofA was considering
backing out of the Merrill deal -- only to relent when Paulson said
regulators, fearing a financial sector collapse, might respond by removing
Lewis and his directors.
report certainly won't go down as a shining moment for a government that has
twisted itself in knots claiming it wasn't pulling the strings at financial
firms it invested in.
But worse, to
some observers, is BofA's failure to disclose any of this information to its
shareholders -- regardless of Lewis's claim he was being leaned on by
could increase the pressure on Lewis as he and some members of the BofA
board face re-election next week at the company's annual shareholder
for me to believe the Treasury and the Federal Reserve would tell Ken Lewis
to violate securities laws," said Jonathan Finger, a longtime BofA investor
who has been critical of Lewis' penchant for empire building at shareholder
expense. "Regardless of the pressure he may have felt, Ken Lewis still had a
duty to protect shareholders and disclose relevant information."
in a letter to congressional leaders and other top federal officials
Thursday that facts unearthed in his investigation raise questions about
"corporate governance and disclosure practices at Bank of America."
dismisses questions about its handling of the deal.
we acted legally and appropriately in the Merrill Lynch transaction,"
spokesman Scott Silvestri said.
observers aren't bowled over by Lewis' claim that he was strong-armed by
the special inspector general of Paulson's Troubled Asset Relief Program,
cautions that reports of the discussions among Lewis, Paulson and Fed chief
Ben Bernanke may overstate the pressure that was applied to Lewis.
"You need to
talk to all the participants in the conversation before you can come up with
a conclusion of 100% of what happened," he told CNNMoney.com Thursday.
generally confirmed Lewis' account, the Cuomo report said.
discussions 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,"
Paulson's office added in a statement Thursday.
Reserve said it did not ask Lewis to stay quiet about his concerns.
"No one at
the Federal Reserve advised Ken Lewis or Bank of America on any questions of
disclosure," said Michelle Smith, a spokeswoman for the Fed. "It has long
been the Federal Reserve's view that questions of this nature are best
addressed by individual institutions and their legal counsel."
spokesman said late Thursday that the commission is reviewing the report.
"We have been
actively reviewing the disclosure surrounding the merger between Bank of
America and Merrill Lynch," SEC spokesman John Nester said in an e-mailed
statement. "The issues identified in New York Attorney General Andrew
Cuomo's letter are part of our review."
shareholders to grill Lewis
Lewis is due to address BofA's
investors -- who have seen the value of their holdings plunge over the past
year, as the bank has been buffeted by collapsing asset values and a pair of
questionable acquisitions -- next Wednesday at the bank's annual shareholder
meeting in Charlotte, N.C.
longtime BofA shareholder who is trying to unseat Lewis and some board
members at the meeting, said the allegations in the Cuomo report chip away
at the already impaired credibility of Lewis and his board.
other big investors, including giant pension plan operator TIAA-CREF, have
said they won't vote for Lewis at the meeting.
issue here is transparency, and shareholders' right to know crucial facts
about the acquisition of Merrill Lynch," said Connecticut treasurer Denise
Nappier, who runs the $20 billion state retirement fund and has demanded
Lewis's resignation. "Our right to transparency trumps any concern Lewis may
have had about saving his job or keeping the current board in place."
who runs the Shareholder Forum investor advocacy group in New York, says the
most damning allegations in the Cuomo report come from the minutes of the
BofA board meetings Dec. 22 and 30 of last year.
describe the "detailed oral assurances" federal regulators supposedly made
to BofA executives. The Federal Reserve and Treasury agreed to provide
financial support to the bank after it completed its acquisition of Merrill
Lynch and before the bank's scheduled Jan. 20 earnings release, the minutes
On Jan. 16,
the bank and regulators announced that the government did cough up $20
billion in new capital and $118 billion in asset guarantees for Bank of
America. BofA had received $25 billion, counting Merrill's allocation, in
the first round of TARP funding.
But in late
December, before the deal's Jan. 1 completion, regulators couldn't make
those promises in writing, according to the minutes, "because any written
assurances would require formal action by the Fed and Treasury -- which
formal action would require public disclosure."
The lack of
formal written agreements at the time BofA decided to go through with the
deal suggests neither party was faithful to its own decision making
processes and disclosure duties, said Lutin, whose forum has been
questioning the reliability of corporate disclosures since the dot-com
insanity a decade ago.
promise might be tougher to enforce in a legal dispute -- but if it was made
in good faith, Lutin wondered why the bank wouldn't disclose it.
Paulson said he could not provide a letter because there was not yet a
specific action plan and he believed that Treasury releasing a vague letter
reiterating Treasury's public commitment to prevent systemically important
institutions from failing would not help Bank of America but would instead
rattle markets by creating more questions than it answered," Paulson's
statement said. "Questions of BofA's disclosures were left up to Bank of
venture that BofA didn't disclose the information because it didn't want to
further stress out shareholders. The bank lost two-thirds of its market
value between October and the middle of December.
the ramifications, corporate officers are duty bound to disclose material
information. So if the Cuomo report's account is accurate, Lutin said, "it
would mean Lewis is a wimp as well as a liar."
CNNMoney.com senior writer Jennifer Liberto contributed
to this report
First Published: April
23, 2009: 3:50 PM ET
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