The Devil Really Did Make Ken Lewis Do It

Thursday, the Attorney General of New York released a letter summarizing the testimony (provided below) of Ken Lewis, Bank of America's CEO, regarding the acquisition of Merrill Lynch. Lewis's testimony describes the strong arm tactics used by Paulson, Bernanke, and federal regulators to continue the acquisition despite the fact that BAC's due diligence determined that Merrill was likely to realize a $14 billion loss for the 4th quarter of 2008. The extent of Merrill's deterioration was revealed to Lewis on 12/14/08 and he subsequently contacted then Treasury Secretary Paulson to indicate BAC's intent to invoke the Material Events Change (MAC) clause in the acquisition contract to void the deal. What followed was a series of threats by Paulson and Bernanke to fire Lewis and the board of directors, if the merger didn't proceed as planned.

We know that the board was aware of the threats by the meeting minutes attached as
Exhibits B and C. Paulson and Bernanke made verbal assurances to Lewis that the resulting losses from Merrill would be covered by future bailout disbursements, but they refused to give a written assurance for fear of disclosure (Exhibits C and D). As you probably know, the merger was completed and BAC reported over $15B in losses directly attributable to Merrill in the 4th quarter. Clearly, Lewis and BAC's board was derelict in its duty to shareholders. In fact, it can be argued (and it should be in court) that shareholders were deceived by senior BAC management so that said management could retain their lucrative positions. Who did Paulson, Bernanke, and BAC leave holding the bag? The usual suspects; Fidelity, Vanguard, State Street, T Rowe Price, and other retirement fund managers. In other words, us. Again.

As we're in the midst of the Crap Rally That Will Not Die, I can only wonder who else the Fed and Treasury have put the boots to. Their actions with BAC were blatantly illegal, so it's hard to remove much from consideration. I have grave doubts about shadowy Fed-surrogates, behind grassy knolls, buying S&P500 futures, since this could be detected in historical volume data. Perhaps, Tyler Durden of Zero Hedge has it right when he says that hedge funds and GS are the real Plunge Protection Team, flitting in and out of low volume markets to manipulate prices. However, Occam's Razor rarely disappoints, so I'm inclined to look towards the $3.5T slush fund that is perfect for this very thing. This slush fund contains the dumbest money ever, has little transparency, won't stand the test of redemption for years, and is controlled by few, some of whom are even TARP recipients.

Most equity retirement (401(k)/IRA) mutual funds claim a maximum stock allocation of 80%, but I'd wager that they are quite a bit north of that. In fact, I wouldn't be shocked to find that some of the $3.8T of money market funding hadn't slipped the leash and found its way into the equity markets. Lewis testified and Paulson corroborated that the government verbally promised to "fill the holes," so I don't think my tin foil hat is terribly shiny here. Nevertheless, this is purely speculation from an entirely unqualified observer, so I encourage you to peruse the Investment Company Institute's archive of mutual fund data and annual Factbook, the EBRI's Databook, and Federal Reserve Board's Flow of Funds Z.1 and see what's what.

Ken Lewis Testimony_BAC_AGNY

STATE OF NEW YORK OFFICE OF THE ATTORNEY GENERAL 120 Broadway New York, NY 10271 ANDREW M. CUOMO Attorney General (212) 416-8050 April 23, 2009 The Honorable Christopher 1. Dodd, Chairman u.s. Senate Committee on Banking, Housing, and Urban Affairs 534 Dirksen Senate Office Building Washington, DC 20510 The Honorable Barney Frank, Chairman House Financial Services Committee Democratic Staff 2129 Rayburn House Office Building Washington, DC 20515 Re: Mary L. Schapiro, Chairman U.S. Securities and Exchange Commission Office of the Chairman 100 F Street, NE Washington, DC 20549 Ms. Elizabeth Warren, Chair Congressional Oversight Panel 732 North Capitol Street, NW Rooms C-320 and C-617 Mailstop: COP Washington, DC 20401 Bank of America - Merrill Lynch Merger Investigation Dear Chairpersons Dodd, Frank, Schapiro and Warren: I am writing regarding our investigation of the events surrounding Bank of America's merger with Merrill Lynch late last year. Because you are the overseers and regulators of the Troubled Asset Relief Program ("TARP"), the banking industry, and the Treasury Department, we are informing you of certain results of our investigation. As you will see, while the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America. Because some matters relating to our investigation involve federal agencies and high-ranking federal officials charged with managing the TARP program, we believe it is important to inform the relevant federal bodies of our current findings. We have attached relevant documents to this letter for your review. On September 15,2008, Merrill Lynch entered into a merger agreement with Bank of America. The merger was negotiated and due diligence was conducted over the course of a tumultuous September 13-14 weekend. Time was of the essence for Merrill Lynch, as the company was not likely to survive the following week without a merger. The merger was approved by shareholders on December 5, 2008, and became effective on January 1,2009. The week after the shareholder vote - and days after Merrill Lynch set its bonuses ­ Merrill Lynch quickly and quietly booked billions of dollars of additional losses. Merrill Lynch's fourth quarter 2008 losses turned out to be $7 billion worse than it had projected prior to the merger vote and finalizing its bonuses. These additional losses, some of which had become known to Bank of America executives prior to the merger vote, were not disclosed to shareholders until mid-January 2009, two weeks after the merger had closed on January 1,2009. On Sunday, December 14,2008, Bank of America's CFO advised Ken Lewis, Bank of America's CEO, that Merrill Lynch's financial condition had seriously deteriorated at an alarming rate. Indeed, Lewis was advised that Merrill Lynch had lost several billion dollars since December 8, 2008. In six days, Merrill Lynch's projected fourth quarter losses skyrocketed from $9 billion to $12 billion, and fourth quarter losses ultimately exceeded $15 billion. Immediately after learning on December 14,2008 of what Lewis described as the "staggering amount of deterioration" at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event ("MAC") occurred. After a series of internal consultations and consultations with counsel, on December 17,2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter. At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America's CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege. Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced: [W]e wanted to follow up and he said, 'I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but' -- as I recall him saying "the government," but that mayor 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 ifhe said "we would remove the board and management if you called it" or ifhe 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 a while. Let me 2 talk to our board." And the board's reaction was of "That threat, okay, do it. That would be systemic risk." In an interview with this Office, Secretary Paulson [argely corroborated Lewis's account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America's invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson's basis for the opinion was e,ntirely based on what he was told by Federal Reserve officials). Secretary Paulson's threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, "that makes it simple. Let's deescalate." Lewis admits that Secretary Paulson's threat changed his mind about invoking that MAC clause and terminating the deal. Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke. After the threat, the conversation between Secretary Paulson and Lewis turned to receiving additional government assistance in light of the staggering Merrill Lynch losses. Lewis spoke with individual Board members after his conversation with Secretary Paulson. The next day, December 22,2008, the Board met and was advised of Lewis's decision not to invoke the MAC. The minutes of that meeting listed the key points of Lewis's calls with Secretary Paulson and Chairman Bemanke: (i) first and foremost, the Treasury and Fed are unified in their view that the failure of the Corporation to complete the acquisition of Merrill Lynch would result in systemic risk to the financial system in America and would have adverse consequences for the Corporation; (ii) second, the Treasury and Fed state strongly that were the Corporation to invoke the material adverse change ("MAC") clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and Fed would remove the Board and management of the Corporation; (iii) third, the Treasury and Fed have confirmed that they. will provide assistance to the Corporation to restore capital and to protect the Corporation against the adverse impact of certain Merrill Lynch assets: and (iv) fourth, the Fed and Treasury stated that the investment and asset protection promised could not be provided or completed by the scheduled closing date of the merger, January 1, 2009; that the merger should close as schedu[ed, and that the Corporation can rely on the Fed and Treasury to complete and deliver the promised support by January 20, 2009, the date scheduled for the release of earnings by the Corporation. The Board Minutes further state that the "Board clarify[ied] that is [sic] was not persuaded or influenced by the statement by the federal regulators that the Board and management would be 3 removed by the federal regulators if the Corporation were to exercise the MAC clause and failed to complete the acquisition of Merrill Lynch." Another Board meeting was held on December 30,2008. The minutes of that meeting stated that "Mr. Lewis reported that in his conversations with the federal regulators regarding the Corporation's pending acquisition of Merrill Lynch, he had stated that, were it not for the serious concerns regarding the status of the United States financial services system and the adverse consequences of that situation to the Corporation articulated by the federal regulators (the "adverse situation"), the Corporation would, in light of the deterioration of the operating results and capital position of Merrill Lynch, assert the material adverse change clause in its merger agreement with Merrill Lynch and would seek to renegotiate the transaction." Despite the fact that Bank of America had determined that Merrill Lynch's financial condition was so grave that it justified termination of the deal pursuant to the MAC clause, Bank of America did not publicly disclose Merrill Lynch's devastating losses or the impact it would have on the merger. Nor did Bank of America disclose that it had been prepared to invoke the MAC clause and would have done so but for the intervention of the Treasury Department and the Federal Reserve. Lewis testified that the question of disclosure was not up to him and that his decision not to disclose was based on direction from Paulson and Bernanke: "I was instructed that 'We do not want a public disclosure. '" Secretary Paulson, however, informed this Office that his discussions with Lewis regarding disclosure concerned the Treasury Department's own disclosure obligations. Prior to the closing of the deal, Lewis had requested that the government provide a written agreement to provide additional TARP funding before the close of the Merrill Lynch/Bank of America merger. Secretary Paulson advised Lewis that a written agreement could not be provided without disclosure. Lewis testified that there was no discussion with the Board about disclosure to shareholders. However, on the night of December 22, 2008, Lewis emailed the Board, "I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want." The December 30 Board meeting minutes further reflect that Bank of America was trying to time its disclosure of Merrill Lynch's losses to coincide with the announcement of its earnings in January and the receipt of additional TARP funds: "Mr. Lewis concluded his remarks by stating that management will continue to work with the federal regulators to transform the principles that have been discussed into an appropriately documented commitment to be codified and implemented in conjunction with the Corporation's earning [sic] release on January 20, 2009." It also bears noting that while no public disclosures were made by Bank of America, Lewis admitted that Bank of America's decision not to invoke the MAC clause harmed any shareholder with less than a three year time-horizon: 4 Q. Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses? What he was doing was trying to stem a financial disaster in the financial markets, from his perspective. From your perspective, wasn't that one of the effects of what he was doing? Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over long term would still be an interest to the shareholders. What do you mean by "short-term"? Two to three years. A. Q. A. Q. A. Notably, during Bank of America's important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark. Indeed, Secretary Paulson informed this Office that he did not keep the SEC Chairman in the loop during the discussions and negotiations with Bank of America in December 2008. As this crucial recovery process continues, it is important that taxpayers have transparency into decision-making. It is equally important that investor interests are protected and respected. We hope the information herein is useful to you in your federal regulatory and oversight capacities and we remain ready to assist further in any way. We also note that we have been coordinating our inquiry with the Special Inspector General for the Troubled Asset Relief Program, whose investigation also remains open. Andrew M. Cuomo Attorney General of the State of New York cc: Neil Barofsky Special Inspector General Troubled Asset Relief Program 5


  1. Hard to see how we achieve true values that have historically reflected secular mkt bottomw until funds unload shares bought way too high.

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  3. In my opinion, retirement funds are yet another institution that have been perverted into a subsidy for Wall Street. If you ever looking for a rude shock, make some comparisons between NYSE market capitalization, DC/DB plan assets, and the indices.

  4. Yes, and imagine what happens if/when big money is sucked out of these funds.

  5. I imagine that very situation often and what I expect is that they will restrict DC plan redemptions. Notice how Obama never followed through on his promise to depenalize hardship 401k redemptions.

  6. Even early IRA reductions now w/ the 10% penalty is not all that unattractive--considering the spectre of future gov't controls and potentially gargantuan marginal tax rates.