Much of the benefit of the Merrill Lynch (ML) and Bank of America (BAC) merger has been lost to investors for a lack of full disclosure.
It is a fundamental principle of American finance that investors are entitled to be told the material facts of a corporate transaction. Regulators and Ken Lewis, CEO of Bank of America, have repeatedly broken their obligations.
On Sept. 15, 2008, Merrill Lynch and Bank of America agreed to merge. Otherwise, Merrill would have probably shared the fate of Lehman Brothers, which filed for bankruptcy the same day. Although saving Merrill was a noble end, participants at Bank of America and the government have employed questionable means. The American taxpayer and BAC’s shareholders are entitled to credible explanations on a number of the following issues.
First of all, what are the limitations on institutions receiving TARP funds? Bank of America recently revealed a desire to repay $20 billion to avoid government oversight on bonuses. The bank received a total of $45 billion; $25 billion originally distributed last fall was part of TARP, and $20 billion was part of Targeted Investment Program funds. Until now it was widely understood that financial companies owing TARP funds needed approval of the “pay czar,” Kenneth Feinberg, to pay bonuses. Bank of America believes that repaying $20 billion would mean the bank would no longer be considered an “exceptional” aid recipient. If the bank’s interpretation is correct, its shareholders and the public have been misled.
Secondly, what would have occurred if the bank needed a portion of the government guarantee? The press widely circulated in January that the government agreed to absorb $118 billion of losses from a pool of assets owned by Bank of America and Merrill Lynch. Eight months later, we learn that no definitive agreement was signed.
Thirdly, was John Thain, the former CEO of Merrill Lynch the “fall guy” for his part over the outrageous bonuses paid to Merrill employees in 2008? On Monday, Federal District Judge Jed S. Rakoff rejected a proposed $33 million settlement of allegations by the Securities and Exchange Commission that Bank of America “materially lied” in shareholder communications about $5.8 billion in bonuses paid to employees of Merrill Lynch. Lewis testified under oath to New York state’s attorney general, Andrew Cuomo, that government regulators encouraged him to keep silent both about Merrill’s $15 billion fourth-quarter loss and its bonus payout.
Fourth, what were the threats made in December 2008 to induce Bank of America to consummate its merger with Merrill Lynch? Lewis testified that the government had threatened to fire Lewis and the bank’s board of directors for lack of judgment if it did not acquire Merrill Lynch. The bank argued to Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson that Merrill’s losses of $15 billion represented a material adverse change. Paulson and Bernanke denied Lewis’s charges; however, the facts support Lewis.
What were the promises? The government offered the bank an opulent dowry to consummate the merger: an additional $20 billion in TIP funds and $118 billion of guarantees to Bank of America against future Merrill losses.
We must be mindful too that the acquisition of Merrill Lynch had casualties. That is, the shareholders of Bank of America lost billions. Its stock declined from more than $30 per share before the announcement of the Merrill merger to less than $3 because investors fear that the combined companies were not viable. And Main Street will pay still higher taxes to defray our mounting federal deficits.
The merger created a credibility gap. Failure to provide prompt and accurate disclosure has undermined confidence in the integrity of our public markets and the veracity of market regulators.
The bedrock of meaningful financial regulation is built on the principle that a person’s word is his bond.
Originally published in the Sarasota Herald-Tribune
