A controversial document from the WSJ came out today containing Ken Lewis’ testimony before New York Attorney General involving the merger with Merrill Lynch. According to the testimony, he learned of Merrill’s worsening losses on December 13 when he was informed by their CFO Joe Price. Then, to the juicy part.
Mr. Lewis testifies about his discussions with Mr. Paulson about the possibility of Bank of America walking away from the Merrill deal, citing the “material adverse effect” clause in its merger agreement:
Mr. Lewis: I remember, for some reason, we wanted to follow up and see if any progress — as I recall, we actually, had not agreed to call a MAC [material adverse condition] after the conversation that we had, and so I tried to get in touch with Hank, and, as I recall, I got a number that was somebody at the Treasury kind of guard-like thing. He had a number for Hank, and Hank was out, I think, on his bike, and he — this is vague; I won’t get the words exactly right — and he said, “I’m going to be very blunt, we’re very supportive of Bank of America and we want to be of help, but” — I recall him saying “the government,” but that may or may not be the case — “does not feel it’s in your best interest for you to call a MAC, and that we feel strongly,” — I can’t recall if he said “we would remove the board and management if you called it” or if he 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 talk to our board.” And the board’s reaction was one of “That threat, okay, do it. That would be systemic risk.” (emphasis mine)
Now that sounds like a threat. One more:
Mr. Lewis testifies about why he did not disclose Merrill’s losses to BofA shareholders:
Q: Had it been up to you would you [have] made the disclosure?
Mr. Lewis: It wasn’t up to me.
Q: Had it been up to you.
Mr. Lewis: It wasn’t.
Q: Why do you say it wasn’t up to you? Were you instructed not to tell your shareholders what the transaction was going to be?
Mr. Lewis: I was instructed that “We do not want a public disclosure.”
Q: Who said that to you?
Mr. Lewis: Paulson.
Mr. Lewis testifying as to what Mr. Paulson did not want a public disclosure of:
Q: A public disclosure of what?
Mr. Lewis: Of what they were going to be doing for us until it was completed.
This whole thing is like a soap on TV that has just begun. But definitely this could trigger a string of questions and even louder calls for the head of Lewis. From the looks of it, Lewis was trying to protect himself and some limited number of people versus protecting the bigger group of shareholders. It is probably makes sense to argue that had they not gone with the transaction, situation at the time would have been worse. But somehow I don’t buy the idea that it was really for the sake of minimizing the fear/panic in the market. After all, did we really expect the banks to be profitable? Or provided they incurred losses, did we really expect the losses to be steady? Furthermore, the manner by which this was done is questionable. Push through with the deal or they could bid farewell to the bank, push through or no additional capital, and be quiet about the losses or the situation could be worse (and/or he could be under fire even more for a firm that is losing money big time).
Lewis’ saving grace would probably only come from Merrill turning out to be a really good deal, but even so it would probably too late by then. He would be long gone from BofA.
Treasury clarified the issue and Fed defended itself today after a document containing the testimony of BofA’s Ken Lewis in February revealed statements by the CEO saying that he was urged by the two to be quiet about the losses of Merrill Lynch. Fed spokeswoman Michelle Smith cleared things out this afternoon in an email:
“No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure. It has long been the Federal Reserve’s view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities.”
In a separate message, a spokesperson for Paulson said:
“Secretary Paulson’s words were his own,” the spokesman said. “(Fed) Chairman (Ben) Bernanke did not instruct him to indicate any specific action the Fed might take.”
However, Neil Barofsky, the special government inspector general assigned to oversee the Troubled Asset Relief Program warned that conclusions not be reached easily about the words that were said.
“I would caution anyone from leaping to too many conclusions about what Secretary Paulson or Chairman Bernanke said until we’ve looked at all the facts and reported on them,” Barofsky, who said he witnessed Lewis’ testimony, told the economic panel. “The conclusion that one may draw that it’s black and white that there was an order from the United States government not to disclose this information, I don’t think it’s as crystal clear.”