Econontersect: A group of shareholders is suing Bank of America for $50 billion. The plaintiffs are charging that BAC deliberately withheld material information from shareholders before conducting a vote to approve the acquisition of Merrill Lynch in the fall of 2008. The group of plaintiffs includes some big investors, such as the Ohio Public Employees Retirement System and the second largest pension plan in Europe from the Netherlands. The lawsuit claims that BAC failed to disclose that there would be a $15.3 billion loss and that shareholders voted to approve the purchase without that knowledge. The complaint charges what happened was a deliberate deception.The charges state BAC senior management, which included CEO Ken Lewis and Chief Financial Officer Joseph Price decided to keep quiet about Merrill’s huge losses after they learned of them. Some of the details of what happened have been discussed by Steven Davidoff in Dealbook at The New York Times:
Mr. Price met with the bank’s general counsel, Timothy J. Mayopoulos, to discuss whether to disclose the loss — at the time about $5 billion — to Bank of America shareholders. Mr. Mayopoulos testified to the New York attorney general’s office that while his initial reaction was that disclosure was warranted, he decided against it. Merrill had been losing $2.1 billion to $9.8 billion a quarter during the financial crisis, and so this loss would be expected by Merrill and Bank of America shareholders.
Plaintiffs in the private action and the New York attorney general’s complaint claim that after this meeting, Mr. Price and other senior executives at Bank of America sought to keep this loss quiet and that Mr. Price in particular misled Mr. Mayopoulos.
Mr. Mayopoulos has testified that on Dec. 3, 2008, Mr. Price told him that the estimated loss would be $7 billion.
Mr. Mayopoulos concluded again that no disclosure was necessary. Plaintiffs contend that Mr. Price misled Mr. Mayopoulos as the forecasted loss at this time had now grown to more than $10 billion.
The Bank of America vote occurred on Dec. 5 without its shareholders knowing about this gigantic looming Merrill loss, which was now about $11 billion.
Mr. Mayopoulos has testified he was surprised at this higher number when he learned of it at a Dec. 9 board meeting. Mr. Mayopoulos sought to meet with Mr. Price about the new loss. The next day, Mr. Mayopoulos was fired and escorted out of the building.
Two weeks after the deal closed BAC announced that Merrill had suffered at $15.3 billion loss. More of the discussion of by Davidoff makes very good reading. Follow the Dealbook link below.
Halah Touryalai has written an article for Forbes, “In Defense of the Bank of America Merrill Lynch Deal. Touryalai wrote:
I can’t help but wonder is how anyone could have been surprised at the extent of Merrill’s losses. In the first three quarters of 2008 Merrill had already reported over $14 billion in losses. As Registered Rep. pointed out back in 2008 Merrill was on the verge of death all year– “through the second quarter, Merrill wrote down about $50 billion in the credit crisis. That sum wiped out about 4.5 years of the company’s earnings (not including the three-straight quarterly losses) — or 86 percent of its book value.”
At the time, BofA was stepping in to buy a dying Merrill Lynch, not a healthy one, and that was no secret. If Merrill wasn’t in such a terrible financial condition Ken Lewis wouldn’t have seriously considered invoking a clause back in December 2008 which would have allowed BofA to exit the deal. Lewis tried to invoke the so-called MAC (material adverse change) clause when Merrill’s fourth-quarter losses were skyrocketing from $9 billion to $12 billion at one point.
But it was the government, specifically then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, who convinced (or threatened, depending on who you ask) Lewis from backing out of the deal. According to Lewis, Paulson said in December of 2008 that if BofA backed out then the government would remove its Board and management. So, Ken Lewis could either buy Merrill or the government would end his career.
Touryalai seems to believe that Ken Lewis was “offered a deal he couldn’t refuse,” using Godfather terms.