The New York Times’s Gretchen Morgenson has a big story today on how Bank of America fooled shareholders into approving its ill-fated merger with Merrill Lynch.
Former CEO Ken Lewis, the business genius who drove his bank into quasi-nationalization with two of the worst acquisitions of all time in Countrywide and Merrill Lynch, has testified in a civil suit that he and his executives misled shareholders on the Merrill deal, Morgenson reports. Lewis says that before shareholders voted to approve the deal, he and other executives knew Merrill’s losses had intensified dramatically and intentionally failed to inform them. He didn’t even tell his board of directors until after the vote.
Worse, Lewis, despite knowing that internal estimates predicted the deal would dilute 2009 earnings by 13 percent, told shareholders at the vote that it would be just a 3 percent dilution, and misled them that 2010 was expected to be accretive (add to profits) when he now knew it would not be.
It appears that if you can get a lawyer—any lawyer to bless something, you can get off the hook. Recall how Lehman Brothers shopped around until it found a London law firm willing to sign off on its Repo 105 book cooking. So no prosecutions.
Lewis says he didn’t inform shareholders “because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary,” in the NYT’s words. I’d like to see some follow stories focus on just how lawyers could advise that not disclosing billions of dollars in new losses was okay.
And do executives have to follow the law themselves even when given bad legal advice? Why should that allow Lewis to stand up at the shareholder meeting and knowingly give false numbers to voters?
Fortunately there’s a complication here on the launder-it-through-the-lawyers front for Lewis and Bank of America: Its own top lawyer, Timothy Mayopoulos, was left out of the loop at first and then when informed, tried to get the loss disclosed. He couldn’t even get a meeting with the CFO, Joe L. Price. Then:
The next day, the filing noted, Mr. Mayopoulos was “fired without explanation and immediately escorted from the premises, without being given the opportunity to collect his personal belongings.”
Not only that, but the company’s treasurer, Jeffrey J. Brown, told Price the CFO that he had to disclose the bigger losses. Not doing so “could be a criminal offense, stating that he did not want to be ‘talking through a glass wall over a telephone’ if no disclosure was made.”
Morgenson, rightly, points out up high that this will raise—yet again—the question of why there has been so little accountability for executives. But she doesn’t mention that this scandal has already been investigated by the SEC, which levied its usual slap on the wrist: A mere $33 million fine.
It’s revealing then that it’s taken private lawsuits to get this critical information when the government (which you should note urged Lewis to do the Merrill deal) has already supposedly investigated it.
How many US taxpayers lied to the banks that they had sufficient capitol or could pay off their mortgages, and when they couldn't, we had the 2008 financial meltdown.?
#1 Posted by R.M. Gautreaux, CJR on Mon 4 Jun 2012 at 04:14 PM
What Ryan leaves out of the story: "...the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch..."
And THERE we have the rest of the story..
Context Ryan deliberately and routinely denies his readers...
Another example of the Gubmint interfering in business and the taxpayers paying the price for it.
#2 Posted by padikiller, CJR on Mon 4 Jun 2012 at 05:30 PM
Padi:
"It’s revealing then that it’s taken private lawsuits to get this critical information when the government (which you should note urged Lewis to do the Merrill deal) has already supposedly investigated it."
#3 Posted by Ryan Chittum, CJR on Mon 4 Jun 2012 at 06:05 PM
Yeah, you got in-depth there regarding the Gubmint's complicity in this stupid deal.
What role did the Gubmint play in hiding information from shareholders? HUH?
If the Gubmint was beating up on BoA to bail out Merrill Lynch, no wonder they cut corners and hid the ball.
Gubmint coercion at work and all we get is that the Gubming "urged" the deal?
Your readers deserve some details regarding this intervention. Why not do some of that "journalism" thing and give it to them?
Oh wait... I know... In Chittumland, the Gubmint can do no wrong.
#4 Posted by padikiller, CJR on Mon 4 Jun 2012 at 06:30 PM
Oh, well... SOMEBODY has to do that "journalism" thing around here, so I guess it falls to me.
When Ryan writes in Chittumese that the Gubmint "urged" the deal, the english translation is "the Gubmint knew that Merrill Lynch's forecasts had been downgraded but nonetheless directly threatened to remove the entire management of Bank of America if BoA scrapped the purchase of Merrill Lynch citing a Material Adverse Change".
This is the FACT OF THE MATTER.
Bank of America had a way out of the contract to buy Merrill Lynch... A "Material Adverse Change" ("MAC") clause in the purchase contract that it could have invoked to scuttle the deal, given the change in the forecast of Merrill Lynch's prospects.
And Bank of America's management suggested doing precisely that.
But then what happened. The Gubmint happened, that's what.
The Federal Reserve strong-armed Bank of America's management into going through with the deal anyway...
"The Treasury and Fed state strongly that were the corporation to invoke the material adverse change 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," Lewis told directors, according to the company's minutes from a board meeting.
And former Treasury Secretary Henry M. Paulson Jr. said in an interview with the New York attorney general's office that he had conveyed the warning to Lewis "at the request of Chairman Bernanke," according to a letter from the attorney general's office to members of Congress.
But hey? Why let the mere facts detract from another Chittum Fairy Tale of corporate greed and fraud, right?
#5 Posted by padikiller, CJR on Mon 4 Jun 2012 at 06:50 PM
When this origininally came out, in early 2009, I thought that there were indications that SecTreas Paulson and President of the NY Fed President (Now SecTreas) Geithner had leaned on Merrill and BoA to conceal this so that the deal could go through.
#6 Posted by Matthew G. Saroff, CJR on Tue 5 Jun 2012 at 10:22 AM
There weren't just "indications" that Paulson threatened BoA... Paulson admitted that he did exactly that to the NY Attorney General, and that he personally made the threat by conveying the Fed's intent to sack the management and board of BoA if they invoked the MAC clause to cancel the purchase of Merrill Lynch.
But see, here in Chittumland, we don't speak of such things in terms of coercion or threats... Tsk, tsk... The beloved Gubmint didn't "lean" on anybody. And we don't need to burden the readers with any nasty details that might confuse them out of placing the blame solely on the shoulders of BoA management, where we've already determined the blame must lie.
The Gubmint merely "urged" the bank to go through with the sale.
You've gotta love that word!.. "Urge".
Such a positive connotation! Like "inspired"... Or "encouraged".
What kind of Benevolent Leader wouldn't "urge" the minions to get a deal done!
Kinda like an armed robber uses a gun to "urge" a victim to hand over a wallet, or like a boss uses a pink slip to "urge" an employee to change a work habit.
Such Orwellian euphemisms typify Ryan's anti-capitalist diatribes. As does his trademarked omission of any crucial details that reflect poorly on the Gubmint or on any of Ryan's kindred liberals.
Such is what passes for "professional journalism" here at CJR.
#7 Posted by padikiller, CJR on Tue 5 Jun 2012 at 10:49 AM
So BoA was just an innocent little business that got bullied by big bad government? Please. If the government was the all-powerful entity here, there would be executives going to jail in kangaroo courts. Instead there has been almost no accountability from the banks and other private financial companies. The banks and bankers are getting what they want far more than "government" is getting what it wants (except, of course, the ability for government workers to cross over into the private sector and get the same insanely wealthy deals they are supposed to be regulating).
Much better to say the problem here is the corruption big money is causing on the business-government relationship ... which is pretty much what Chittum is saying.
#8 Posted by Noah Body, CJR on Tue 5 Jun 2012 at 12:35 PM
Yeah... When the Treasury Secretary personally calls a private CEO and tells him that if the CEO doesn't cram a deal down the throats of shareholders, the Gubmint will gut the company in retaliation..
Yeah, Noah... When that happens... The Gubmint isn't responsible.
Get real.
At any rate, my point is not a defense of Lewis or BoA. I don't care if Lewis ends up rotting in prison or if BoA folds (I personally hate BoA - I closed my personal and business accounts there years ago for other reasons).
My point is that Ryan is playing hide-the-ball with his readers in order to further his leftist, anti-corporate agenda.
He's entitled to his screwy collectivist opinion, of course. But he cheats his readers with omission and euphemism. And this isn't "journalism".... It's activism, pure and simple.
I'm just calling it like it is.
#9 Posted by padikiller, CJR on Tue 5 Jun 2012 at 01:14 PM
No, you're calling it as you see it, not as "it is." You seem to have developed the American conservative disease, of thinking that any criticism of business is tantamount to communism. Luckily, most of us conservatives living in the rest of the world are not so demented (even if US nuttiness occasionally affects us).
This blog is dedicated to critiquing business journalism, so it is not surprising that its contributors call out a press that was all "rah rah rah" all the way into the current mega-recession, rather than acting as the fourth estate is supposed to. I like the press to be as adversarial as possible (to those with power), regardless of which party is in charge.
#10 Posted by noah Body, CJR on Tue 5 Jun 2012 at 01:30 PM
Criticize business all you want..
Go for it. Like I said, if Lewis committed a crime, let him rot in prison.
But DON'T hide the ball with the facts.
I'm not talking about the merits of banking or financing. I'm talking about that "journalism" thingie!
Don't reduce a direct threat from the Treasury Secretary himself to gut the management of the largest bank in the U.S. to a parenthetical statement that nameless Gubmint minions "urged" a deal.
#11 Posted by padikiller, CJR on Tue 5 Jun 2012 at 01:54 PM
Capitalism Shapitalism, Leftists Shmetists, it all boils down to a lack of integrity. The reason greed is bad is not because wanting money is evil, but it "allows" you to take what is not yours, or, worse, lie about what you don't have in order to get what don't deserve.
Yes, Capitalism works . . . when you play by the rules! Trouble is some people have a difficulty following them.
#12 Posted by Zev Davis, CJR on Tue 5 Jun 2012 at 02:07 PM
LOVE the way that right-wingers can make the failings of greedy and incompetent business leaders to be the fault of government! Government that business lobbying has turned into lapdogs of business. A mater, in right-wing think, of "Government bad, private business good. Always."
#13 Posted by SJ Jolly, CJR on Wed 6 Jun 2012 at 10:57 AM
"When Ryan writes in Chittumese that the Gubmint "urged" the deal, the english translation is "the Gubmint knew that Merrill Lynch's forecasts had been downgraded but nonetheless directly threatened to remove the entire management of Bank of America if BoA scrapped the purchase of Merrill Lynch citing a Material Adverse Change".
This is the FACT OF THE MATTER."
Hey, I remember that story:
http://abcnews.go.com/Business/story?id=8092013
Do you remember the part where Hank Paulson was a right wing, free market, prick appointed from Goldman Sachs after his bank pioneered some of the techniques used to crater the economy while walking away with their stash of money, right?
You do remember the part where Paulson, the prick, bailed out Bear Stearns and then left Lehman to swing because
he didn't like Dick Fuldof 'moral hazard', right?"JOE NOCERA: Moral hazard poses the question: If you bail somebody out of a problem they themselves cause, what incentive will they have the next time to avoid making the same mistake?
NARRATOR: As a hard-bitten veteran of Wall Street, Paulson had personally made hundreds of millions of dollars believing the best government was no government.
MARK LANDLER: He's an unapologetic free marketeer. He's a Republican. He has that deregulatory mindset that the Bush Administration has. That's why he was chosen...
JOE NOCERA: When I interviewed the secretary of the Treasury, I was really astounded at the vehemence of his reaction towards Dick Fuld. He was very angry. And whether that predated him being Treasury secretary or not, I don't know, but he was very, very angry. He said, you know, "I told Dick Fuld to sell the firm or to look for a buyer because he had a problem, and he wouldn't do it." And he's just, you know, practically pounding the table with his fist.
CHARLES DUHIGG: At this point, he makes a critical decision, because of this issue of moral hazard, that Lehman will be allowed to fail.
JON HILSENRATH: It was a very high stakes game of signalling that he was playing. He wanted to show these guys, you know, all of his old buddies on Wall Street, that they were going to need to step up and do something themselves...
JOE NOCERA: On that last weekend, they really did think they had a deal lined up with either Bank of America or Barclays. But neither Bank of American America nor Barclays were willing to do the deal without the same kind of government guarantees that Bear Stearns got. And this time, unfortunately for Lehman, unfortunately for Mr. Fuld, this time the government said no.
NARRATOR: Moral hazard trumped systemic risk. The government would not intervene. There were no options left. Bankruptcy was now a certainty.
HENRY PAULSON: Good afternoon, everyone. And I hope you all had an enjoyable weekend. [laughter] Yeah. Yeah. Well-
JOHN CASSIDY: The Fed and the Treasury thought that Lehman could go under without causing a major conflagration. It would be a big event, but it wouldn't cause a cataclysm.
HENRY PAULSON: But the American people can remain confident in the soundness and the resilience of our financial system. Thank you very much.
NARRATOR: As soon as he left this room, Paulson would be told the markets were crashing."
So yeah, Paulson was one of those big dick swinging bankers who believed in free markets until the world started crashing in, and then he saw his own bank was threatened and took action.
#14 Posted by Thimbles, CJR on Wed 6 Jun 2012 at 02:20 PM
So what did he do?
""I mentioned the possibility that the Federal Reserve could remove management and the board of Bank of America if the bank invoked the MAC clause. I believe my remarks to Mr. Lewis were appropriate," he says."
Oh, so he made a threat. That's a serious issue if he could make such a threat and act on it.
"However, Paulson emphasizes that Fed Reserve Chairman Ben Bernanke never asked him to indicate "any specific action the Federal Reserve might take." Rather, Paulson says he was simply expressing what he believed was "the strong opinion" held by the Fed -- and shared by the Treasury -- that a Bank of America pull-out was "not a legally viable option … threatened significant harm to Bank of America and to the financial system … [and] would raise serious questions about the competence and judgment of Bank of America's management and board."
The distinction is crucial because Bernanke told the House panel on June 25 that he had never personally threatened to remove Lewis or the bank's board members. In what became to some extent a question of semantics, Bernanke acknowledged that he did have concerns about the bank's management. In response, Rep. Jason Chaffetz, R-Utah, stated, "I'm just not buying that. I think that's a threat."
So did the government's actions constitute a threat? An aide to the House panel's majority staff said that Paulson's testimony "supports the theory that Lewis was engaged in a shakedown."
In the panel's first hearing on the matter, held June 11, Lewis gave the committee his impression of the government's actions. "I would say they strongly advised and they spoke in strong terms, but I thought it was with good intention," he said. Ultimately, Bank of America agreed to proceed with the deal and eventually received another $20 billion in taxpayer bailout money."
Let's remember who Bank of America is
http://www.rollingstone.com/politics/news/bank-of-america-too-crooked-to-fail-20120314
and who Merril Lynch is:
http://www.propublica.org/article/the-subsidy-how-merrill-lynch-traders-helped-blow-up-their-own-firm
Before we go on and on about how these poor firms were bullied into doing things they didn't want to do.
And let's remember who was in charge of the government, mainly the deregulatory, free market bankers who let the crisis explode in our laps, before we talk about how the big bad government strong armed anybody.
We tried market anarchy and you guys lied to (defrauded) your shareholders, clients, and to the limp wristed regulators in charge. The supposed adults were in charge and you blew up the economy.
So don't try and lay that wreckage on the people who are trying to prevent you guys from doing that in future, 'kay?
#15 Posted by Thimbles, CJR on Wed 6 Jun 2012 at 02:39 PM
The relevant POINT is that the Treasury Secretary personally threatening to gut the management of the largest bank in the U.S. unless it paid too much for a brokerage firm.... Is not simply the "urging" of a nameless Gubmint minion to get the deal done.
PERIOD.
Ryan is playing journalistic hide-the ball to further his screwy liberal agenda.
And this is crappy journalism.
PERIOD.
He can and should jump all over Lewis and everybody else all he wants... More power to him! But he shouldn't cover up the Gubmint's role in the deal.
#16 Posted by padikiller, CJR on Wed 6 Jun 2012 at 06:40 PM
Just saw Gretchen C. Morgenson in an interview about the banks and it was the best, most informative and true show I have seen in a long time. Thank you Mrs. Gretchen C. Morgenson for doing such a great job.
#17 Posted by Keith Richard Radford Jr, CJR on Wed 6 Jun 2012 at 07:38 PM
"The relevant POINT is that the dick swinging banker was threatening to gut the some other dick swingers in the largest bank in the U.S. unless it paid too much for a brokerage firm.... Is not simply the "urging" of a nameless Gubmint minion to get the deal done."
Tell me how they would have achieved this, how Paulson and Bernanke would have ravaged BofA. You're a lawyer, give me the legal specifics on how they would have gone after the management of a shareholder controlled bank. Until you do and show me some proof of how they were going to do so, you've got nothing but idle words between some big balling bankers in New York.
Guys like Jimmy Cayne:
http://nymag.com/daily/intel/2009/03/jimmy_cayne_lets_loose_on_time.html
But you want to claim "But then what happened. The Gubmint happened, that's what."
Fine. I will let you have that claim, it's not the government was encouraging openness and honesty with the public during those days of crisis, in spite of the fact that presenting of false information to shareholders constitutes a crime (though you don't think so because you're a double talking shill who, in your words on Repo 105, thinks:
"Shuffling money to dodge a regulation isn't illegal.
That's why.
Or at least, that's what the prosecutors have concluded."
Oh yeah, the 'Gubmint' is the source of all evil and can't be trusted in any way, unless it exonerates your criminal banker buddies. You're a joke, padi.)
I will let you have that claim as long as you acknowledge that IT WAS YOUR GUYS WHO MADE UP THE 'GUBMINT' AT THE TIME.
The fact of the matter is your criminal bankers are to close to the government and hold too much sway over it and it's because of this that they get to break the law with impunity and receive billion dollar bailouts for their troubles, not because the "big bad gubmint makes them do it".
#18 Posted by Thimbles, CJR on Wed 6 Jun 2012 at 08:29 PM
For more info on the BoA/Merrill negotiations, check out the shotgun wedding portion here:
http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter20.pdf
And propublica has been putting up the source material for the lying to shareholders here:
http://www.propublica.org/article/how-bank-of-america-execs-hid-losses-in-their-own-words
#19 Posted by Thimbles, CJR on Wed 6 Jun 2012 at 09:01 PM
It wasn't "My guys" who bailed out Wall Street, Thimbo.
The only way you can sustain your juvenile ad hominem is with outright lies.
You know that I called for Bush's impeachment over the TARP crapola.
Grow up a bit.
Again... The POINT (since this is "journalism" review) is that Ryan is deliberately marginalizing and mischaracterizing the Gubmint's coercion.
That's just a damned fact.
When the Secretary of the Treasury personally communicates a direct threat that the Gubmint will take down the management of the biggest bank in the U.S. unless that bank pays too much for a failing brokerage firm.... The readers deserve to know this.
This is NOT the act of a nameless Gubmint minion "urging" the completion of the deal. PERIOD!
#20 Posted by padikiller, CJR on Wed 6 Jun 2012 at 10:20 PM
"It wasn't "My guys" who bailed out Wall Street, Thimbo.
The only way you can sustain your juvenile ad hominem is with outright lies."
Dude, we can't have a thirty second conversation about the bankers, who through their direct actions and fraud, caused the crisis without you piping in about 5000 black helicopters. Heh, tell me more juvenile ad hominem.
"Again... The POINT (since this is "journalism" review) is that Ryan is deliberately marginalizing and mischaracterizing the Gubmint's coercion.
That's just a damned fact."
No, the point is you are being a deliberate jerk. The fact is Ryan was making a point that the reason this information is coming out is because of private investigations as a result of shareholder lawsuits, not because of government investigation (as it should have YEARS AGO). This ought to have been a result of the SEC investigations whose information would have fed into FBI criminal and the shareholder suits. But it wasn't. Why? Because "the government urged the deal" and therefore "it is revealing" that the government might feel vulnerable and culpable when this information does not come out of government investigation.
But that ain't good enough for you. Oh no, we got to have a big old hissy fit over Hank's panic attacks during the systemic collapse he caused during his "F#ck Lehman" maneuver. Ryan must be labeled a communist because he just implied a government coverup of government complicity in a law breaking action. That's what you're freaking out about.
And in pissing about with the Hank Paulson BS (who was a great guy and was completely sinless, until he walked through the revolving door of government (and anybody who thinks negative about his work at Goldman is 'calling the 5000 black helicopters')) you missed the big error.
It was a $150 million dollar fine levied by Judge Rakoff who had a lot of juicy quotes about the piss poor job the SEC had put before him to stamp, not a $33 million dollar one.
The other thing that has to be remembered is that BoA was actually paid a billion to assume Merrill's liabilities according to page 384 of the Financial Commission report:
"The merger was completed on January 1, 2009, with no hint of government assistance. By the time the acquisition became official, the purchase price of $50 billion announced in September had fallen to $19 billion, thanks to the decline in the stock prices of the two companies over the preceding three months."
How much was their bailout again? 20 billion?
Had the 'Gubmint' not been involved, the whole works would have collapsed, and you know it.
Your guys in the government were negligent because they had the Alan Greenspan attitude that "the market knows best", "the government should not get involved", and "the enforcement agencies of the government should mop up after bubbles, not pop them".
Then government had to help these assh*les limp back to health because of their self inflicted injuries. They broke the law on the way down, and the government helped by looking away, they broke the law limping the way up, and the government helped with moneybombs and looking the other way.
Maybe the government shouldn't keep looking the other way for these bastards and put some of them in jail.
HUH?!
#21 Posted by Thimbles, CJR on Thu 7 Jun 2012 at 01:23 PM
Another good read about the merger if one's interested.
http://www.theatlantic.com/magazine/archive/2009/09/the-final-days-of-merrill-lynch/7621/1/
Notable bit:
"Lewis kicked off the discussion by talking about how Bank of America, in the fourth quarter of 2008, would likely suffer its first quarterly loss in 17 years—a loss entirely independent of the Merrill deal—and then Price walked Paulson, Bernanke, and their aides through the magnitude of the losses that Merrill had taken. “The main thing we were concerned about was the very large hole that would have been created” in Bank of America by Merrill’s losses, Lewis said in his deposition. The Bank of America executives then broached the idea of invoking the merger agreement’s MAC clause. But Paulson and Bernanke were unreceptive. They warned Lewis and Price against taking that step, and they urged caution. Lewis was told to “stand down” for the moment, he recalls, until Paulson and Bernanke had a chance to put their heads together. “And so we left,” Lewis said.
By December 20, Bernanke had come to the view that “the MAC threat is irrelevant because it is not credible,” according to an e-mail written that day by Jeffrey Lacker, the president of the Federal Reserve Bank of Richmond, who had just spoken to Bernanke. “Also,” he wrote, Bernanke “intends to make it even more clear that if they play that card and then need assistance, management is gone.”"
Wait, the threat was "if you don't buy Merrill and you need help later, as terms of your bailout we're going to replace management - like was done with GM"?
That's a little different from the "We're gonna hunt you down like a gazelle in the Serengeti" image you're trying to push.
#22 Posted by Thimbles, CJR on Thu 7 Jun 2012 at 01:31 PM