The Wall Street Journal scoops this morning that Bank of America knew two days before its shareholders voted (we had questions about press coverage of that back then) to buy Merrill Lynch that the dog of a company it was buying was getting mangier by the day.
The Journal has the smoking gun here that ought to do in CEO Ken Lewis: The bank’s estimates of Merrrill’s losses swelled considerably—by almost $2 billion—two days before BofA shareholders approved the acquisition, on a downward revenue adjustment of $3 billion.
That increased Merrill’s already-known losses by 27 percent, something BofA decided wasn’t “material” enough to disclose. Uh huh. Those attorneys who’ve filed the shareholder lawsuits are excitedly rubbing their palms together right about now.
The Journal does well to put this up high, in the fourth paragraph:
There was disagreement inside the bank about whether to tell shareholders about Merrill’s losses, which companies must do if they suffer materially significant financial hits, people familiar with the discussions said.
And to put this in the sixth:
James Cox, a professor of corporate and securities law at Duke University, said it “is highly likely” that a change of $2 billion in Merrill’s forecasted net losses “would be material, but it is even more likely to be material if this was indicative of conditions at Merrill that were deteriorating.”
And this isn’t all. It appears the bank knew the numbers were going to get even worse, but still didn’t find that newsworthy for shareholders:
“December may take some further hits,” Neil A. Cotty, acting chief financial officer… wrote in a Dec. 3 email to Merrill Chairman and Chief Executive John Thain. “Turning a profit in December may prove to be challenging.”
Combine this with Lewis’s purchase of Countrywide, his foolish deal for Merrill, his going through with the deal, his lying to shareholders about aspects of the deal, the resulting massive bailout of his bank by Uncle Sam—and it’s a head-scratcher why he still has a job. I imagine he won’t shortly.
My question is why the bank would think it didn’t have to disclose the worsening losses. Was it trying to make sure Lewis didn’t suffer an embarrassing defeat at the ballot box?
We’ll see more on this in the coming days.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.