BofA CEO confirms government coerced him into Merrill deal

Bank of America CEO Ken Lewis is fighting to keep his job because earnings at his company have plummeted. BofA’s acquisition of Merrill Lynch has been a large part of the problem.  Now, understanding that he is being made out to be the fall guy, he has fessed up that BofA was coerced into the deal.

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. — a deal that later triggered a government bailout of BofA — according to testimony by Kenneth Lewis, the bank’s chief executive.

Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

Mr. Lewis’s testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis’s decision to keep problems at Merrill under wraps.

“Everybody — Lewis, Paulson, Bernanke — eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system,” according to an individual close to BofA.

A person in government familiar with Mr. Bernanke’s conversations with Mr. Lewis said Wednesday that the Fed chairman didn’t offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.

Mr. Paulson repeatedly told Mr. Lewis that “the U.S. government was committed to ensuring that no systemically important financial institution would fail,” according to his spokeswoman.

All of this should be quite alarming to American citizens because it demonstrates the lengths to which our government has gone to conceal the true nature of this financial crisis. I do want to point out that BofA was apparently coerced into the Countrywide deal as well as I said in a March post.

This past Monday, I posted an article about comments made by Kansas City Fed Chair Hoenig which have received zero press despite their significance.  Here they are (I have bolded the significant part):

The Treasury Department, the Federal Reserve and other regulators have also arranged bailouts and mergers for large struggling or insolvent institutions, including Fannie Mae and Freddie Mac, Bear Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other firms, such as Lehman Brothers, have been allowed to fail.”

Now, I don’t know about you, but I certainly do not remember hearing about the Bank of America transactions with Countrywide and Merrill Lynch as deals foisted upon BofA by the government.  In essence, Hoenig is suggesting that Bank of America is a US-equivalent of Lloyds Bank.

If you recall, HBOS, a very reckless lender in Britain, was on the verge of collapse after Lehman Brothers declared insolvency in September.  Gordon Brown, desperate to save his legacy as Chancellor during the asset bubble, coerced Lloyds into taking over HBOS without proper due diligence.  This deal has failed spectacularly as HBOS has many more writedowns than was anticipated and Lloyds has effectively been nationalized along with Royal Bank of Scotland (not before the executives involved came under criticism).

If one looks across the pond at Bank of America, Countrywide and Merrill Lynch, circumstances are not too dissimilar. To my mind, it makes sense that no one has gone to jail if the government basically foisted Countrywide and Merrill on to Ken Lewis and BofA in return for assurances down the line that the government would not make waves.

BofA is to Lloyds as Merrill and Countrywide are to HBOS. In both cases, the government was desperate to consummate a merger which prevented the collapse of a systemically-important financial institution. Unfortunately for shareholders of BofA and Lloyds, these mergers have been quite destructive to shareholder value. Ken Lewis’ revelations certainly demonstrate that BofA shareholders have reason to complain.

Lewis Testifies U.S. Urged Silence on Deal – WSJ

  1. Jporter says

    Great post Edward. These are fascinating developments. I do question Lewis’s credibility a bit at this point considering the pickle he’s in.

  2. Edward Harrison says


    I couldn’t agree more regarding Lewis’ credibility. BofA is really Nations Bank, an acquisitive super regional that used deregulation and a bull market to leap into the big leagues. Ken Lewis has benefited from all of this. It is not clear to me that Bank of America has anything going for it other than size, unlike JPMorgan Chase, a better run institution.

    The whole mess surrounding BofA and Merrills stinks to high heaven. There are definitely things we are not privy too which we should be privy to. The U.S. government must eventually be forced to reveal more about what it has been doing behind the scenes. These deals should not be state secrets.

    Let’s see how Bloomberg gets on in their lawsuit against the Fed. That may be a test case for better disclosure.

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