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Documents Indicate Ken Lewis Utilized the MAC to Shake Down Bernanke and Paulson

Posted by Larry Doyle on September 29, 2009 2:33 PM |

10.01.09 UPDATE FROM LD: I wrote this commentary this past Tuesday afternoon. Mr. Lewis tendered his resignation last evening. In regard to my concluding remarks in this post, I only wish all my calls on the market were equally as prescient.


The intrigue embedded in the Bank of America takeover of Merrill Lynch is never ending. While the book and movie of this high stakes Wall Street thriller will be voluminous, the story most certainly has many chapters yet to be written. To this point, the following questions remain outstanding:

1. Why, at the time, did Bank of America pay such a premium for Merrill Lynch?

2. Did Bank of America know all the details surrounding the $3.5 billion in accelerated bonus payments made to Merrill employees in December 2008?

3. What did Merrill CEO John Thain share with Bank of America CEO Ken Lewis in regard to the growing losses at Merrill?

4. Did Ben Bernanke and Hank Paulson pressure Lewis to complete the merger against his will?

5. Did Ken Lewis consider invoking the MAC (material adverse condition) clause and negate the deal? Did Lewis consider invoking the MAC to negotiate a cheaper price?

6. Did Ken Lewis use the leverage embedded in the potential implementation of the MAC clause to generate significant government support?

Recall that a recent SEC fine of $33 million imposed by the SEC on Bank of America was thrown out by Judge Jed Rakoff as nothing more than a contrivance in which taxpayer funds were used to effectively repay other taxpayers, those being Bank of America shareholders.

Judge Rakoff will hear this case between the SEC and Bank of America in early February. Perhaps at that time answers to the questions asked above will be fully uncovered and released. Perhaps stories will leak beforehand to shed light on this drama. To that end, welcome to Sense on Cents.

I read a story to which I will link, but can not promise the link will not be broken at some future point. As such, I will provide a brief synopsis which provides riveting insights into Question 6. reports today¬†How Bank of America Used Merrill’s Losses to Bully the Government. In this report, the reporter offers that Corporate Counsel magazine has pored over hundreds of documents, e-mails, and transcripts pertaining to the Bank of America merger with Merrill Lynch.

In regard to the use of the MAC clause or renegotiating the deal, very clearly lays out how events unfolded last December:

The record shows that Bank of America decided not to disclose to shareholders its consideration of a MAC before the Dec. 5 vote. It also apparently decided not to use the MAC as leverage against Merrill to lower its price before the vote, even though the bank had agreed to pay a premium — $29 per share for Merrill stock that was selling at $17. It might have, but didn’t, use the MAC to force Merrill to drop its multibillion-dollar bonus pool.

Instead, the bank waited until after the shareholders approved the merger — but before the deal closed on Jan. 1 — and used the MAC to muscle the federal government and U.S. taxpayers into ponying up more bailout funds. At the time, the bank did not disclose the role of federal regulators in not invoking the MAC, and in promising the bank another $20 billion of taxpayer money in 2009 to complete the deal. (The bank had already received $25 billion in bailout funds in 2008.)

Some observers and politicians have accused federal banking officials of forcing Bank of America CEO Kenneth Lewis into completing the merger. But the documents suggest it was Lewis doing the bullying, relying on a highly vulnerable marketplace to win his way.

Wow. Did Ken Lewis overplay his hand? In light of this information, is there any doubt that Lewis is a short timer?

We will learn more in the days and weeks ahead as this drama plays out. You can’t make this stuff up . . .

Thoughts, comments, questions always appreciated.


Related Sense on Cents Commentary:
Did Big Ben Bernanke and Heavy Hank Paulson Break the Law in Buying Ken Lewis’ Silence (April 28, 2009)
Rep Edolphus Towns on Bernanke’s Testimony: ‘Something Rotten in the Cotton’ (June 26, 2009)

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