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Posts Tagged ‘Bank of America merger with Merrill Lynch’

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

Posted by Larry Doyle on September 29th, 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.

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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.

Law.com 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, Law.com 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.

LD

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)

Uncle Sam:Geppetto as Citi and BofA:Pinocchio

Posted by Larry Doyle on July 16th, 2009 1:32 PM |

If you did not think we are entering into a Brave New World of an Uncle Sam economy, then today is a day which should help change your mind.

Independent Wall Street firms, such as Goldman Sachs and JP Morgan, would like a return to business as usual. Their outsized profits are nothing more than “to the victors go the spoils.” They will fight and lobby to make sure they get to take home these profits in the form of compensation.

Meanwhile back in the toy shop, Geppetto (in the form of Uncle Sam) is pulling the strings and watching Pinocchio (in the form of Citigroup and Bank of America) dance along.  While Geppetto has been exceptionally busy, the taxpaying public has been kept very much in the dark. We see evidence of Geppetto’s ‘dark workroom‘  on three fronts today.

1. The Wall Street Journal offers Lawmakers Spread Blame on Merrill Deal:

House lawmakers lambasted former Treasury Secretary Henry Paulson and Bank of America Corp. Chief Executive Kenneth Lewis on Thursday, suggesting officials looked the other way as major mistakes at the bank required a $20 billion bailout of the firm at the expense of taxpayers.

“While all of this was going on, the American people, investors and the Congress were kept in the dark,”(LD’s highlight) said Rep. Edolphus Towns (D., N.Y.), suggesting negotiations over the bank completing its deal for Merrill Lynch & Co. was a “good, old-fashioned Brooklyn shakedown.”

Rep. Dennis Kucinich (D., Ohio), citing internal Federal Reserve documents obtained by the committee, said Mr. Paulson and Fed Chairman Ben Bernanke ignored evidence that bank management had withheld material information from shareholders, as well as indications that Mr. Lewis’s management of Bank of America “was seriously deficient.”

While Paulson is being grilled, there is little doubt that he believes he did what was in the best interest of the country and the economy – – if not necessarily the interests of Bank of America shareholders. Paulson offered that he was not qualified to provide a legal opinion on his engagement with Lewis.

2. If there were ever any doubt about Geppetto’s lack of confidence in Ken Lewis (aka Pinocchio), it is brought to bear today by news of a ‘secret regulatory sanction’ imposed upon him and the BofA board. The WSJ highlights U.S. Regulators to BofA: Obey or Else:

Bank of America  Corp. is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to people familiar with the situation.

Rarely disclosed publicly, the so-called memorandum of understanding gives banks a chance to work out their problems without the glare of outside attention. Financial institutions that fail to address deficiencies can be slapped with harsher penalties that include a publicly announced cease-and-desist order.

The order was imposed in early May, shortly after shareholders of the Charlotte, N.C., bank stripped Chief Executive Kenneth Lewis of his duties as chairman. Bank of America faces a series of deadlines, some at the end of July and others in August, these people said.

3. In the final act of today’s puppet show, we also learn from the Financial Times Citi Close to Secret Deal with Regulator:

Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues.

The proposed agreement requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity, these people added.

The regulator’s action highlights concern over Citi’s financial health, governance and the strength of its management team, led by Vikram Pandit, chief executive. The FDIC is known to be frustrated with the slow pace of Citi’s “toxic” assets sales, its losses and the lack of commercial banking experience at the top.

What are we to learn from all of these developments? Very simply, do not accept anything at face value at this stage in our new economy. There is a reason why Geppetto is working in the dark. That is, the embedded losses in these institutions would sink these firms if not the entire economy.

Historical measures of value and economic behavior need to be looked at in the context of how Geppetto is pulling the strings!!

Enjoy the show!!

LD






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