New York State
Attorney General Andrew Cuomo's letter to the SEC and Senate
Banking Committee on the Bank of America, Merrill Lynch Merger provides strong
evidence of coercion to commit securities fraud by former Treasury Secretary
Paulson and Fed Chairman Ben Bernanke, and actual securities fraud by Bank of
America CEO Kenneth D. Lewis.
At issue is Lewis's decision to back away from the merger deal with Merrill
Lynch on a MAC (material adverse change) clause because of rapidly
deteriorating conditions at Merrill Lynch. Here are a few pertinent snips
from Cuomo's letter.
learning on December 14, 2008 of what Lewis described as the "staggering
amount of deterioration" at Merrill Lynch, Lewis conferred with counsel
to determine if Bank of America had grounds to rescind the merger agreement
by using a clause that allowed Bank of America to exit the deal if a material
adverse event ("MAC") occurred. After a series of internal
consultations and consultations with counsel, on December 17, 2008, Lewis
informed then-Treasury Secretary Henry Paulson that Bank of America was
seriously considering invoking the MAC clause. Paulson asked Lewis to come to
Washington that evening to discuss the matter.
At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben
Bernanke, Lewis, Bank of America's CFO, and other officials discussed the
issues surrounding invocation of the MAC clause by Bank of America. The
Federal officials asked Bank of America not to invoke the MAC until there was
further consultation. There were follow-up calls with various Treasury and
Federal Reserve officials, including with Treasury Secretary Paulson and
Chairman Bernanke. During those meetings, the federal government officials
pressured Bank of America not to seek to rescind the merger agreement. We do
not yet have a complete picture of the Federal Reserve's role in these
matters because the Federal Reserve has invoked the bank examination
Bank of America's attempt to exit the merger came to a halt on December 21,
2008. That day, Lewis informed Secretary Paulson that Bank of America still
wanted to exit the merger agreement. According to Lewis, Secretary Paulson
then advised Lewis that, if Bank of America invoked the MAC, its management
and Board would be replaced.
In an interview with this Office, Secretary Paulson largely corroborated
Lewis's account. On the issue of terminating management and the Board,
Secretary Paulson indicated that he told Lewis that if Bank of America were
to back out of the Merrill Lynch deal, the government either could or would
remove the Board and management.
Secretary Paulson's threat swayed Lewis. According to Secretary Paulson,
after he stated that the management and the Board could be removed, Lewis
replied, "that makes it simple. Let's deescalate." Lewis admits
that Secretary Paulson's threat changed his mind about invoking that MAC
clause and terminating the deal.
Coercion To Commit
It's crystal clear from the letter that a strong case can be made that
Paulson and Bernanke coerced Lewis to carry out a merger agreement that was
not in Bank of America's shareholders best interest. Lewis arguably did so
only to save his own job and the board.
Flashback Monday, September 15, 2008
I called this correctly at the time. Please consider Market Votes "No Confidence" In
Merrill, Bank of America Merger.
“There was no
pressure from regulators, absolutely no pressure,” said Mr Lewis, who
described the deal as “the strategic opportunity of a lifetime”. He
said: “The first contact came on Saturday morning and we put the
transaction together in 48 hours. The instant we talked it made sense.”
My Translation: "The pressure from the Fed was enormous. Anyone
in their right mind knows this deal makes no sense to Bank of America".
The moral of this story is: The strong swallow the weak until the strong
And so it was, the relatively
strong was coerced to buy the pathetically weak.
I suspect Lewis he will be forced out as CEO whether he is indicted or not. Certainly
he deserves to go. The more serious issue is the appearance of coercion by
Paulson and Bernanke.
Please note that Cuomo's letter states "In an interview with this
Office, Secretary Paulson largely corroborated Lewis's account. "
As far as I am concerned, Paulson just pleaded guilty. I do not care what
Paulson's reasons were, no one is above the law.
Let the criminal indictments begin: Paulson, Bernanke, and Lewis.
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