Who forced Bank of America (NYSE:BAC) to complete the merger with Merrill Lynch when Merrill’s fourth quarter earnings looked like a disaster? All fingers point to Federal Reserve Chairman Ben Bernanke.
New York Attorney General Cuomo deposed chief executive Ken Lewis and former Treasury Secretary Hank Paulson as part of an investigation into bonuses paid by Merrill shortly before its merger with BofA. Lewis admitted that Paulson and Bernanke threatened to oust him and Bank of America’s senior management along with its Board of Directors if BofA invoked a MAC (material adverse change) to back out of its deal to acquire Merrill. “Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke,” Cuomo wrote in a letter to Sen. Dodd, Rep. Frank, SEC Chairman Schapiro, and TARP Oversight Chair Warren that summarized his investigation into the secrets kept from shareholders and taxpayers about the deal.
Federal Reserve Chairman Ben Bernanke likes to tout his efforts to bring greater transparency to the Federal Reserve. But actions speak louder than words. From the collapse of Bear Stearns and Lehman Brothers to using AIG as a conduit, Bernanke’s Fed has been anything but forthcoming in their actions. Cuomo writes: “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 privilege.” Essentially the Fed is claiming that information related to this matter is “sensitive” and was provided to the Fed confidentially. This is how Bernanke defines “transparency.”
In “Government Forced Bank of America To Marry Merrill Lynch,” I described how Bernanke and Paulson pressured Lewis not to back out of the deal, offering BofA a Citi-style rescue after the deal was completed. However, in questioning by the AG’s office, Lewis recounts that it wasn’t until a December 21 phone conversation that Paulson threatened the removal of Lewis, the management and the bank’s Board if they called off the deal. After Lewis told Paulson he would talk to the Board about it, Paulson said “Good; I’ll call Ben and tell him that.”
Now the focus turned to additional government assistance to help BofA absorb Merrill’s losses. BofA’s Board wanted the government’s commitment to the merger in writing, so Lewis called Bernanke and asked him if he would comply. To which Bernanke replied, "Let me think about it.” Bernanke never called back. Instead Paulson called to say that “this would be a disclosable event and we do not want a disclosable event.” Lewis reiterates that “I was instructed that we do not want public disclosure,” but didn’t recall if the “we” referred to Bernanke or Paulson.
Lewis said that no one considered that part of the oral agreement was a commitment for financing which would therefore require disclosure to the SEC. He said it was either Bernanke or Paulson who told him the deal needed to close on time under its original terms. Bernanke and Paulson’s intensity about consummating the merger shows they knew they had made a colossal mistake by allowing Lehman to collapse and did not want a repeat.
The minutes of the December 30 BofA Board meeting describe that Bernanke instructed BoA management to communicate with Kevin Warsh. However, Lewis tells the Board that Bernanke “had assured him the Corporation would not be penalized by accepting the commitment of the federal regulators and that acceptance of the commitment would be beneficial to the Corporation and its shareholders.” Two days before the January 1 merger, Lewis told the Board that the details of the government’s commitment had not been finalized.
Were BofA shareholders sacrificed for the good of the financial system as a whole? Was it proper and legal for BofA to fail to disclose to the shareholders and not invoke the MAC clause when BofA clearly knew it was not in their best interest to consummate the deal? Is Bernanke guilty of conspiring to force Ken Lewis in breaking securities regulations related to disclosures?
Bernanke can attempt to stimulate the economy through negative interest rates and all kinds of liquidity enhancement programs, but none of this will replace the confidence lost by Bernanke's Fed sacrificing the trust of shareholders.
Disclosure: no positions