NEW YORK - Chairman of the US Federal Reserve Ben Bernanke and former Treasury secretary Hank Paulson are at the centre of an investigation by New York attorney-general Andrew Cuomo into the Fed-brokered takeover of Merrill Lynch by Bank of America (BoA). The two men are alleged to have threatened to fire BoA president and former chairman Ken Lewis when he attempted to block the merger between the two firms by invoking his rights under a material adverse change clause to kill the deal. Lewis had allegedly discovered the billions in undisclosed Merrill losses that would subsequently force BoA to accept successive federal bail-outs to stay solvent. Lewis told Cuomo's investigators that Paulson - who says he was acting at the behest of Bernanke - threatened Lewis and his entire board with dismissal should they block the merger, which the regulators, fearing the systemic risks of a Merrill collapse, were determined to complete at all costs.
If the result turned out to be BoA insolvency, Paulson allegedly told Lewis the US Treasury would provide cash from the Troubled Asset Relief Program (Tarp) to help swallow the pill. Lewis has also claimed that, because the US authorities did not want to publicly disclose their Tarp pledge until after the merger closed, Paulson and Bernanke rejected Lewis's request for commitment in writing. Lewis then complied with the their demands with the approval of his board, but without disclosing to shareholders the state of Merrill's finances. The merger closed on January 1, followed by a $20 billion Tarp bail-out and $118 billion asset guarantee announced on January 16, the same day BoA revealed a $15 billion fourth-quarter loss at Merrill.
The shareholder revolt still plaguing BoA is complicated by former Merrill chief executive John Thain's decision to pay out $3.6 billion in 2008 staff bonuses early, before the merger was completed. Lewis claims he was not informed about the bonus payments, which were ultimately borne by BoA. Thain, who was fired in January, has countered by pointing out that a letter signed by Lewis exists that permitted unspecified payouts from Merrill's $5.8 billion bonus pool. A BoA spokesman's comment was that it is "time to move on". News that BoA requires a $33.9 billion recapitalisation to pass the Treasury's bank stress tests prompted Lewis to say: "We do not need new government money. Our game plan is to get the government out of our bank as soon as possible."
More on Regulation
Heavy regulatory costs and fragile systems will be problems in 2015
Avoiding model failure will be a key issue in 2015
Tax evasion, corporate ownership and sanctions will all be concerns
Response to criticism of deference to big banks
Sign up for Risk.net email alerts
Sponsored webinar: IBM
Watch highlights of this year's London conference
Operational risk and the challenges of defining and dealing with conduct risk
Watch discussions and speakers from our North America conference
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.