In the July/August issue of The Pomerantz Monitor, the editors report on the latest rumblings over Bank of America’s merger with Merrill Lynch.
Did they or didn’t they? Did Ben Bernake and Hank Paulson threaten to fire the entire Bank of America (“BofA”) board, including the CEO, last December unless they completed the merger with Merrill Lynch? It depends on whom you ask.
Months ago Ken Lewis, BofA CEO, testified in a civil suit that he considered withdrawing from the merger when he learned last December that Merrill had suffered losses of $15 billion in the fourth quarter. He discussed this possibility with Bernanke, Chairman of the Federal Reserve, and Paulson, then the Treasury Secretary, and they both threatened to oust him and the board if they pulled the plug on the deal, instructing Lewis and the board not to disclose Merrill’s catastrophic losses to shareholders before the deal closed. The Fed promised it would lend Merrill $20 billion to help cover the losses. Lewis repeated this testimony before Congress in early June.
But on June 25 Bernanke told a totally different version of this story, which is that “I did not tell Bank of America’s management that the Federal Reserve would take action against the board or management” if they decided to back out of the deal, nor did he tell anyone else to make such representations. Bernanke also said no one at the Fed ever urged Bank of America to keep quiet about Merrill Lynch’s financial problems.
Merrill’s $15 billion fourth quarter loss was not disclosed until January, two weeks after the deal had closed. The result was a shareholder outcry and, of course, massive class action litigation. As if to underscore this last point, a couple of weeks after Bernanke testified, the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System, the Teachers Retirement System of Texas, Stichting Pensioenfonds Zorg en Welzijn and Fjarde AP-Fonden were appointed lead plaintiffs in the securities class action targeting Lewis and BofA.
There is good reason to be skeptical of both versions of this story. Lewis, for his part, might have exaggerated the government’s threats in an attempt to justify his own questionable decision to go ahead with the merger while keeping his mouth shut. Although Lewis subsequently lost his position as BofA chairman, he still clinging to his CEO post.
On the other hand, we might also be skeptical of Bernanke’s testimony because he seemed to believe that unless the merger went through, Merrill would collapse and cause another Lehman-like shock to the financial system. He therefore had reason to pressure Lewis, if necessary, to make the merger happen; and internal Fed emails confirm that this was his intention. Even if he did not make explicit threats, he may have made his intentions more than clear in other ways.
Beyond that, Bernanke is no doubt worrying that his alleged bullying of BofA may put Congress in fear of what he might attempt with the vastly expanded powers the Fed is slated to be granted under the Obama Administration’s new regulatory proposals.
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