naked capitalism

Perhaps I am reading too much into a late breaking Wall Street Journal story, but inquiring minds do wonder.

The Journal tells us that Bank of America CEO Ken Lewis told the New York attorney general’s office in February that he had been told by Hank Paulson and Ben Bernanke to keep quiet about deteriorating conditions at Merrill Lynch.

This story strikes me as more than a little weird.

First, the testimony was back in February. Why is it being leaked now, more than two months later?

Hhm, Ken Lewis is under more than a bit of pressure from less than happy shareholders. The heat would intensify considerably if BofA fared poorly in the stress tests. Since the tests are being skewed to go easy on capital markets players like the former Merrill, the Charlotte bank presumably won’t come off too badly.

But what about Countrywide? Funny how Lewis keeps harping on how awful it was that he was forced to buy Merrill (how he forgets that he was keen to buy the securities firm back in September) and we never hear a peep about the role Countrywide has played in the bank’s falling fortunes.

The other part that is a bit sus is the lack of specificity re timing. Remember, BofA closed on the deal on Jan 1. The Merrill-related bailout appears to have first been leaked January 14, and was officially announced January 16.

Now remember, Merrill was an independent, public company. Yes, BofA had internal information due to the deal’s imminent close, but pray on what basis could Lewis have disclosed information about Merrill prior to January 1? The story indicates that Lewis was negotiating with the government as of mid-December. Having that sort of information leak out could have been detrimental to the process if you wanted a deal done (look at the anger when the bailout news did break). And as we know, the powers that be did want the Merrill deal to close.

Let’s put it much more simply. Lewis wanted to break the deal. The officialdom told him that was a non-starter.

I’m not at all surprised as to additional heat being applied regarding confidentiality, since a leak would have been a back channel way to throw a spanner in the works and still have Lewis look cooperative. No wonder he was told to keep his mouth shut.

In other words, there were legitimate reasons for Lewis not to have talked about the Merrill results, and I don’t see how he could have prior to January 1, unless he tried to scupper or renegotiate the deal (and even then, joint statements are usually made).

So the story attempts to play up Lewis being blocked from a course of action that I cannot see him as having taken (ie merely disclosing Merrill’s deteriorating condition, as opposed to having that come out as a by-product of breaking the deal), at least directly. Am I missing something here?

Thus the purpose of today’s leak would seem to be to remind the great unwashed of how badly Lewis, and extension Bank of America, was treated in the Merrill affair.

From the Wall Street Journal:

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. — a deal that later triggered a government bailout of BofA — according to testimony by Kenneth Lewis, the bank’s chief executive.

Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Yves here. See how weird the construction is? The real issue is the old hat, that BofA was blocked from breaking or renegotiating the deal. The silence bit is a red herring. Of course you keep your trap shut when you are negotiating a sensitive deal. Lewis needed to be told that? The only way I can fathom any logic here is :Lewis wanted to renegotiate the deal, which would reveal Merrill’s lousy condition, and perhaps create alarm about other banks. And that would particularly need to be avoided in the second half of December when trading volumes are thin. But even then, the silence bit is merely a symptom, not a legitimate issue on its own. Back to the story:

Bank of America CEO Ken Lewis testified he was pressured to keep silent about deepening financial difficulties at Merrill Lynch.
Q: Were you instructed not to tell your shareholders what the transaction was going to be?

A: I was instructed that ‘We do not want a public disclosure.’

Q: Who said that to you?

A: Paulson…

Q: Had it been up to you would you [have] made the disclosure?

A: It wasn’t up to me.

Q: Had it been up to you.

A: It wasn’t.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

Yves again. SEC lawyers encouraged to speak up. I don’t fathom under what theory Lewis could have made a disclosure regarding Merrill prior to the close of the deal. Upsetting the apple cart by trying to renegotiate would have that effect, but again, that’s an indirect route. Back to the story:
“

Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

Mr. Lewis’s testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis’s decision to keep problems at Merrill under wraps.

“Everybody — Lewis, Paulson, Bernanke — eventually agreed that any public discussion of the situation at Merrill would have adverse consequences for the system,” according to an individual close to BofA.

A person in government familiar with Mr. Bernanke’s conversations with Mr. Lewis said Wednesday that the Fed chairman didn’t offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.

Mr. Paulson repeatedly told Mr. Lewis that “the U.S. government was committed to ensuring that no systemically important financial institution would fail,” according to his spokeswoman.

Mr. Lewis couldn’t be reached for comment. A BofA spokesman said, “We had no legal obligation to disclose ongoing negotiations with the government and disclosure of ongoing negotiations likely would have severely disrupted the global financial markets and damaged the bank.”….

Yves again. This strikes me as closer to the mark. Notice the spokesman puts the finger on the negotiations, and not any obligation to disclose Merrill’s condition. Frankly, this transcript may simply reflect an New York State investigator pushing Lewis on every possible angle and going a tad off the mark. Back to the story:

The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis’s testimony with the New York attorney general’s office corroborates that account.

Mr. Cuomo’s office says it has been unable to gather a full picture of the Fed’s role in the December discussions because the Fed has invoked a regulatory privilege, allowing it to keep some documents confidential.

Mr. Lewis has previously said that he first considered backing out of the Merrill deal on Dec. 13, when he said his chief financial officer told him projected after-tax losses were “about $12 billion.”

Shareholders of the Charlotte, N.C., bank voted to approve the purchase on Dec. 5, and the deal was completed on Jan. 1.

Bank of America agreed to accept $20 billion in new capital from the government and announced the injection, in conjunction with the Merrill losses, with its regularly scheduled earnings release on Jan. 20.

Mr. Lewis has since been vilified by lawmakers and shareholders for his handling of the purchase. Several investors, including TIAA-CREF, a major pension-fund manager, have said they intend to vote against his re-election as chairman. Some argued that Mr. Lewis should have informed shareholders of the potential losses at Merrill before the Jan. 1 closing of the deal.

During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis’s own job was at stake. Mr. Lewis still was considering invoking his legal right to terminate the Merrill deal. Mr. Paulson was out on a bike ride when Mr. Lewis phoned to discuss the matter, according to the transcript.

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said. “I said, ‘Hank, let’s de-escalate this for a while. Let me talk to our board.’ “

So we have to get to the very end of the story to have it revealed what the real issue was. I know I am belaboring the point, but I find the reporting to be misleading. There is plenty to be upset about here, but this is an effort to play up a secondary issue as something more than it is.