Lewis Testified Treasury and Fed Pressed for Silence on Merrill Woes

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.

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  1. Anders

    put t much => put it much


    Isn't that something that any shareholder at Bank of America…would want to know?" => put the " prior to Isn't that

    Interesting article – let us hope that it is used as a reason for a more thorough *public* investigation.

    Oh, and incidentally, this is corruption, one way or the other (or both). Either the FED ordered individuals to do things that were not against their immediate self-interest, or the board acted against the interest of the shareholders. In either case – or both, as said – it stinks.

  2. clara


    Could you please use a different font size/style/colour/whatever when posting your own comments to seperate from the underlying text? It greatly increases readability (especially as I tend to copy and paste your posts to a word document for printing and reading during my lunch breaks)

    As for BAC–it’s hard to say that they are any less solvent than C, GS, MS, or STI. To a fist order approximation, they’re all completely worthless. It is strange, though, for Lewis to say that he put his own job ahead of his shareholders’ interests. It’s not surprising that he would, of course–just strange that he would actually come out and say so.

    On a somewhat unrelated note, I am a little curious about the whole TARP repayment issue. Most of these banks will require a lot more money in the very near future. If they repay TARP, it’s hard to imagine that they’re going to get any more $ in this political environment. Does anyone have any thoughts?

  3. Fazenda JK

    I wonder if it does not bother others that the only reason Lewis backs the deal is because he fears losing his job. There is no mention regarding his obligations to shareholders. Once the threat is given he rolls over like a trained pet. What is he being paid millions for again?

  4. B. Mull

    Having given in to threats is not going to quell the shareholder revolt. But the real issue is not how this all went down–it’s that it went down and it was costly for investors. CEOs are supposed to be judged on results.

    The timing of the leak probably has something to do with the 29th, don’t you think? The interesting question is whether the leaker actually helped his case ahead of the meeting.

  5. seahag

    Lewis has every reason to be afraid of the Fed.. remember LTCM… Bear Sterns.

    Nevertheless, Lewis is a self serving idiot and needs to go….. NOW!!!

  6. Sundar

    The fact that Ken Lewis of BOA was told remain silent by Bernake and Paulson with regard ‘forced’ to take over of MER, should give a big PAUSE for every one in the investing community! A material fact event went unreported by a major Bank prior to merger. I hope share holders initiate class action suit on BOA to put Treasury/Fed vs SEC

    Regulators are supposed to upheld law and NOT encourage to ignore it. But precisely this has happened with hardly a ripple in MSM, so far!

    Imagine the credibility of so called ‘stress’ results from the same regulators and the BANKSTERS! Insanity reigns!

  7. Brick

    I agree that there is something amiss here. During the days when Lehman got into problems it looked like Bank of America was lined up to buy Lehman only for the treasury to refuse to bankroll Lehman’s debt. Barclays stepped in to buy Lehman North America letting Lehman the holding company collapse, while Bank of America went after Merril.

    Barclays is on record saying Lehman was a good deal for them, so either Bank of America made a big mistake switching to Lehman or Merril really is a more attractive acquisition. After 10 billion is rumoured to have appeared on Countrywide books just before it was taken over perhaps Bank of America was trying to hold out for a similar piece of good fortune, only to loose out to Barclays on that weekend.

    As for Lewis being told to keep his mouth shut once he realised the losses at Merril, to stop any shareholder revolt then you have to ask what Paulson had on Bank of America to be able to suggest the board could have been removed. I suspect there is an untold story here.

  8. Leo Kolivakis

    On word: DISCLOSURE. Without proper disclosure, investors do not have a clue of what lurks on the balance sheets of banks, insurance companies or pension funds.

    Lewis was coerced to remain silent. How many investors lost billions because of this? This isn’t capitalism, it’s the Wild West where financial players cannibalize each other and investors lose billions.

  9. Edward Harrison

    To my mind the real story, as I just wrote this morning, is that BofA had Merrill foisted on it by a desperate U.S. government. If you recall, the Fed has been sued by Bloomberg because it did not want to reveal the collateral and counterparties it has accepted as it bloats its balance sheet.

    All of this sounds like a government hiding the truth from ts citizens time and time again. Apparently, we need to be saved from ourselves because we can’t handle the truth. In my view, it is the Fed and Treasury who come out of this looking the worst.

  10. Independent Accountant

    For the first time in months, I disagree with you. If the B of A was my client, I would have told it talk to your securities lawyers and file an 8-K on Merrill’s projected losses. If your lawyers don’t think the B of A should file the 8-K, get another one. This case looks like Paulson and Bernanke aiding and abetting securities fraud. Indict them! My money quote, “Paulson repeatedly told Mr. Lewis that ‘the US government was committed to ensuring that no systematically important financial institution would fail’.”
    Why is this important? Repeatedly! There is a California case, Gantt v. Sentry Insurance, in which an attorney, Fribance, repeatedly told Gantt not to do something. The jury held, which was sustained on appeal, that Fribance had ordered Gantt’s silence. I will get the citation and post on this. My comments her are from memory.
    “‘Regulators are supposed to tell you to obey the law, not to disobey the law,’ said Jonathan R. Macey, deputy dean of Yale Law School. ‘If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders’.” Amen Macey.

  11. Kid Dynamite

    this story makes Lewis no less culpable, but does indeed make Bernanke and Paulson MORE culpable… why isn’t anyone calling for their heads? what grounds do they have for this alleged coercion? they have no grounds to remove Lewis and the board, even if Ken Lewis is an incompetent buffoon.

  12. DownSouth

    We have a very similar situation going on here in Mexico, recently given voice by none other than the heirarchy of the Catholic Church. In Mexico it is the government in collusion with powerful capos, whereas in the U.S. it is the government in collusion with powerful bankers. Economic coercion is of course much more subtle and covert than the violent methods used by the cartels, but the underlying dynamic–that the government is colluding in the commission of criminal acts–is the same.

    Everybody in Mexico already knew that politicans work hand in glove with the drug lords. The capos run their sprawling criminal operations in broad daylight with complete and total impunity. As the bishop of Saltillo, Raúl Vera, is quoted in today’s El Universal said: “what a coincidence that the only ones who don’t know (where El Chapo is) are the authorities.”


    Raúl Vera’s comments come on the heels of those of the archbishop of Durango, Héctor González Martínez, who a few days ago intoned: “On the other side of Guanaceví, there’s where El Chapo lives. Everybody here knows that, except the authorities.”


    Raúl Vera and González Martínez both accuse politicians of working with the capos to create “a structure that supports drug trafficking.” Raúl Vera adds that “it is time to stop those who from inside the political structure aid organized crime and also to confront its formidable economic structure.”

    Those inside the government who work with the cartels may not do so for purely selfish motives. Some estimates peg the amount of money that the cartels bring into Mexico each year at $40 billion. That’s almost as much as Mexico receives from both oil exports and the remesas that 12.7 million Mexicans working in the U.S. send home each year. The loss of drug revenues to the Mexican economy would be devastating.

    So this argument that committing criminal acts is justified because to do otherwise would “impose a big risk to the financial system” is an argument that we too here in Mexico have become accustomed to hearing.

  13. scattershot

    This is a bit of an aside to this post, but it mentioned again that the stress tests are being ‘skewed to go easy on capital market players.’ I assume this is referring to the post from a few days ago which mentioned that loans were being treated more harshly than instruments like CMOs in the testing process.

    There is a legitimate interpretation of this implied bias. The capital market instruments are generally kept on the books at some approximation of market value, while most of the loans are still on the bank’s books at par – even when the borrowers are facing substantial financial difficulties. Even if the ‘market values’ are being manipulated, they have at least been marked down somewhat, and thus have less distance to go during the stress tests.

  14. art-eclectic

    I’d chalk the whole thing up to image rehabilitation for Lewis in reaction to the movement to have him ousted as Chairman. Lewis is trying to come off as having had his arm twisted by the FED and being forced into a shotgun wedding. Which may be true, but he didn’t seem to be complaining too much at the time.

  15. donebenson

    Obviously Lewis considers his job, and that of the directors, more important than his obligation to his employers, the stockholders. I can’t imagine any more reason for firing him, and possibly the board as well.

  16. Lee


    I’m glad you made the point about Lewis’s motive (i.e. to save his job). Does he realize what he is saying? My job was threatened so I abandoned my fiduciary duty to the company? He should be fired on the spot for that statement.
    It suggests to me he is already gone.

  17. 21stdem

    “‘Regulators are supposed to tell you to obey the law, not to disobey the law,’ said Jonathan R. Macey, deputy dean of Yale Law School. ‘If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders’.”I take some issue with this, particularly as it comes from one of our “prestigious” schools of higher learning.

    The actual first obligation to all involved is follow the law.

    This is a pretty big issue when we have private/public oligarchy that believes following the law need only be at their pleasure.

    Sad times.

  18. Rellag

    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 Per section 6.3 of the ML/BAC merger agreement:

    Board of Directors of Parent [BAC] shall use its reasonable best efforts to obtain from its stockholders the stockholder vote approving the issuance of Parent Common Stock in the Merger, on substantially the terms and condiions set forth in this agreement…and shall recommend such approval except to the extent making such recommendation would cause the Board of Directors of Parent to violate its fiduciary duties to Parent stockholders under applicable law.BAC board specifically negotiated a fiduciary out with respect to their recommendation.

  19. Matthew

    I think you missed the forest for the trees, Yves. The reason they told him to shut up was because he wanted to back out of the deal under a material adverse change clause, which would have required disclosure.

  20. Yves Smith


    With all due respect, I believe you misread the article, or are attributing what the Journal wrote to me.

    The point of the post is:

    1. The pressure to keep silent was secondary issue at the very best, and the real issue was that Lewis wanted out of the deal and was blocked. This has already been reported in the press.

    2. It is therefore odd this non-issue is being leaked now and promoted as a bona fide item of interest. It appears to be another attempt by the Lewis camp to bolster his position.

    And while I did not make the point, some readers pointed out:

    3. Did the Feds have something on Lewis/BofA so that the threat to throw him and the board out was credible? Let’s face it, if he had really tried to stare them down. or said he’d quit first and say it was over the pressure to complete the Merrill deal, it would have been hugely damaging to the Treasury and Fed and frankly would have given Lewis enormous stature (it was the Saturday Night Massacre, when Nixon fired Eliot Richardson, and the next two guys in the Attorney General’s office quit, that really sealed his fate). And I don’t see on what basis they could threaten to throw out the board (any reader ideas?)

  21. Independent Accountant

    Your point 3 is close to what I see. Lewis seems to be an unlikley “whistleblower”, but that seems to be the case. No matter what Paulson had, or thought he had on Lewis, Lewis could have called a press conference, told exactly what Paulson did, date and time, then asked for Paulson’s indictment. I checked the case, is Gantt v Sentry. I will prepare a post using it later.

  22. clara


    You wrote in your reply to Matthew that, “It appears to be another attempt by the Lewis camp to bolster his position.”

    I don’t understand how telling shareholders that he was scewing them over to save his job bolsters his position in any way. So far as I can tell, it just opens him up to more lawsuits. (Incidentally, Lewis still hasn’t explained the ridiculous premium he paid for MER at the time–even if he was forced into buying MER, he could have done so at a *much* lower cost)

    The most lasting result of this story will likely be that it will be very hard for the Treasury to force anybody into any type of merger in the future, I think. This will probably be a significant problem in the next couple of months.

  23. clara

    As a follow up, this may be leaked 2months after the fact to excuse poor results over the Stress test results (or add pressure to their release). But it seems highly unlikely that BAC’s CEO would be so unbelievably stupid as to admit that his sole concern was saving his own bacon.

    Then again, I thoguht it was highly unlikely that someone would be stupid enough to have heavy dealings with CFC and then buy them out, so I could be way off on this.

  24. Yves Smith


    Banks are not normal companies. Having a banking license means your regulators have considerable authority over you, You simply do not fight with your regulator. You will lose,

    I am presuming the reason Paulson and Bernanke felt able to pressure Lewis is that it would be trivial for them to threaten to pull his banking license (I’d have to do some homework, but I would be pretty confident that BAC has some important licenses under the Fed and the OCC’s jurisdiction).

    As Bill Black has stressed, regulators can also increase capital requirements if they deem assets to be risky. Think BofA has some risky assets?

    The real point is that if they went the next step in the fight, it could well have been mutual assured destruction. Markets go to hell due to worries over Merrill collapse. Lewis could as well look like a goat as a hero. And if the Fed and Treasury did have some dirt on his operation, they would take him out and not disclose the dirt. Think taking out a CEO under force, presumably due to undisclosed performance problems, would be good for the stock?

    The point is it is a lot more complicated than it looks on the surface, and I am not sure 3 is the full story Lewis does look craven, and I’ve had a dim view of him since he did the first part of the 2 step Countrywide deal, but a brave stand may not have been as clearly pro-shareholder as Monday morning quarterbacks think.

    The real issue is that Merrill hid losses, and it looks like traders played games in December too. Thain is as much a goat here as Lewis, but he is out of the limelight for now.

  25. Chindit13

    I’m not sure who has less credibility here. At the original press conference with Thain re the merger, Lewis could barely contain himself he was so enthusiastic about becoming a player or One Stop Shop. If MER was forced on him against his will, then he deserves an Oscar. Encouraged upon him, perhaps, but it clearly did not look like a force job, and he said that he had long been looking at the firm. And if he had waited until Monday, the feared mayhem in the financial markets would barely have begun, but he could have stepped in as the hero and paid a tenth of what he eventually paid for MER and saved his shareholders the dilution.

    Given this as backdrop, when the realization came that MER had a lot more rot in the system, I suspect Lewis may have seen the error of his ways and decided to try to foist all the blame on Fed/Treasury. Lewis never said nor insinuated that MER was forced upon him until the MER loss revelations surfaced. Perhaps this latest “disclosure” about a Fed/Treasury warning is just more trying to cover his own backside and absolve himself of the blame for a bad deal.

  26. Fred


    I am securities lawyer, and would make two points. First, ML and BAC jointly prepared proxy statements for their shareholders, each of which contained information on the other. BAC received information on ML prior to closing and had to make its own determination on materiality for its shareholders. BAC could have made disclosure to its shareholders regardless of what ML did. This happens sometimes when a bigger more reputable institution buys another one with substantially lower disclosure standards, but would be unusual in the BAC ML circumstances.
    That would have been aggressive and embarassing for the Fed and Treasury but not enough to oust the Board of BAC. The BAC threat not to close the transaction, despite the fact that there was no MAE resulting from the changes in ML marks, could have been the basis for action by the Fed as BAC regulator – again in extremis – if it was determined that BAC had acted in a manner that threatened the safety and soundness of the company. It was not appropriate for Paulson to be speaking of such things on behalf of the Fed however, given the formal independence of the Fed.
    Paulson is still the bully here, in my view, but Lewis appears to be a CEO embarassingly in overhis head

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