U.S. Forced Bank Board To Carry Out Merrill Deal

SOURCE: New York State Attorney's office | By Tobey - The Washington Post - April 24, 2009
By David Cho and Tomoeh Murakami Tse
Washington Post Staff Writers
Friday, April 24, 2009

NEW YORK, April 23 -- Federal Reserve Chairman Ben S. Bernanke and former Treasury secretary Henry M. Paulson Jr. threatened to remove the management and board of Bank of America if it backed out of its deal to acquire ailing investment house Merrill Lynch late last year, according to documents released yesterday by New York Attorney General Andrew M. Cuomo.

Kenneth Lewis, Bank of America's chief executive, told investigators he wanted to stop the merger because "devastating losses" at Merrill would be detrimental to his company, the documents show. But the threat from Paulson changed his mind, he told the attorney general's office.

Paulson said he made the threat at the request of Bernanke, according to the documents, out of concern about the danger to the wider financial system.

Lewis did not immediately inform shareholders about the losses at Merrill or the pressure from the federal government. Several prominent shareholder groups say this violated securities laws requiring the disclosure of information, and they are campaigning to unseat Lewis at the company's annual meeting Wednesday.

The documents highlight the lengths to which government and industry officials have gone to prop up the global financial system -- even at the expense of not disclosing the severity of troubles to shareholders. In another instance, Freddie Mac resisted its federal regulator in reporting to shareholders that the government's management of the company was undermining its profitability, according to sources.

Lewis suggests in sworn testimony that he felt pressured by officials to withhold disclosure about potential government assistance. The bank has been under investigation by Cuomo's office over whether it misled shareholders about Merrill's health before they voted to approve the deal, as well as about bonuses to Merrill executives that were paid out in December, ahead of schedule and before the merger closed.

Yesterday, spokespeople for Paulson and Bernanke said both men denied telling Lewis what to disclose to shareholders. "It has long been the Fed's view that questions of this nature are best addressed by individual institutions and their legal counsel," said Michelle A. Smith, a Fed spokeswoman.

According to a source close to Paulson, the only time the disclosure issue came up was when Paulson refused to provide Lewis a letter guaranteeing federal aid to the bank if it stuck with the deal. Such an action would have required a public disclosure from the Treasury and would have raised more doubts about the bank for its investors, the source said.

The Cuomo documents were first reported by the Wall Street Journal.

The Securities and Exchange Commission said it is "actively reviewing the disclosure surrounding the merger" and that the questions raised by Cuomo were part of the review.

Legal experts say the SEC could go after federal officials for aiding and abetting if they did in fact tell Lewis to keep mum on Merrill's mounting losses, but that it is the bank's obligation to inform shareholders of decisions that could materially affect the firm's fortunes.

Lewis said he was instructed to not make a public disclosure about potential government financing. When asked where that instruction came from, Lewis responded: "Paulson."

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