U.S. Forced Bank Board To Carry Out Merrill Deal
In Inquiry Into Merger, Cuomo Details Pressure On Bank of America

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."

The spokespeople for Paulson and Bernanke acknowledged that the two men pressured the bank to go through with the Merrill deal, arguing that the bank would lose the inevitable court battle if it was canceled.

In a series of interviews last year, Paulson acknowledged he often had to force firms to bend to his will to prevent the banking system from collapsing. Those actions required him to stretch the boundaries of his authority as Treasury secretary, he said.

"Even if you don't have the authorities -- and frankly I didn't have the authorities for anything -- if you take charge, people will follow," Paulson said in the interviews. "Someone has to pull it all together."

Bank of America entered into an agreement to buy Merrill in September, as the global financial system sank in turmoil over the failure of Lehman Brothers. The government helped orchestrate the agreement.

On Dec. 5, Bank of America shareholders approved the merger. Yesterday, a Bank of America spokesman said that "we believe we acted legally and appropriately with regard to the Merrill Lynch transaction."

According to Cuomo, after learning on Dec. 14 of "staggering" losses at Merrill, Lewis told Paulson that the bank was considering backing out of the merger under a clause allowing companies to exit deals if a "material adverse event" occurred.

Lewis informed board members in a Dec. 22 meeting that they would be removed if the bank backed out. Lewis also told the board that Bernanke had spoken with other regulators, including incoming Treasury officials of the Obama administration, and that all parties had pledged their commitment to provide additional government funds to help Bank of America absorb losses from Merrill's toxic assets.

Days after the deal closed on Jan. 1, Bank of America reported a $15 billion loss, and received $20 billion in government bailout funds on top of the $25 billion it had already received.

Yesterday, shareholder groups renewed calls for Lewis's ouster.

"They should not have gone through with the merger -- they clearly understood that," said Dan Pedrotty, director of AFL-CIO's office of investment. "But when it came to down to the health of the company and the best interest of shareholders, Lewis chose to keep his job."

But other activist investors expressed some sympathy toward Lewis. Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners, said his group had not yet decided how to vote on Lewis. The executive "clearly" should have disclosed what he knew about Merrill, Durkin said, "but at the same time, you have the heavy hand of government on him."

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he had been aware for months of the pressure put on Lewis to go through with the deal.

Frank declined to say whether that pressure was appropriate, adding, "There wasn't anything we could do about it. It was a fait accompli . . . I put my energies into things where I can make a difference. There was never any congressional role here."

But Frank said it would be "wrong" and "outrageous" if Paulson instructed Lewis to keep quiet about Merrill's grim financial condition.

Staff writers Lori Montgomery, Zachary A. Goldfarb and Neil Irwin contributed to this report.

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