Documents raise skepticism on Hill about Bank of America
At issue: Were worries about merger kept from shareholders?

By Tomoeh Murakami Tse
Washington Post Staff Writer
Wednesday, October 21, 2009

NEW YORK -- Congressional investigators think that reams of internal documents turned over by Bank of America last Friday show that its executives were alarmed by mounting losses at Merrill Lynch well before shareholders voted to approve the merger, according to sources familiar with the matter.

Investigators also think the documents, combined with prior testimony and fresh interviews with a key executive, suggest that Bank of America chief executive Kenneth D. Lewis used the threat of backing out of the government-backed deal as leverage for billions more in taxpayer bailout money, the sources said.

Bank of America's purchase of Merrill Lynch has turned into one of the most scrutinized moments of the financial crisis, prompting investigations by federal and state authorities, including the New York State Attorney General's Office and the Securities and Exchange Commission.

Among the issues being probed are whether the bank made appropriate disclosures to its shareholders about losses at Merrill Lynch, the bank's misgivings about the merger and its negotiations with the government for additional support, as well as billions of dollars in bonuses handed out to Merrill executives just before the deal closed on Jan. 1. Shareholders voted on the deal Dec. 5.

The House Oversight and Government Reform Committee has been conducting its own probe for several months and recently received more than 1,000 pages of documents from Bank of America, including e-mails between executives discussing the transaction.

Copies of some of the documents were obtained Tuesday by The Washington Post. The sources spoke on the condition of anonymity because they were not authorized to speak publicly.

In one e-mail dated Nov. 5, Neil Cotty, chief accounting officer for Bank of America's global wealth and investment bank division, forwarded to Joe Price a message from the corporate planning department at Merrill Lynch outlining financial estimates for October 2007 that showed core revenue levels to be significantly lower than during the prior quarter. Cotty added as a comment "Read and weep."

In another e-mail on Dec. 7, Gary Carlin, Merrill's former chief accounting officer, wrote Cotty a three-word message: "What a disaster!" Attached to the e-mail were Merrill's financials through Dec. 5.

The latest e-mails and other documents -- about 20 pages -- represent a small fraction of the thousands of documents in the committee's possession.

Bank of America denied Tuesday that it had withheld any meaningful information from investors. It has said that significant losses at Merrill did not come to light until after the shareholder vote.

"The full weight of these documents reflects very candid and thoughtful discussion in good faith," said Lawrence T. Di Rita, a spokesman for the bank. "The strategic wisdom of the Bank of America-Merrill Lynch combination have subsequently become obvious."

Last week, Bank of America reported a $1 billion third-quarter loss, after reporting gains in the second quarter. It received a $20 billion infusion from taxpayers in January, when it disclosed that Merrill Lynch had fourth-quarter losses of $15 billion.

The committee is also exploring whether Bank of America officials threatened to derail the deal unless the bank received more federal aid. On Dec. 17, Lewis and other executives spoke with top government officials about backing away from the merger under a "material adverse change" clause, after discovering on Dec. 14 billions in additional losses at Merrill, according to a deposition of Lewis taken by the New York Attorney General's Office.

But based on interviews and documents, the House committee contends that Lewis and the bank were aware that the adverse-change clause had little chance of succeeding, according to a source with close knowledge of the committee's investigation. The source pointed to a Dec. 18 e-mail from the bank's lawyers at Wachtell, Lipton, Rosen & Katz that described the legal obstacles if Bank of America tried to walk away.

Di Rita said the bank went to federal officials based on its belief that there were grounds for scuttling the deal and that the full set of documents the bank provided to the committee and other regulators will show that the legal advice it received was "entirely consistent with that business conclusion."

The committee, chaired by Rep. Edolphus Towns (D-N.Y.), postponed a hearing on the merger slated for Thursday in order to conduct more interviews with bank executives, including Brian Moynihan, a senior executive who is said to be in contention to succeed Lewis when he retires at the end of the year.

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