Sue Reisinger, Corporate, Law.com, October 22, 2009
New documents in the Bank of America Corp. investigation show that chief executive Ken Lewis apparently misled federal officials when he asked them to cough up $20 billion and other financial incentives to keep him from canceling the bank's merger with Merrill Lynch & Co., Inc.
Lewis told the feds that he had just learned of Merrill's spiraling fourth quarter losses that eventually reached $15 billion, when in fact his bank had been following the growing losses throughout October and November. Corporate Counsel has previously reported about the timing of disclosure of the losses, and the new documents confirmed earlier stories.
Lewis, the documents show, told the officials that the Charlotte, N.C.-based bank believed it had a "MAC" -- a material adverse change that would trigger an escape clause that would allow Bank of America to get out of the merger. In fact, according to a story in story in Wednesday's Charlotte Observer, former general counsel Tim Mayopoulos told bank executives that they did not have grounds for a MAC.
Mayopoulos was fired was fired days before Lewis told the Feds he intended to "call the MAC."
The House Oversight and Government Reform Committee has been probing the circumstances of the deal for months, along with the Securities and Exchange Commission, the New York attorney general and others. House investigators interviewed Mayopoulos on Monday, the Observer said, after the bank's board of directors decided to waive attorney-client privilege. The newspaper cited sources saying they knew what Mayopoulos told House investigators about his advice.
The House committee also canceled a hearing, scheduled for today, so that it could pursue other leads that arose in some 1,000 documents recently turned over to investigators. The hearing may be held as early as next week, a spokesman said.
One of those documents from Brian Moynihan, an interim general counsel in December after the bank ousted Mayopoulos, advised Lewis on "talking points" to discuss with the board of directors. It specifically discusses a phone call with Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and others in which Lewis "described the intention to call a MAC on Merrill."
Lewis also did not tell the feds that his own lawyer had advised that there were no grounds to invoke the MAC. The lack of grounds, according to one source close to the deal, was because the merger agreement specifically stated that losses on transactions made prior to the agreement could not be counted as a reason to call a material adverse change. And the bulk of Merrill's losses were from prior transactions.
The Moynihan "talking points" also discuss a later phone call between Lewis and Paulson, in which Lewis "relayed that while we still believe a MAC has occurred, that we would be willing to not declare the MAC and to complete the transaction if the Federal Treasury and related entities put together a package" for the bank worth $23 billion.
In a later phone call with Bernanke, according to the document, Lewis again "stated that we believe we had a MAC, but that the Bank of America would be willing to go forward in the transaction on the condition that we get an infusion of capital and loss sharing on Merrill assets."
The federal officials, fearing a collapse of Merrill Lynch as well as the vulnerable U.S. financial system if the deal fell through, agreed to Lewis' terms. The merger closed Jan. 1. Later that month the bank received an additional $20 billion in U.S. bailout funds plus U.S. protection against losses on some $118 billion in toxic assets.
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