Government regulators threatened to remove top Bank of America executives if they backed out of a buyout of failing brokerage giant Merrill Lynch, and offered to provide taxpayer funds to compensate for Merrill’s poor performance, according to company records obtained by The Washington Times.
The documents - e-mails between bank executives and their outside attorneys as well as board meeting “talking points” prepared for then-Bank of America Chief Executive Ken Lewis - offer new insight into the hardball tactics that produced one of the biggest deals negotiated during the late 2008 global financial crisis, one that is still reverberating on Wall Street and in Washington.
They also underscore the fear shared by then-Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Board Chairman Ben S. Bernanke that allowing the deal to fall through would mean a sequel to the collapse of Lehman Brothers, whose failure months earlier sent the world economy into a tailspin.
“It’s highly unusual for a government agency - let alone a Treasury secretary and a Fed official - to virtually order a company to do something like this under threat of removal,”said Cornelius Hurley, director of the Morin Center for Banking and Financial Law at the Boston University School of Law. “It raises a fascinating question which is, if you’re Bank of America and you have a shareholder’s interests paramount in your mind, what is your liability if you go against those interests in the interests of the country?”
Summaries written by the bank executives of their conversations with Mr. Bernanke and Mr. Paulson also appear to show that incoming Treasury Secretary Timothy F. Geithner agreed with the deal, which some lawmakers say raises questions over congressional testimony given by Mr. Bernanke this summer in which he said Mr. Geithner was not involved in the discussions.
Bank of America’s acquisition of Merrill Lynch - and the government’s role in the deal - are the subject of a hearing Thursday before the House Committee on Oversight and Government Reform. Bank of America executives said they were told their top brass would be fired if they attempted to renegotiate their bid for Merrill by declaring what’s known as a “material adverse change” (MAC) - a clause in their acquisition agreement that would allow them to walk away or renegotiate the price in light of Merrill’s mounting losses.
“The Treasury and the Fed strongly stated that if we were to invoke the MAC clause and fail to close this transaction, they would remove the board and management due to the risk we would create in the system,” according to draft talking points prepared by company attorneys for Mr. Lewis ahead of a Dec. 22, 2008, board meeting.
Bank executives say financial regulators assured them that taxpayer money from the $700 billion Troubled Asset Relief Program (TARP) bailout fund was available to compensate them for Merrill’s disappointing fourth-quarter financial results if they followed through on the deal.
In an e-mail to Kevin Warsh, a member of the Federal Reserve Board of Governors, Bank of America Chief Financial Officer Joe Price wrote: “I think Ken [Lewis] mentioned to me that there was some 45 bn still out there, clearly enough to replenish the capital loss at Merrill. FYI - Treasury (HP) had a higher number but nevertheless, enough to deal with this issue.”
Another board member’s notes said Mr. Lewis told the board Mr. Bernanke told him $45 billion in TARP funds were “available if necessary.”
Elsewhere in the records, handwritten notes by a bank official during a Jan. 9, 2009, meeting indicate that the Fed was willing to provide even more taxpayer assistance: “400 B Discount Window Available For Armageddon Scenario.”
The documents appear to contradict testimony made by Mr. Paulson to the House investigative panel this summer that he and Bank of America executives did not have “any kind of specific agreement” on a dollar amount of TARP funds - and therefore there was no need to publicly disclose any Treasury commitments.
A spokeswoman for Mr. Paulson did not respond to a request for comment.
Kurt Bardella, a spokesman for Rep. Darrell Issa of California, the senior Republican on the House committee, said the merger was the outcome of “a collaborative effort orchestrated by Ken Lewis, Henry Paulson, Ben Bernanke, Timothy Geithner and Larry Summers.” Mr. Summers at the time of the Bank of American deal had been selected as director of the incoming Obama administration’s National Economic Council.
“As a result of this collaboration, the taxpayers ended up footing the bill so Bank of America didn’t have to absorb Merrill Lynch’s losses,” Mr. Bardella said. “It’s clear now that this ‘shotgun-wedding’ began when Bank of America told government officials that they intended to exercise the MAC clause, well before Hank Paulson and other officials first made their threat to have the board and management removed.”
Bank executives said they had “the strongest assurances” that a change in administration would not jeopardize the deal, and that Mr. Geithner was in agreement with Mr. Paulson and Mr. Bernanke. They asked for written guarantee that they would receive TARP funds for not invoking the MAC clause, but instead had to rely on the word of the outgoing and incoming administrations.
But Mr. Bernanke told the House panel on June 25 that Mr. Geithner “had already been designated as the Treasury secretary nominee, and therefore he recused himself from detailed intervention or involvement in such transactions. We did give him basic information so that he would be informed, but he was not involved in the details of the - of the package that was put together for Bank of America.”
A Fed spokeswoman referred questions about Mr. Geithner’s involvement to a Treasury spokesman.
“After being named as Treasury secretary nominee, Geithner was recused from any issues involving individual banks, including Bank of America,” spokesman Andrew Williams said. “It was perfectly natural and appropriate that the incoming Treasury secretary would be kept apprised of key developments, but he was not making decisions for the government.”
A spokesman for Bank of America did not respond to a request for comment.