NEW YORK — Then-Treasury Secretary Henry Paulson threatened to remove Bank of America Corp. Chief Executive Kenneth Lewis and the bank's board of directors if the bank backed out of its merger with Merrill Lynch & Co. last year, New York Attorney General Andrew Cuomo said.
In a letter to members of Congress on Thursday, Cuomo said his investigation into the Charlotte-based bank's merger has found that Paulson told Lewis on Dec. 21, 2008, that the government "could or would" replace the bank's management and its directors if the bank exited the deal.
Lewis had informed Paulson on Dec. 17, 2008, that Bank of America was planning to invoke a material adverse event clause in the merger agreement that would allow it to call off the deal, Cuomo said.
Three days before, Lewis had learned that Merrill Lynch's financial condition "had seriously deteriorated at an alarming rate" since Dec. 8, 2008, Cuomo said.
"Secretary Paulson told Lewis a series of concerns, including that Bank of America's invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC," Cuomo said.
Merrill Lynch reported a fourth-quarter loss of $15.84 billion.
Cuomo's office has been probing the event surrounding Bank of America's merger with Merrill Lynch, including $3.6 billion in bonuses paid out last year on the eve the tie-up. The deal closed Jan. 1.
The letter was sent to Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee; Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee; U.S. Securities and Exchange Commission Chairwoman Mary Schapiro; and Elizabeth Warren, chairwoman of the Congressional Oversight Panel in charge of reviewing the Treasury's Troubled Asset Relief Program.
Paulson told Cuomo's office that he made the threat to remove Bank of America's management and board at the request of Federal Reserve Chairman Ben Bernanke.
"Lewis admits that Secretary Paulson's threat changed his mind about invoking the MAC clause and terminating the deal," Cuomo said.
After making the threat, Lewis and Paulson discussed the possibility of the bank receiving additional government assistance.
Lewis informed the bank's directors of his decision not to invoke the MAC clause on Dec. 22, 2008, Cuomo said. The board minutes say the board "was not persuaded or influenced by the statement by the federal regulators that the board and management would be removed by the federal regulators if the corporation were to exercise the MAC clause and failed to complete the acquisition of Merrill Lynch," Cuomo said.
At another board meeting on Dec. 30, Lewis, according to the board minutes, said the bank would have sought to assert the MAC clause and seek to renegotiate the transaction "were it not for the serious concerns regarding the state of the United States financial services system and the adverse consequences of that situation to the corporation articulated by federal regulators," Cuomo said.
"Despite the fact that Bank of America had determined that Merrill Lynch's financial condition was so grave that it justified termination of the deal pursuant to the MAC clause, Bank of America did not publicly disclose Merrill Lynch's devastating losses or the impact it would have on the merger," Cuomo said. "Nor did Bank of America disclose that it had been prepared to invoke the MAC clause and would have done so but for the intervention of the Treasury Department and the Federal Reserve."
Lewis, in a deposition with Cuomo's office in February, testified that the question of disclosure wasn't up to him and that his decision not to disclose the information was based on direction from Paulson and Bernanke.
"I was instructed that 'We do not want a public disclosure,'" Lewis told Cuomo's office.
However, Paulson told Cuomo's office that his discussions with Lewis were regarding the Treasury Department's own disclosure obligations.
"Prior to the closing of the deal, Lewis had requested that the government provide a written agreement to provide additional TARP funding before the close of the Merrill Lynch/Bank of America merger," Cuomo said. "Secretary Paulson advised Lewis that a written agreement could not be provided without disclosure."
Cuomo said Lewis told the board, in a Dec. 22, 2008, email, "I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want."
According to the Dec. 30 board minutes, the bank was trying to time its disclosure of Merrill Lynch's losses to coincide with the announcement of its earnings in January and the receipt of additional TARP funds, Cuomo said.
"Mr. Lewis concluded his remarks by stating that management will continue to work with the federal regulators to transform the principles that have been discussed into an appropriately documented commitment to be codified and implemented in conjunction with the Corporation's earning [sic] release on January 20, 2009," Cuomo said, quoting the board minutes.
Cuomo said it also appears the SEC was kept in the dark, regarding the December discussions. Paulson told Cuomo's office that he didn't keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.
"As this crucial recovery process continues, it is important that taxpayers have transparency into decision-making," Cuomo said. "It is equally important that investor interests are protected and respected."
