Immediately after learning on December 14, 2008 of what Lewis described as the "staggering amount of deterioration" at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event ("MAC") occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.
Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced:Secretary Paulson's threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, "that makes it simple. Let's deescalate." Lewis admits that Secretary Paulson's threat changed his mind about invoking that MAC clause and terminating the deal.Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke.
The questions becomes, are we looking at government fueled securities fraud? Mish thinks so:
It's crystal clear from the letter that a strong case can be made that Paulson and Bernanke coerced Lewis to carry out a merger agreement that was not in Bank of America's shareholders best interest. Lewis arguably did so only to save his own job and the board.
Karl Denninger spells it out for those not up to date on securities law:
Your first obligation isn't to your regulator, it is your fiduciary responsibility to your share and bondholders.
If your regulator decides to remove you from office as a consequence, they do. That doesn't change a thing; your personal interests cannot override your responsibilities.
As the CEO of a public firm you don't work for the govermment, whether you think you're some "left arm adjunct" or not. You work for the holders of your stock and debt - period. On this matter the law is clear, and the government, even post-TARP, had a minority stake.
As such they lack standing to tell you to shut up when your obligation to disclose is a matter of black-letter law.
The WSJ does their best to focus the blame squarely on the Paulson and Bernanke, perhaps appropriately, but at the end of the day, it appears Lewis put his own interests ahead of his legal and professional responsibilities to Bank of America. I would join Mish and Denninger and hope that all three receive indictments.
4 comments:
I don't disagree with the post, but are we naive enough to think that any CEO is in the position for the honorable good of the stockholders wallet and not his own?
I don't know a lot of businessmen taking one for the team. If I'm honest, and my company needed me to resign so that they could become more profitable, I can't say I would oblige.
However, this does bring us back to the discussion of virtue and ethics. Ultimately if we can make decisions based on the long term and not just the next quarter, if we do what is good for the stockholders, the company, the industry, then it should benefit us in the long term. Unfortunately when parties, governments, employees, and employers are all after the next payoff then it creates a system such as just manifested itself. We have created an environment that does not always encourage virtuous decisions.
I do believe there are some CEOs that would not break the law when threatened or bribed, even when the threats and bribes come from the government. Would I be happy if I knew the percentage of Fortune 500 CEOs that would stand by the law - who knows. But that is the beauty of the law, it can bring justice when humans harm others with their actions.
There are two simple legal defense to this - (1) futility and (2) business judgment rule. 1 - Any action taken by Lewis would have been futile in the face of imminent summary regulatory action. When you beg the government for billions of tax payer dollars, you aren't exactly in a position to refuse a demand from the government, even if that demand is contrary to interest of the shareholders. 2 - Similar to (1), except instead its couched in terms of "In my judgment it would have been futile to try and stop the deal - faced with the Scylla of merger and the Charybdis of government involvement, I chose merger for the good of the company." Furthermore, any derivative suit brought by the shareholders will necessarily involve an analysis of BOA's health prior to accepting TARP I funds with the Merrill string attached. I haven't read Denniger's article, but it sounds like he's simply not addressing this issue.
I'll make no comment as to the underlying ethics issue.
On a slightly related but not really note, I met a gentleman this weekend who worked for Merrill and now works for BOA. From our discussion, its clear that there is a internal anger over the merger from both sides. There were definitely some 4-letter words thrown around when I asked him how things were going post-merger...
Thanks for the legal analysis.
I don't know how it will play out, and I don't know the true facts, but everyone is indeed entitled to a full defense. You covered Lewis' defense, what about Paulson and Bernanke, are they outside the jurisdiction of securities law?
In the full article, it appears that BOA never wanted any TARP money, and was strong armed by government into accepting it the first time around. This would corroborate the statements by other bank CEOs to the same effect. According to them, the government did not want the public flocking to the relatively stronger non-TARP banks, so they made all of the large (top 9 I think) institutions accept TARP money.
What I understand of the merger is that BOA was interested in the fire sale purchase until the ugly numbers starting coming out.
Thanks for the anecdote. Most mergers fail because of culture differences and the resulting inability to work together. It does not appear BOA and Merrill are off to a good start.
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