Bank of America’s Acquisition of Merrill Lynch: A “Shotgun Merger”?
Bank of America’s Ken Lewis is under fire again. Shortly after being stripped of his position as Chairman of the Board earlier this year, he faces yet another controversial issue that could further undermine shareholder confidence in him.
Congress’s investigation into the Bank of America acquisition of then troubled investment house Merrill Lynch (the deal was finalized last January) revealed some seriously questionable moves on the part of both CEO Lewis and government officials. Internal Fed emails retrieved and allegations disclosed have led lawmakers and the public to believe that the merger of the two institutions was one that bore traces of being a “shotgun” transaction – at the expense of taxpayers’ money at that.
As Chairman of House Committee on Oversight and Government Reform Edolphus Towns aptly puts it, “The question is, who was holding the shotgun?”
Here are the various issues on this latest controversy that has put Lewis in the hot seat again.
Issue #1. Government purportedly put pressure on Lewis to push through with the merger.
Speaking before the House committee Thursday (June 11), Lewis publicly stated for the first time that pressure from former Treasury Secretary Henry Paulson and other Fed regulators for the completion of BofA’s acquisition of Merrill Lynch was one of the reasons why the deal went through, despite his misgivings about Merrill’s financial standing. Government officials allegedly told him in no uncertain terms that there would be changes in BofA’s management should the bank back out from its announced takeover of the beleaguered investment giant.
Whether the government had gone too far with its intervention is something that Congress seeks to look further into in the next few days. Even Lewis himself is quick to point out that despite Paulson’s and Fed officials’ coercion, he could see that they were only acting with “good intentions”, seeking to avoid a further deterioration of the country’s financial system.
Issue #2. Lewis chose to withhold information on Merrill’s losses from shareholders.
What makes this revelation from the top executive of one of the country’s largest banks unacceptable to its shareholders is that in the face of government pressure to keep markets calm amidst a financial crisis, Lewis caved in and chose to keep mum about Merrill’s growing losses; and then proceeded to go through with the merger.
In January, Merrill Lynch announced a $15-billion loss for the fourth quarter of 2008. During the hearing, Lewis could only defend himself on this matter by saying that “No one thought things would get as bad as it did in the fourth quarter.”
Issue #3. Lawmakers allege that Lewis may have bluffed about backing out of the merger to get more in government aid.
Another theory being floated around by some lawmakers is that the BofA CEO was not as unaware of Merrill’s troubles as he made it appear in mid-December, and used his “surprise” about Merrill’s state and subsequent plans of calling off the deal to instead walk away with additional bailout money.
“Why did a private business deal announced in September and approved by shareholders in December — with no mention of government assistance — end up costing taxpayers $20 billion in January?” Congressman Towns asked during the Thursday Committee hearing.
What’s next?
These issues are begging for more questions rather than answering them. Former Treasury head Paulson and Fed Chairman Ben Bernanke are expected to be invited anytime soon to the hearings to shed more light on the matter. For House Oversight Committee members however, one thing is clear: new laws need to be written to make the financial oversight and regulatory process a more transparent one.
