When Bank of America announced it was buying Merrill Lynch in September 2008, bank execs told their shareholders that the merger might hurt earnings a touch. It didn’t turn out that way. Losses at Merrill piled up over the next two months, before the deal even closed. Yet the execs kept painting a prettier picture to shareholders — even though it turns out they knew better.
As the New York Times detailed this morning, a brief in a new lawsuit filed in federal court in Manhattan recounts sworn testimony and internal emails in which execs admitted to giving bad information to shareholders and that they had worried about the legal ramifications of doing so.
According to the filing, Bank of America’s then-CEO Kenneth Lewis admitted in a deposition that what he told shareholders about the financials of the merger was “no longer accurate” on the day they approved it.
We’ve pulled out the most revealing parts of the suit, which tell the story of how the deal went down.
On Sept. 15, 2008, Bank of America announced its agreement to buy Merrill Lynch. In the press release announcing the deal and other presentations, Bank of America said it would cause a 3 percent decrease in earnings in 2009, and that by 2010 the deal would break even or do better.
In October, concerns started to emerge about Merrill’s financials. As it became clear the company was going to lose $7.5 billion that month, one exec emailed another the numbers with the message “read and weep.”
Merrill kept losing money in November. Late that month, Bank of America ordered Merrill to sell off assets to try to stabilize its finances:
Forcing Merrill to down-size (p. 18)
reducing the denominator in Merrill’s TCE Ratio). Id. Thus, as BoA Treasurer Brown testified, “to avoid [Merrill’s] capital ratio completely getting crushed,” BoA was forced to order Merrill to “reduce assets to help offset some of that . . . capital deterioration.” ? 63. Accordingly, by no later than November 26 – ten days before the shareholder vote – senior BoA executives, including Treasurer Brown, directed Merrill to materially reduce the size of Merrill’s balance sheet. ?? 57-60. In response, Merrill executives informed Brown that a “no…
After current Bank of America CEO Brian Moynihan admitted in a deposition that this sale meant the deal was less valuable to shareholders:
Impact of Merrill’s down-sizing (p. 21)
As Moynihan testified, the reduction in Merrill’s capital and balance sheet meaningfully impacted the combined company’s future earnings streams, to the detriment of BoA’s shareholders:
Q: And since Bank of America was purchasing Merrill Lynch, it would obviously affect Bank of America earnings streams?
A: Our shareholders were not getting the benefit they were supposed to get. We were giving them [Merrill shareholders] a portion of a company [i.e., BoA] to get back earnings gain [and] capital, and neither of those were going to be present.
On Dec. 1, Bank of America issued a $9 billion debt offering. Publicly, they said this was “for general corporate purposes.” But private communications showed that they were trying to raise money to cover Merrill’s losses:
BAC stand-alone. I would not have issued any debt in 4q, 1q, 2q. Due to ML, we raised $9B in debt this week, need to raise another $5B in 1q and $5b in 2q…. How do we think about the cost of this debt…ie) I think you should be including this in the dilution impacts for ML. Their liquidity position at hold-co isn’t pretty. … It hurts your #s I know … but this is real … and should be associated with the transaction.
Bank of America’s then-treasurer, Jeffrey Brown, wrote in emails just before the shareholder meeting that they needed to disclose that the Merrill losses were behind the debt offering. He also testified that he told other execs they could be committing a criminal offense by not disclosing the losses:
How do we think about the cost of this debt…ie) I think you should be including this in the dilution impacts for ML. Their liquidity position at hold-co isn’t pretty. … It hurts your #s I know … but this is real … and should be associated with the transaction.
Possible criminal offense (p. 26)
Price that Merrill’s losses should be disclosed. ?? 89-91. Brown testified that he told Price “that we should disclose. That the losses were meaningful enough.” ? 89. When Price refused to disclose Merrill’s losses, Brown pointedly warned him that the failure to disclose could be a criminal offense, stating that he did not want to be “talking through a glass wall over a telephone” if no disclosure was made 90-91.
On Dec. 5, Bank of America shareholders met to decide whether to approve the merger. They questioned Lewis about the financial impact of the deal, and he reassured them:
Participant: You didn’t respond to the lady’s comment. This will dilute our shares. Will it not? Yes or no; not in the future, someday, but this afternoon?
Mr. Lewis: We have said as I recall in the [September 15] presentation that we will have dilution in the first year, break-even in the second; and then accretion in the third.
Participant: Oh good, okay….
That day, shareholders voted to approve the merger.
In his deposition for the lawsuit, Lewis said that what he told them was not accurate. Bank of America had already revised their numbers to reflect Merrill’s losses:
dilutive impact of the Merger as of the date of the December 5 shareholder vote. ?? 94-98. As Defendant Lewis admitted, by the date of the vote, there had been a “significant change in the dilution and accretion analysis,” and the numbers that BoA had previously represented had changed “dramatically” to become the figures in the December 9 board presentation. Id.
Accordingly, Lewis testified that, by December 5, 2008, the representations that BoA had made concerning accretion and dilution were “no longer accurate.” ? 94. Defendant Lewis testified as follows:
Q. Now, as of December 5, 2008, the numbers set forth in the September 15 presentation regarding accretion and dilution, they were no longer accurate, correct?
A: They were not these numbers, no.
Q: These numbers – the numbers set forth on page 16 of [the September 15 analyst presentation] were not accurate, correct?
A: They had changed to this [referencing the numbers in the December 9 Board presentation].
Q: And that was as of December 5, 2008, right?
A: Yes.
Q: And when you say – I’m sorry, when you say it had changed – they had changed to this, what is the “this” you are referring to? The figures set forth in Mr. Price’s December 9th board presentation?
A: Meaning they were different than these, yes.
Just days after the deal was approved, on Dec. 12, a law firm for Bank of America prepared documents making the case that they could back out of the merger, based on Merrill’s new financial woes:
Backing out of the merger (p. 31)
Under the circumstances, BAC’s Board of Directors has serious concerns as to whether it can go forward with the proposed merger consistent with its fiduciary duty to BAC stockholders.
On the 17th, Lewis took that argument to then Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, who, according to the lawsuit, were stunned by Merrill’s losses:
The government’s response (p. 32)
reflected in Alvarez’s notes, Secretary Paulson stated that Merrill’s fourth quarter losses were “breath-taking” and “so far beyond expectations,” and that “losses of ML size will shake [the] market.” ? 137. Ultimately, the Federal Government agreed to provide a $138 billion bailout
According to the suit, Lewis raised the possibility of a bailout then:
Possibility of a bailout (p. 32)
While Lewis stated that BoA was inclined to terminate the merger, Lewis also raised the prospect of BoA consummating the merger on the condition that it receive a taxpayer-funded “guarantee” to “cap [the] losses” that BoA was exposed to from Merrill’s toxic assets.
But it wasn’t until January that shareholders — and the public — learned how bad things were. Bank of America stock dropped precipitously, and taxpayers ultimately padded the bank’s bailout funds with an extra $20 billion to cover the losses. The SEC has actually already settled its own charges against Bank of America over misleading shareholders on the deal. The bank paid $150 million — and didn’t admit any wrongdoing.
Bank of America didn’t comment to the Times on the new lawsuit, and didn’t immediately respond to a request for comment from us.
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