It’s amazing how quickly secrets leak out these days. The WSJ has testimony from Bank of America’s CEO Ken Lewis’s testimony before New York Attorney General in February. It’s wild and somewhat troubling stuff.
What emerges from the WSJ story is a picture of Treasury Secretary Paulson and Fed Chairman Bernanke exceeding any semblance of statutory authority and, frankly, running rough shod over the law.
Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.
Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.
“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.
“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.
Mr. Lewis’s testimony suggests how aggressively federal regulators have been willing to behave in their fight to fix the U.S. financial system. The testimony for the first time spreads some of the blame to Messrs. Paulson and Bernanke for Mr. Lewis’s decision to keep problems at Merrill under wraps.
Lewis is, of course, interested in saving his own reputation or whatever is left of it. He probably faces years of litigation over the Merrill acquisition and his life is generally in tatters. All of that needs to be kept in mind as you review this report and the many that are sure to follow. At the same time, it would be folly to not believe that there is truth in what he speaks. He is not stupid and knew when the arm twisting occurred precisely his duties as an officer and director of the bank.
I hesitate to excerpt the last paragraph or two of the article as they are clearly only one side of the story. Nevertheless, here it is.
During his testimony, Mr. Lewis described a conversation with Mr. Paulson in which the Treasury secretary made it clear that Mr. Lewis’s own job was at stake. Mr. Lewis still was considering invoking his legal right to terminate the Merrill deal. Mr. Paulson was out on a bike ride when Mr. Lewis phoned to discuss the matter, according to the transcript.
“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said. “I said, ‘Hank, let’s de-escalate this for a while. Let me talk to our board.’ ”
Like I said, wild stuff. It’s also no more than “he said, she said” but you know as well as I that it went down somewhat along these lines.
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