Ken Lewis is about to face a grilling on Capitol Hill. The subject at hand: that merger with Merrill Lynch.
Here’s some background to the hearing, drawn from the FT Alphaville and FT archives.
Item one, “We’re good at this” – or selected excepts from Ken Lewis on the Bank of America/Merrill Lynch conference call, September 15th, 2008. Emphasis FT Alphaville’s:
: I guess the question is why pay $29 at this point?
: Yeah, it’s an obvious good question. You can think of several scenarios. One, probably the more likely is that Merrill had the liquidity and capacity to see this through… Secondly, there’s always the possibility of investment in Merrill Lynch by others and so then others would have that opportunity, and then finally, we could have roll the dice and possibly could have got it at a cheaper price. We thought the long-term benefits were so overwhelming, it was such a strategic opportunity that we elected not to roll the dice and to go ahead and do it at this time. Again, also, you- I don’t know- I don’t know anybody who’s perfect at picking the absolute bottom, and we thought we had a compelling situation for the shareholders over the long term and at the time, we did.
: can you provide a little more colour on some of the due diligence that was done?
Well, Joe, you want to go over it again in terms of- and the JC Flowers piece is key because they were renewing something- an effort that had already gone on and been very, very extensive…Clearly we had a tremendous amount of historical knowledge both as a competitor with Merrill Lynch and reviewed and analyze the company over the years.
…it’s not as if we don’t have a very significant knowledge of the markets around the asset classes that are most problematic. In addition, as you would expect, we deployed the team that we would ordinarily deploy in these types of situations, which had well over 45 people from our team on site as well as others offsite outside counsel and the like.
Item two, Merrill’s “my bad” (Feb 2009):
Merrill Lynch filed its annual report [on Feb 29], revealing an addition $500m loss. Oops.
Restated, the company, bought by Bank of America last year, had a $27.6bn loss in 2008, instead of the $27.1bn previously reported. The extra half billion of losses seems to have come from using the wrong yield curve on a swap contract and messing up the accounting on a single hedge in the fourth quarter.
Merrill’s auditors, Deloitte & Touche, had this to say: “In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, Merrill Lynch has not maintained effective internal control over financial reporting as of December 26, 2008, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.”
Another $500m of losses may seem like small change nowadays, but if Merrill can’t control its own books, then surely, Bank of America never had a chance when it came to doing due diligence on the deal — even though, as BoA’s Ken Lewis famously proclaimed, they’re really quite “good at this“
Item three, BOA/Mer due diligence, trading edition (Mar 2009). From the NY Times:
CHARLOTTE, N.C. — One Merrill Lynch trader apparently gambled away more than $120 million in the currency markets. Others seemingly lost hundreds of millions on tricky credit derivatives.
But somehow all this red ink did not spill into plain view until after Merrill earmarked billions for bonuses and staggered into the arms of Bank of America…
Bank of America’s embattled chief executive, Kenneth D. Lewis, is trying to bridle Merrill’s traders, whose rush into risky investments nearly brought down the brokerage firm. But questions over the Merrill losses – in particular, who knew about them, and when – keep swirling. Merrill hemorrhaged $13.8 billion during the final three months of 2008 alone…
Item four, Cuomo confidential (April 2009):
In testimony leaked to the Wall Street Journal … Bank of America chief Ken Lewis suggests that former US Treasury secretary Hank Paulson forced his hand on the Merrill deal.
Lewis had his doubts about the transaction, but Paulson convinced him it was not in the CEO’s “best interest” to walk away, according to the testimony given in February as part of New York attorney general Andrew Cuomo’s investigation into the merger and bonuses paid to Merrill execs.
But the investigation raises questions about more than just the bonuses; questions so serious, according to Cuomo, that senior Congress members need to be made aware of them.
Item five, The smoking gun emails (June 2009). From the FT on Thursday:
Ken Lewis, chief executive of Bank of America, used the threat of invoking a “material adverse change” clause to break off his agreement to buy Merrill Lynch last December because he wanted to negotiate a lower price, Federal Reserve chairman Ben Bernanke claimed in an e-mail.
Mr Lewis…only dropped his threat after being told by former US Treasury secretary Hank Paulson that regulators, including Mr Bernanke, would remove him and his board if BofA tried to invoke the “MAC” clause.
The Financial Times has learned that Mr Bernanke, in an e-mail, described Mr Lewis’s threat to invoke the “MAC” clause as a “bargaining chip”, and a “foolish move”, before concluding that “the regulators will not condone it”.
A staffer at the Federal Reserve bank in Richmond, Virginia, said in an e-mail that top executives at BofA, including the bank’s chief financial officer, Joe Price, “want the transaction to go through but have to protect their shareholders”.
Over to Ken Lewis.
Related links:
Liveblogging Ken Lewis’ testimony on the Hill – WSJ Deal Journal
Banker of the year goes bye-bye? – FT Alphaville