Today, the House Committee on Oversight and Government Reform held a hearing entitled “Bank of America and Merrill Lynch: How Did a Private Deal Turn Into A Federal Bailout?” which proposed to investigate the events surrounding Bank of America’s (BoA) recent acquisition of Merrill Lynch in which the U.S. Treasury provided BoA with $20 billion in TARP funding to help the bank complete the deal. Bank of America CEO and President Kenneth D. Lewis was the sole witness to testify before the Committee.
Committee Chairman Edolphus Towns (D-NY) and Representative Dennis J. Kucinich’s (D-OH) opening remarks reflected deep concern over whether BoA failed to disclose to its shareholders the expected mounting losses at Merrill Lynch, and whether the Federal Reserve and Treasury compelled the BoA board not to invoke a material adverse change (MAC) clause to back out of the transaction with Merrill. As part of Mr. Lewis’s prepared testimony, he stated that, although “the acquisition of Merrill came with risks,” there “does not appear to be any debate” that the Merrill acquisition was “in the best interests of the financial system, the economy, and the country.” During questioning, members of the Committee pressed Mr. Lewis over the two significant issues identified by Chairman Towns and Rep. Kucinich: (i) whether BoA failed to disclose material information about Merrill’s losses prior to the BoA shareholder vote; and (ii) whether the federal government “threatened” the BoA board and management with termination if they invoked the MAC clause to back out of the transaction.
With respect to the disclosure of material information to BoA shareholders, Mr. Lewis stated that BoA “did not supplement the proxy with information regarding mounting losses at Merrill” before the BoA shareholder vote, and in particular, that the federal government “never told BoA not to disclose” this information, however BoA “would have supplemented the proxy” if it had been advised by counsel to do so.
In response to Ranking Member Darrell Issa (R-CA) and Rep. Paul E. Kanjorski's (D-PA) inquiry whether Mr. Lewis “felt there was an implied” or “perceived” threat to the BoA board from the government not to invoke the MAC, Mr. Lewis stated that when BoA informed the Federal Reserve and Treasury with “concerns about closing the [Merrill] transaction,” he felt their response was “not a threat” but that “yes” he did felt pressure not to invoke the MAC but only “in the context of believing it was in the best interests of BoA and the financial system,” especially given that BoA is “so intertwined with the financial system.” Several members of the Committee challenged Mr. Lewis’s response that there was no threat, citing emails from federal regulators stating that “we can explain to BAC that with some confidence why we think it [invoking the MAC] would be a foolish move and why the regulators will not condone it,” and that if BoA “plays that card [invoking the MAC], and then need[s] assistance, management is gone.” Representative Jeff Flake (R-AZ) called it “incredulous not to consider this a threat,” and Rep. Elijah Cummings (D-MD) stated that “If that is not a threat, I don’t know what is.”
Separately, Rep. Kucinich inquired as to whether Mr. Lewis ever requested a letter from Federal Reserve Chairman Bernanke that would state the Federal Reserve ordered BoA to close the deal, in order to provide cover for BoA’s decision not to invoke the MAC clause, to which Mr. Lewis responded that he “does not recall.” However, Rep. Kucinich referenced an email he obtained as part of a subpoena of documents from the Federal Reserve, stating that the Federal Reserve “would not provide” such letter. Chairman Towns stated that the Committee intends to invite Chairman Bernanke and former Treasury Secretary Henry Paulson to testify at a future date on the above matters.
Today’s hearing coincided with the Committee’s ongoing investigation of the BoA/Merrill transaction, including delivery of a subpoena to the Federal Reserve requesting documentation regarding the transaction and a joint letter sent last week by Chairman Towns and Domestic Policy Subcommittee Chairman Dennis Kucinich to Federal Reserve Board Chairman Ben Bernanke requesting copies of records previously reviewed by Committee staff.