Dogged by shareholder lawsuits and by multiple law-enforcement investigations into his bank’s ill-fated merger with Merrill Lynch, Bank of America CEO Ken Lewis announced on Sept. 30 that he would leave his post by the end of the year. There is no doubt that Lewis, who was removed as chairman by shareholders earlier this spring, is resigning under tremendous pressure, and some Wall Street watchers are speculating that his resignation signals an impending criminal charge. Jim Cramer of CNBC’s Mad Money commented on the resignation, “No bank can afford to have its CEO indicted, and that may have been on the table behind the scenes.”
Certainly Judge Jed S. Rakoff wants heads to roll and doesn’t mind saying so. The U.S. District Court judge recently refused to approve a $33 million settlement in Securities Exchange Commission v. Bank of America Corp, a civil enforcement action challenging Bank of America’s failure to publicly disclose $3.6 billion in planned bonus payments to Merrill Lynch executives when the companies merged. Deriding the settlement as a sweetheart deal for executives, Rakoff demanded that the bank name the individuals most responsible for the mess. Speaking to the New York Times, Rakoff recalled an era when prosecutors pursued bad men rather than bad businesses. “The feeling then,” he said, “was if a crime had been committed, it was important to discover who the persons were who made the wrongful decisions.”
At the root of Lewis’s woes is a merger that more closely resembles a shotgun wedding. Bank of America negotiated a hasty takeover agreement with Merrill Lynch over the course of a single September weekend following the shocking collapse of Lehman Brothers. Treasury secretary Hank Paulson aggressively championed the deal as integral to his effort to stem the rising financial crisis. But in the weeks between the announcement of the deal on Sept. 15, 2008, and its consummation in January, Merrill Lynch booked a breathtaking $15.3 billion in additional losses — a fact not disclosed to the public by executives at either concern.
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Merrill’s staggering losses required Bank of America to accept a $20 billion infusion of additional federal cash immediately following the merger, and Bank of America’s shares now trade at a fraction of their former value. Virtually everyone is angry, and they seem, at the moment, to have settled on a common enemy: Ken Lewis. Congress is irate that Treasury found it necessary to commit billions in additional funds from the Troubled Asset Relief Program (TARP) to Bank of America, and Rep. Dennis Kucinich (D., Ohio) has accused Ken Lewis of conspiring to make the payments necessary. Bank of America shareholders are suing. Their numerous civil complaints say that Lewis sold out their interests by saddling them with a disproportionate share of the cost of rescuing the world economy at the behest of bureaucrats in Washington.
Law-enforcement activities suggest a trap slowly closing on the unpopular chief. New York State attorney general Andrew Cuomo already has subpoenaed Lewis in connection with an investigation of the merger, and the federal securities laws under which the SEC has pursued Bank of America also provide for criminal sanctions against individuals. But the events surrounding the merger indicate that Paulson and Bernanke may have placed improper pressure on Lewis to disregard his legal duties to his shareholders. If that is true, then Lewis looks less like a criminal than like the hapless pawn of top government regulators determined to stem the crisis at any cost.
Lewis testified that he became aware of the “staggering deterioration” of Merrill’s assets as a result of a worried phone call from Bank of America CFO Joe Price several days after the December 5 shareholder vote approving the deal. By then, Merrill Lynch had unexpectedly lost roughly $11 billion. Horrified, Lewis called Paulson to tell him that Bank of America would likely invoke an escape-hatch provision in the merger contract called the “material adverse change,” or “MAC,” clause. A court might or might not have agreed that the bank was justified in doing so, but Lewis and Bank of America’s board of directors thought they would best serve their shareholders by walking away from the deal and letting the courts resolve the issue.
