Thursday, February 04, 2010

People of State of New York v. Bank of America

As global markets hit a big banana peel today, not all the financial excitement in the Big Apple was on Wall Street. New York Attorney General Andrew Cuomo filed suit against Ken Lewis, former CEO of Bank of America, in New York State Supreme Court in Manhattan. Former B of A CFO Joe Price was also named in the suit.

In brief, Lewis is accused of defrauding Bank of America investors and the federal government in the purchase of Merrill Lynch in the fall of 2008 and in its applications for TARP bailout money. This summary gets to the heart of the matter:

Bank of America agreed to buy Merrill on Sept. 15 after just 25 hours of due diligence, according to the suit. When the board of directors met that day to approve the transaction, they thought they were going to buy Lehman Brothers Holdings Inc., the suit says.

Cuomo said Bank of America scheduled a shareholder vote to approve its plan to buy Merrill on Dec. 5, 2008. By that date, Merrill incurred losses of more than $16 billion, Cuomo said. Bank of America’s management, including Lewis and Price, knew of the losses and knew that more were coming, Cuomo said.

After the merger was approved, Lewis told federal regulators the bank couldn’t complete the deal without a taxpayer bailout because of accelerated losses from Merrill, Cuomo said. However, between the time the shareholders approved the deal and the time Lewis sought the bailout, Merrill’s losses only increased by $1.4 billion, Cuomo said.

Reading stories like this, you don’t know whether to laugh or cry: “When the board of directors met that day to approve the transaction, they thought they were going to buy Lehman Brothers”! A day of “due diligence” to buy one of the biggest banks in the country as it was going into financial free-fall!? But this is just the tip of the iceberg.

The question everyone is asking is the role of the Treasury and Federal Reserve in orchestrating this takeover. Even as Lewis’ counsel was dismissing the law suit as “totally without merit,” reports were circulating that the defense would subpoena both former Treasury Secretary Hank Paulson and Federal Reserve Chair Ben Bernanke to testify. And who knows—maybe Tim Geithner will make a cameo appearance. We may yet find out what was going on in those late night phone calls between New York and Washington in the midst of the global financial meltdown. And who knows: even justice may yet be done.

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