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Bank of America executives told government officials last December they were considering backing out of their Merrill Lynch deal, even though the bank's own top lawyer had told them they didn't have grounds, a congressional investigation has learned.
The revelation is likely to fuel accusations that the Charlotte bank threatened to abandon the purchase only because it wanted to win a bailout from government officials worried about a tottering financial system. The purchase ultimately closed Jan. 1 and the bank received $20 billion in loans weeks later.
The House Oversight and Government Reform Committee, along with other authorities, has been probing the circumstances of the deal for months. Last week, Bank of America provided about 1,000 pages of documents that shed new light on the bank's internal communications and interaction with its outside lawyers.
Documents obtained by the Observer on Tuesday evening show that the bank was worried about rising losses at Merrill Lynch in November, before shareholders voted to approve the deal Dec. 5. Later in December, two directors appeared to express concerns about rising losses at Bank of America and Merrill Lynch. Added director Chad Gifford in an e-mail: "it's the way we approved acquisitions that tick me off the most!!!"
The disclosure of the documents came as the committee postponed a hearing scheduled for Thursday that was to include testimony from Gifford, Director Thomas May and former general counsel Tim Mayopoulos. The committee, led by New York Democrat Edolphus Towns, now wants to interview both directors as well as consumer banking executive Brian Moynihan, who also played a role in the bank's talks with the government.
Declining to discuss specific documents, Bank of America spokesman Larry Di Rita said, "Selective review of individual documents does not change the facts: The full record of these documents reveals business people and their legal advisers dealing with complex issues in unprecedented times to make decisions based on the best information available."
Committee sources said the panel's investigators on Monday interviewed Mayopoulos, the former general counsel who abruptly left the bank Dec. 10 for undisclosed reasons. He was briefly replaced by Moynihan, who is seen as a possible successor to departing chief executive Ken Lewis.
In the interview with investigators, Mayopoulos said he met with chief financial officer Joe Price and then strategy executive Greg Curl on Dec. 1, four days before the shareholder vote, the sources said. The executives asked him if the bank had met the conditions of a Material Adverse Change clause, or MAC - circumstances that would allow the bank to get out of the Merrill deal because of rising losses. Mayopoulos said the bank had not met the conditions, the sources said.
A person familiar with the matter said that Price was likely asking Mayopoulos about the MAC because he wanted to be ready for questions that might come up at the shareholder meeting. The bank didn't make a business decision to weigh a MAC until mid-December, the person said.
Merrill losses accelerating
On Dec. 5, the day of the shareholder vote, Bank of America was projecting $9billion in fourth-quarter losses at Merrill, according to Lewis' February testimony to New York Attorney General Andrew Cuomo's office, which is also investigating the deal. Around Dec. 14, Lewis was informed by Price that the projected losses had accelerated to about $12 billion, according to Lewis' testimony. By the time the fourth quarter ended, Merrill had lost more than $15 billion.
On Dec. 17, Lewis called then-Treasury Secretary Hank Paulson to tell him the bank was considering a MAC because of the ballooning losses. Paulson told him to fly to Washington, and later that day Lewis met with Paulson and Federal Reserve Board Chairman Ben Bernanke. Lewis was accompanied by Price and Moynihan. At the meeting, the government officials said they didn't like the idea, and both sides agreed to talk again Dec. 21.
Among the documents obtained by the committee is an e-mail that suggests bank executives as early as November were analyzing whether a government aid package like one received by Citigroup would be helpful to the bank. And in a Dec. 17 e-mail to Price, a bank employee said the company was considering applying for "new administration infrastructure" spending.
A day later, the bank's outside lawyers at Wachtell, Lipton, Rosen & Katz sent an e-mail suggesting that if the bank sought to exercise the MAC, Merrill would likely sue - and could win. The Wachtell lawyers cautioned the bank that its deal was governed by Delaware law, where courts have never allowed a buyer to use a MAC to back out of a deal. Bank of America would also probably have to prove that it was blindsided by Merrill's losses. But, the lawyers wrote, Merrill already had billions of dollars worth of losses on its books when the bank agreed to buy it.
Although Bank of America didn't contact the government until Dec. 17, internal e-mails show that bank officials were monitoring Merrill's losses and expressing concern as early as November.
"Read and weep," bank executive Neil Cotty wrote in an e-mail to Price on Nov. 5. He was forwarding a message from a Merrill employee about Merrill's October returns, which showed falling revenue and other red flags.
As losses mounted, the communications got more pessimistic. On Nov. 24, a Merrill employee said that Merrill executive Tom Montag, who now runs the combined company's investment bank, "wants to take heads and related costs down" to cope with falling revenue. A few hours later, Cotty e-mailed Price: "This is not good."
Directors worried, too
At least some of the bank's directors were also aware of the problems behind the scenes at Merrill. On Dec. 10, William Barnet, who has since left the board, e-mailed Gifford: "Numbers were numbing....too fast and overwhelming...ML equally amazing. no mention, except in passing, of holiday greeting... much pressure..felt KL feeling it...."
Gifford and Barnet, who joined the board when Bank of America bought FleetBoston Financial in 2004, also discussed Moynihan, a former Fleet executive. Sources told the Observer this spring that Moynihan was set to leave the bank last fall after he turned down a request to head the bank's Delaware-based credit card unit. But after the board, including former Fleet directors, learned of this, he was instead named general counsel.
"Glad (I hope) Brian got saved....last of the Fleet guys and good person and team player...not sure what it does to Tim M," Barnet writes.
"A bit scary willing to let Brian go...notwithstanding fleet he's a key character in understanding all that's on plate," Gifford responds. "But seems ken heard us a bit and at least we had an executive discussion with many seemingly agreeing..."
Later that day, the bank announced Mayopoulos' departure and Moynihan's appointment as general counsel.
