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Congressional testimony and documents released today shed new light on the Federal Reserve's concerns about Bank of America Corp.'s management following the near unraveling of its Merrill Lynch & Co. purchase in December.
Fed Chairman Ben Bernanke told a congressional panel this morning that the regulator asked the bank to “look at top management and make changes to its board” after the Charlotte bank proceeded with the deal and accepted another dose of government aid in January.
Documents released by the committee today indicate the Fed may have imposed requirements on Bank of America similar to previously undisclosed actions taken against Charlotte-based Wachovia Corp., now part of Wells Fargo & Co. Bernanke did not say when the Fed told the bank to examine its management, but the Wall Street Journal reported today that the demand came in April.
Bank of America spokesman Scott Silvestri declined to comment.
Amid a global financial meltdown in mid-September, Bank of America agreed to buy Merrill after a mere 48 hours of negotiations. When Merrill's losses ballooned in the fourth quarter, Bank of America chief executive Ken Lewis attempted to back out in December, but Fed and Treasury officials strongly objected. The deal closed Jan. 1, and weeks later the bank received an extra $20 billion capital injection.
Under questioning from members of the House Oversight and Government Reform committee, Bernanke acknowledged that he had “concerns and questions” about Bank of America's management after it tried to back out of the Merrill acquisition.
Just days after Bank of America signaled plans to trigger an escape clause in the deal, Federal Reserve officials suggested the bank's management should be subject to a “supervisory action,” according to the new documents. In a Dec. 20 e-mail, Federal Reserve Bank of Richmond official Mac Alfriend suggested an arrangement similar to restrictions imposed on Wachovia.
In the e-mail exchange, Fed official Deborah Bailey said of Bank of America: “Personally, I think management should be downgraded, no more acquisitions, raise some ‘real capital,' frequent meetings with the Board, etc. It will definitely (have) a price to pay.”
She adds: “I always had my doubts about the quality of the due diligence they did on the (Merrill Lynch) deal.” Bailey also notes the bank paid a premium to buy Merrill even though the firm was struggling. “How do you pay a premium and now ask for help? This will not go over well at all,” she wrote.
In recent weeks, Bank of America has announced the retirement of longtime chief risk officer Amy Woods Brinkley and a shakeup of its board, which has included the addition of four new directors and the departure of six members. As part of government stress tests, the Fed has previously said big banks need to review their management and boards to make sure they have sufficient expertise to navigate the current economic climate.
Bernanke said the Fed is not involved in Bank of America's day-to-day management, but is reviewing the bank's capital, assets, liquidity and leadership.
In his e-mail, Alfriend suggested an arrangement similar to one in which Wachovia was required to “retain an independent consultant acceptable to the Reserve Bank to conduct a review of the effectiveness of Wachovia's corporate governance and risk management … and to prepare a written report of findings and recommendations.”
The e-mail does not say when Wachovia was required to conduct this review. But in May of 2008 the bank said its board and management planned to retain an independent consultant to review its internal controls and risk management practices. That decision followed a spate of embarrassing miscues at the bank, including a larger-than expected quarterly loss and a settlement with federal regulators over ties to telemarketers. The bank did not indicate that the review was required by regulators.
A little more than two weeks later, the Wachovia board ousted chief executive Ken Thompson, and by October the bank had agreed to the takeover by San Francisco-based Wells as the bank verged on collapse.
According to Alfriend's e-mail, the Fed's agreement with Wachovia required an extensive review of the bank's leadership and risk management. The consultant's review was to evaluate:
-- the effectiveness of Wachovia's board of directors and senior management in carrying out risk management responsibilities and “communicating Wachovia's appetite for risk and risk levels.”
-- “an assessment of the current structure and composition of the board of directors and its committees, and a determination of the structure and composition needed to adequately supervise the risk management of Wachovia and its subsidiaries.”
-- “an assessment of the management structure at Wachovia at the corporate and business levels,” including the “type and number” of senior executives.
-- an “assessment of whether all risk management functions are independent and have sufficient authority to discontinue business activities that are outside board-approved risk levels and appetite.”
-- “the ability of risk management to: effectively identify, measure, and aggregate risk; provide timely information to the board of directors and senior management regarding emerging risks and deviations from board-approved risk levels and appetite; and ability to discontinue business activities which are outside of corporate risk tolerances.”
Alfriend said the review also needed to examine Wachovia's “strategic thinking and budget process as it had been overly optimistic all year,” adding: “This would include an independent review of any models and assumptions.”
A Fed spokeswoman declined to comment on the Wachovia supervisory action.
