Wednesday, April 29, 2009

"Bankster" Persecution Set to Escalate

Since the start of the crisis, new words have entered into the mainstream vocabulary. In 2007, we learned what "subprime" really was. In 2008, the word du jour was "bailout." The competition is fierce and the candidates are many for words that will be newly constructed to describe the current situation.

Corporate "restructuring"?

"Public-Private Partnership"?

Or how about "bankster"?

If I had to choose one of them, I'd throw my weight behind the latter. The screws are really being turned on the banking elite and before the year is out, I'd wager to guess that many of these billionaire CEOs will be on their way to the slammer.

Anyone who was paying attention knew that there was massive amounts of fraud going on in the last year. But the people who typically ask questions of such matters were largely silenced or marginalized while it was happening. Most others simply turned away, falling for the "if it isn't done then the sky will fall" excuse. But now that the average person can see the economy collapsing around them anyway, they are sharpening their teeth and looking back at what actually transpired (and is still transpiring) for hints of a scapegoat.

And the accusations and evidence are starting to pour out. We learned last week that Hank Paulson, Ben Bernanke, Ken Lewis and likely others were involved in securities fraud over the Bank of America takeover of Merrill Lynch. Merrill was taken over in September by BoA in an attempt to avoid another Lehman-like collapse. The deal was for an approximate $50 Billion in BoA stock.

I would argue that the takeover alone was a blatantly poor decision, and it could probably be proven quite easily that Lewis was not acting in his shareholder's best interest in the purchase. Bear Stearns had already been taken in by JP Morgan, and Lehman was on the brink of collapse as well. It is not unreasonable to conclude that Lewis could have procured the assets at a far cheaper price had he only waited a few more days. And we even have precedent to prove that he could have because Barclay's Bank and Nomura Holdings purchased the Lehman assets only days later for a fraction of what Lewis paid for similar assets at Merrill.

But that is not even the issue.

The issue is that 3 months later, BoA had a chance to really look at the toxic soup of assets that they had purchased. What they found was not all that inspiring. Luckily for them, there was a clause in the takeover contract that allowed them to back out of the deal if there was a Material Adverse Change (MAC) in the asset. BoA had determined that the $50 Billion purchase price was far too high and that they would invoke the MAC clause to back out. But upon Lewis telling this to Paulson and Bernanke, he was then threatened with his job along with the jobs of his entire board of directors. Lewis' response was then to "deescalate" the situation. In other words, do as Paulson and Bernanke said in order to save his own hide.

It is without a doubt that if the alleged is what actually transpired (and the allegations are confirmed by the subjects themselves), then Lewis is guilty of defrauding his shareholders and Paulson, Bernanke, plus whoever else were present at these meetings (most likely including Tim Geithner) are guilty of conspiring to commit fraud.

It is with this information that the New York Attorney General Andrew Cuomo wrote a letter to the Senate, Congress, SEC and Congressional Oversight Panel last thursday.

I think that this is a fairly significant event. Enough so, that I have copied the entire document below: (emphasis is all mine).

Dear Chairpersons Dodd, Frank, Schapiro and Warren:

I am writing regarding our investigation of the events surrounding Bank of America's merger with Merrill Lynch late last year. Because you are the overseers and regulators of the Troubled Asset Relief Program ("TARP"), the banking industry, and the Treasury Department, we are informing you of certain results of our investigation. As you will see, while the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America. Because some matters relating to our investigation involve federal agencies and high-ranking federal officials charged with managing the TARP program, we believe it is important to inform the relevant federal bodies of our current findings. We have attached relevant documents to this letter for your review.

On September 15, 2008, Merrill Lynch entered into a merger agreement with Bank of America. The merger was negotiated and due diligence was conducted over the course of a tumultuous September 13-14 weekend. Time was of the essence for Merrill Lynch, as the company was not likely to survive the following week without a merger. The merger was approved by shareholders on December 5, 2008, and became effective on January 1, 2009.

The week after the shareholder vote -and days after Merrill Lynch set its bonuses Merrill Lynch quickly and quietly booked billions of dollars of additional losses. Merrill Lynch's fourth quarter 2008 losses turned out to be $7 billion worse than it had projected prior to the merger vote and finalizing its bonuses. These additional losses, some of which had become known to Bank of America executives prior to the merger vote, were not disclosed to shareholders until mid-January 2009, two weeks after the merger had closed on January 1, 2009.

On Sunday, December 14, 2008, Bank of America's CFO advised Ken Lewis, Bank of America's CEO, that Merrill Lynch's financial condition had seriously deteriorated at an alarming rate. Indeed, Lewis was advised that Merrill Lynch had lost several billion dollars since December 8, 2008. In six days, Merrill Lynch's projected fourth quarter losses skyrocketed from $9 billion to $12 billion, and fourth quarter losses ultimately exceeded $15 billion.

Immediately after learning on December 14, 2008 of what Lewis described as the "staggering amount of deterioration" at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event ("MAC") occurred. After a series of internal consultations and consultations with counsel, on December 17, 2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America's CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege.

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced:

"[W]e wanted to follow up and he said, 'I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but' --as I recall him saying "the government," but that mayor may not be the case -"does not feel it's in your best interest for you to call a MAC, and that we feel so strongly," --I can't recall if he said "we would remove the board and management if you called it" or if he said "we would do it if you intended to." I don't remember which one it was, before or after, and I said, "Hank, let's deescalate this for a while. Let me talk to our board." And the board's reaction was of "That threat, okay, do it. That would be systemic risk." "

In an interview with this Office, Secretary Paulson largely corroborated Lewis's account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America's invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson's basis for the opinion was entirely based on what he was told by Federal Reserve officials).

Secretary Paulson's threat swayed Lewis. According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, "that makes it simple. Let's deescalate." Lewis admits that Secretary Paulson's threat changed his mind about invoking that MAC clause and terminating the deal.

Secretary Paulson has informed us that he made the threat at the request of Chairman Bernanke. After the threat, the conversation between Secretary Paulson and Lewis turned to receiving additional government assistance in light of the staggering Merrill Lynch losses.

Lewis spoke with individual Board members after his conversation with Secretary Paulson. The next day, December 22, 2008, the Board met and was advised of Lewis's decision not to invoke the MAC. The minutes of that meeting listed the key points of Lewis's calls with Secretary Paulson and Chairman Bernanke:

"(i) first and foremost, the Treasury and Fed are unified in their view that the failure of the Corporation to complete the acquisition of Merrill Lynch would result in systemic risk to the financial system in America and would have adverse consequences for the Corporation; (ii) second, the Treasury and Fed state strongly that were the Corporation to invoke the material adverse change ("MAC") clause in the merger agreement with Merrill Lynch and fail to close the transaction, the Treasury and Fed would remove the Board and management of the Corporation; (iii) third, the Treasury and Fed have confirmed that they. will provide assistance to the Corporation to restore capital and to protect the Corporation against the adverse impact of certain Merrill Lynch assets: and (iv) fourth, the Fed and Treasury stated that the investment and asset protection promised could not be provided or completed by the scheduled closing date of the merger, January 1, 2009; that the merger should close as scheduled, and that the Corporation can rely on the Fed and Treasury to complete and deliver the promised support by January 20, 2009, the date scheduled for the release of earnings by the Corporation. "

The Board Minutes further state that the "Board clarify[ied] that is [sic] was not persuaded or influenced by the statement by the federal regulators that the Board and management would be removed by the federal regulators if the Corporation were to exercise the MAC clause and failed to complete the acquisition of Merrill Lynch."

Another Board meeting was held on December 30, 2008. The minutes of that meeting stated that "Mr. Lewis reported that in his conversations with the federal regulators regarding the Corporation's pending acquisition of Merrill Lynch, he had stated that, were it not for the serious concerns regarding the status of the United States financial services system and the adverse consequences of that situation to the Corporation articulated by the federal regulators (the "adverse situation"), the Corporation would, in light of the deterioration of the operating results and capital position of Merrill Lynch, assert the material adverse change clause in its merger agreement with Merrill Lynch and would seek to renegotiate the transaction."

Despite the fact that Bank of America had determined that Merrill Lynch's financial condition was so grave that it justified termination of the deal pursuant to the MAC clause, Bank of America did not publicly disclose Merrill Lynch's devastating losses or the impact it would have on the merger. Nor did Bank of America disclose that it had been prepared to invoke the MAC clause and would have done so but for the intervention of the Treasury Department and the Federal Reserve.
Lewis testified that the question of disclosure was not up to him and that his decision not to disclose was based on direction from Paulson and Bernanke: "I was instructed that 'We do not want a public disclosure. '"

Secretary Paulson, however, informed this Office that his discussions with Lewis regarding disclosure concerned the Treasury Department's own disclosure obligations. Prior to the closing of the deal, Lewis had requested that the government provide a written agreement to provide additional TARP funding before the close of the Merrill Lynch/Bank of America merger. Secretary Paulson advised Lewis that a written agreement could not be provided without disclosure.

Lewis testified that there was no discussion with the Board about disclosure to shareholders. However, on the night of December 22, 2008, Lewis emailed the Board, "I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want."

The December 30 Board meeting minutes further reflect that Bank of America was trying to time its disclosure of Merrill Lynch's losses to coincide with the announcement of its earnings in January and the receipt of additional TARP funds: "Mr. Lewis concluded his remarks by stating that management will continue to work with the federal regulators to transform the principles that have been discussed into an appropriately documented commitment to be codified and implemented in conjunction with the Corporation's earning [sic] release on January 20, 2009."

It also bears noting that while no public disclosures were made by Bank of America, Lewis admitted that Bank of America's decision not to invoke the MAC clause harmed any shareholder with less than a three year time-horizon:

"Q. Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?

"A. What he was doing was trying to stem a financial disaster in the financial markets, from his perspective.

"Q. From your perspective, wasn't that one of the effects of what he was doing?

"A. Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over long term would still be an interest to the shareholders.

"Q. What do you mean by "short-term"?

"A. Two to three years."

Notably, during Bank of America's important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark. Indeed, Secretary Paulson informed this Office that he did not keep the SEC Chairman in the loop during the discussions and negotiations with Bank of America in December 2008.

As this crucial recovery process continues, it is important that taxpayers have transparency into decision-making. It is equally important that investor interests are protected and respected. We hope the information herein is useful to you in your federal regulatory and oversight capacities and we remain ready to assist further in any way. We also note that we have been coordinating our inquiry with the Special Inspector General for the Troubled Asset Relief Program, whose investigation also remains open.


Andrew M. Cuomo
Attorney General of the State of New York

cc: Neil Barofsky, Special Inspector General, Troubled Asset Relief Program

What I found interesting is that Cuomo wasn't even investigating these charges. He was investigating fraudulent bonus payments that Merrill Lynch had made in advance of the deal closing on January 1. In the course of his investigation of those charges, he stumbled across this even greater issue. This is the problem with compulsive lying and deception. Eventually, one loses track of all their deceptions. And in the act of trying to defend oneself against allegations of one lie, one will often incriminate themselves of another. Such is the case here.

Lewis and the entire board of Directors of Bank of America have acted in complete dereliction of their duty to shareholders. This is of course no surprise to anyone reading this blog. We have known for a long time that shareholders are of little concern to company CEOs - especially those in the financial services industry. The degradation of principles has been going on for decades. Companies would be sold off or acquired solely for the bonus provisions given to executives upon completion. Company profits would be used to buy back stock as opposed to paying dividends to shareholders - and the buybacks would coincidently align with the expiration of executive stock options. Those are just a few of the many examples.

There was little shame on the behalf of executives. But investors didn't really pay much attention because they saw their account statements rising year after year regardless. They rarely bothered to read company releases, attend meetings, or cast votes for management. Collectively, the investors are just as liable for the fraud as the perpetrators. Much like the populace of a country is liable for electing a tyrannical leader. It is their obligation to prevent it from happening - but via pacification campaigns, they can often be convinced to turn a blind eye.

But once the tide goes out (share prices drop, the tyrant turns on his own population) the enormity of the previous complicity becomes apparent to the ultimate victims. They immediately stop their activities and attack the attackers. This letter from the NY Attorney General is an example of that. And it is only the tip of the iceberg. Before this year is over, there will be dozens of similar high profile cases. All along the way, we will uncover such unbelievable arrogance, greediness and negligence that it will make people revile the idea of "investing" in public companies. Mistrust of executives will linger for decades. And I would imagine that many of them will spend the rest of their days either behind bars, poor or both. Sadly, I would venture to guess that the suicide of Freddie Mac CFO David Kellerman will not be the last. Their downfall will be celebrated. They will be sacrificed as kingpins of a morally bankrupt society to which blame should be spread more equitably - but won't.

Stopping to think rationally and pointing out that even the victims were complicit in their own plight will fall on deaf ears. Or worse - the sensible will be grouped in with "the banksters" and persecuted in kind. The only option is to join the rabid masses in their lust for blood.

So what the heck...

"You're good at stealin',
and you're good at lyin',
now let's see how good you are at flyin',
Jump You Fu%#ers!"

Warning: The video below contains excessive profanity

Now I know why Lord of the Flies was required reading in high school.

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