Page 412 - untitled

CRISIS AND PANIC 

CDOs and no Alt-A positions at all. “We’re down to  million in subprime on our
trading books,” Thain said. “We cut our non-U.S. mortgage business positions in
half.” 
The Fed approved the merger on November , noting that both Bank of America
and Merrill were well capitalized and would remain so after the merger, and that
Bank of America “has sufficient financial resources to effect the proposal.”  Share-
holders of both companies approved the acquisition on December .
But then Bank of America executives began to have second thoughts, Lewis told
the FCIC. In mid-November, Merrill Lynch’s after-tax losses for the fourth quarter
had been projected to reach about  billion; the projection grew to about  billion
by December ,  billion by December , and  billion by December .  Lewis
said he learned only on December  that Merrill’s losses had “accelerated pretty dra-
matically.”  Lewis attributed the losses to a “much, much, higher deterioration of the
assets we identified than we had expected going into the fourth quarter.” 
In a January conference call, Lewis and CFO Joe Price told investors that the bank
had not been aware of the extent of Merrill’s fourth-quarter losses at the time of the
shareholder vote. “It wasn’t an issue of not identifying the assets,” Ken Lewis said. “It
was that we did not expect the significant deterioration, which happened in mid- to
late December that we saw.”  Merrill’s Thain contests that version of events. He told
the FCIC that Merrill provided daily profit and loss reports to Bank of America and
that bank executives should have known about losses as they occurred.  The SEC
later brought an enforcement action against Bank of America, charging the company
with failing to disclose about . billion of known and expected Merrill Lynch losses
before the December  shareholder vote. According to the SEC’s complaint, these in-
sufficient disclosures deprived shareholders of material information that was critical
to their ability to fairly evaluate the merger. In February , Bank of America
would pay  million to settle the SEC’s action. 
On December , Lewis called Treasury Secretary Paulson to inform him that
Bank of America was considering invoking the material adverse change (MAC)
clause of the merger agreement, which would allow the company to exit or renegoti-
ate the terms of the acquisition. “The severity of the losses were high enough that we
should at least consider a MAC,” Lewis told the FCIC. “The acceleration, we thought,
was beyond what should be happening. And then secondly, you had a major hole be-
ing created in the capital base with the losses—that dramatically reduced [Merrill
Lynch’s] equity.” 
That afternoon, Lewis flew from North Carolina to Washington to meet at the Fed
with Paulson and Fed Chairman Bernanke. The two asked Lewis to “stand down” on
invoking the clause while they considered the situation. 
Paulson and Bernanke concluded that an attempt by Bank of America to invoke
the MAC clause “was not a legally reasonable option.” They believed that Bank of
America would be ultimately unsuccessful in the legal action, and that the attendant
litigation would likely result in Bank of America still being contractually bound to ac-
quire a considerably weaker Merrill Lynch. Moreover, Bernanke thought the market
would lose faith in Bank of America’s management, given that review, preparation,