Cover Story

Split decision

"Split decision" Continued...

Issue: "Playing with capitalism," May 23, 2009

But there was a glitch in the plan: Not every bank wanted the federal money, and some worried about shareholder reaction and the restrictions that would come with the TARP funds. Paulson pushed back, insisting the infusions were critical to stabilizing the economy. Bank leaders conceded. Testifying before the House Financial Services Committee about accepting the money, Lewis said: "At the urging of the U.S. government, Bank of America accepted TARP funds."

With the initial infusion of government cash, BofA leaders moved forward with plans to buy Merrill Lynch. The bank announced in October that then-Merrill Lynch CEO John Thain would become president of the combined company's global banking, securities, and wealth-management division when the sale was final.

As the two banks hammered out details, BofA shareholders met on Dec. 5 to approve the purchase. But a week later, Lewis considered backing out of the deal. His chief financial officer gave him sobering news: Merrill Lynch's projected losses for the fourth quarter would total some $12 billion. (The losses actually soared to over $15 billion.)

The next day, Lewis expressed his concerns to Paulson and Bernanke. What happened next isn't clear. But Lewis testified before New York's attorney general in February that the two men wanted him to do two things: proceed with the purchase and not tell shareholders about Merrill Lynch's losses. They offered another $20 billion in government aid and protection against $118 billion in troubled assets. Lewis accepted.

Lewis hasn't said he was directly ordered to stay quiet, but he has given a glimpse of the kind of pressure he faced from Bernanke and Paulson. Lewis described a phone conversation with Paulson when he told him he was considering killing the deal: "I can't recall if he said, 'We would remove the board and management if you called it [off]' or if he said, 'We would do it if you intended to.'"

When it came to keeping quiet about Merrill Lynch's losses before the sale was final, Lewis testified that Paulson and Bernanke were emphatic, saying disclosing the losses would "impose a big risk to the financial system" of the entire country. Lewis said Paulson told him: "We do not want a public disclosure."

An investigator questioning Lewis during the New York hearings about the Merrill Lynch losses asked: "Isn't that something that any shareholder at Bank of America . . . would want to know?" Lewis replied: "It wasn't up to me."

A spokeswoman for Paulson told The Wall Street Journal the secretary didn't believe Lewis could legally back out of the deal in December, and he wanted to safeguard the financial system. A spokeswoman for Bernanke said the chairman did not instruct anyone at BofA to withhold information about Merrill Lynch from the public.

At the shareholders
meeting in Charlotte, Lewis seemed eager to move past the Merrill Lynch controversy, and he even downplayed the role of Paulson and Bernanke, saying: "We made our decision independent of any threat." He also said the bank wasn't legally obligated to disclose its negotiations with the government.

Not everyone in the audience was satisfied. Though most shareholders gave Lewis a sustained round of applause when he entered the room, others lined up at microphones to tell the CEO how much money they had lost, and to ask why he didn't disclose information about Merrill Lynch. Gerald Abrams, a retired fisherman from Florida, asked: "Where was the due diligence?"

Lewis mostly listened stoically, standing behind a microphone for nearly four hours and offering few comments on difficult questions. But his patience broke with one shareholder who pressed hard for answers about Merrill Lynch. The CEO said he was limited in his ability to comment because of pending litigation, and he sharply told the shareholder: "If you want to know more, drop your lawsuit."

Lewis may not be able to avoid more questions about Merrill Lynch for long: Rep. Spencer Bachus, R-Ala., of the House Financial Services Committee said he would likely call hearings to investigate the role of the Treasury and Federal Reserve in the Merrill Lynch deal, and he may call Paulson, Bernanke, and Lewis to testify.

Shareholders also want answers about some $3.6 billion in bonuses Merrill Lynch paid to its employees before the sale to BofA closed in January. Both shareholders and taxpayers have expressed outrage over Merrill Lynch awarding the bonuses while the government poured in taxpayer funds.

BofA officials have said former Merrill Lynch CEO John Thain decided to pay the bonuses. (Lewis fired Thain in January, saying the BofA board was displeased with Merrill Lynch's fourth-quarter losses and blamed him.) BofA officials also said Thain decided alone to pay the multibillion-dollar bonuses. Thain bitterly rejects that notion, saying he consulted with BofA officials on bonus amounts. He also insists he was forthcoming about Merrill Lynch's losses and says his firing came as a surprise.

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