New York Attorney General Andrew Cuomo’s office is at it again. They’ve been investigating the circumstances that led to the merger of Bank of America and Merrill Lynch and the subsequent bonus payments to executives. In a letter to Senator Chris Dodd (D-CT), chairman of the Senate Banking Committee, Cuomo quotes Bank of America CEO Ken Lewis as saying that former Treasury Secretary Hank Paulson threatened him with removal from his position and mass firing of the board and senior management if he didn’t allow the merger to go through.
The trouble with Paulson came in December, when Merrill Lynch’s projected fourth quarter losses began to skyrocket. Lewis met with Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Bank of America’s CFO, and other officials to discuss whether or not Bank of America could invoke an escape clause in their contract that protected them from a material adverse event. (This is called the “MAC” clause.)
From Mr. Cuomo’s letter:
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.”
Lewis advised the board of the threats made by the Treasury and they agreed to go ahead with the merger in order to avoid any systemic threat to the financial system. The letter goes on to say that while Paulson corroborates Lewis’ story, he claims to have made the threat at the request of Fed Chairman Ben Bernanke.
Further, Lewis also claims that he didn’t disclose this information to shareholders at the request of Paulson and Bernanke… a charge that Bernanke apparently denies.
You can read Cuomo’s letter and examine the documents he’s provided to the Senate: