Fed May Have Strong-Armed BofA into Merrill Deal

Internal Federal Reserve e-mails released in a Congressional subpoena suggest that Bank of America Corp. (BofA) was pressured by the Fed into its merger with Merrill Lynch last year.
Fed May Have Strong-Armed BofA into Merrill Deal
6/12/2009
Updated:
6/12/2009

Internal Federal Reserve e-mails released in a Congressional subpoena suggest that Bank of America Corp. (BofA) was pressured by the Fed into its merger with Merrill Lynch last year.

The e-mails were obtained by the House Committee on Oversight and Government Reform ahead of Bank of America CEO Kenneth Lewis’s testimony on Capitol Hill on Thursday.

The Fed e-mails support Lewis’s previous remarks that BofA had attempted to break up its agreement to acquire brokerage firm Merrill Lynch & Co. in mid-December after discovering that Merrill’s financial conditions to be rapidly worsening. BofA originally agreed to a $50 billion deal with Merrill in September 2008, the same weekend of Lehman Brothers’ collapse.

Federal Reserve brokered talks between the banks, but as the recession dragged on and Merrill’s conditions exacerbated in December, BofA no longer saw the merger as viable or in the best interest of its shareholders.

BofA approached then-Treasury Secretary Hank Paulson about possibly breaking up the deal.

In a Dec. 21, 2008 e-mail to Fed staff obtained by the Committee, Fed Chairman Ben S. Bernanke wrote that he viewed BofA’s actions as “a bargaining chip,” and that he did not “see it as a very likely scenario at all.”

Bernanke urged Fed staff to “Explain to BAC (Bank of America Corp.) with some confidence why we think (backing out of the deal) would be a foolish move and why the regulators will not condone it.”

In a separate internal document with talking points for Bank of America, the Fed said that any breakup of the deal “would cause significant reputational consequences for BA (Bank of America), in the markets, with the public, and with the regulators.”

In another internal memo, Federal Reserve Bank of Richmond President Jeffrey Lacker called BofA’s proposal “irrelevant.”

Lacker added that the Fed “Intends to make it even more clear that if they (BofA) play that card and then need assistance, management is gone.”

Indeed, responding to an inquiry from New York state attorney general Andrew Cuomo, Lewis said he felt his job was on the line if he did not proceed with the deal to rescue Merrill.

Eventually, the Fed agreed to provide BofA $20 billion in funding and up to $118 billion in asset guarantees to cover future losses at Merrill.

‘Shotgun Wedding’

Lewis was in Washington on Thursday testifying in front of the House Oversight Committee on allegations that BofA was pressured into a deal it didn’t want to make.

Committee Chair Rep. Edolphus Towns (D-N.Y.) called the $20 billion given to BofA “dowry for a shotgun wedding.”

Lewis, in a prepared copy of his speech, called the purchase of Merrill a sound business decision as of September 2008. He cited Merrill’s strength in financial advisory and investment banking.

“We did so without any promise or expectation of governmental support. Our shareholders approved that transaction on December 5, 2008,” Lewis said.

But shortly, BofA “Became aware of significant, accelerating losses at Merrill Lynch, and we contacted officials at the Treasury and Federal Reserve to inform them that we had concerns about closing the transaction,” Lewis said. “At that time, we considered declaring a “material adverse change,” which as a matter of contract law can, if upheld, allow an acquirer to avoid consummating a deal.”

Federal Reserve officials expressed concern that pulling out of the deal would cause detrimental consequences on the financial markets and Merrill could collapsed like Lehman did earlier.

“We commenced discussions to determine whether governmental support could limit the risk of proceeding with the transaction,” Lewis said. The $20 billion and $118 billion in financial assistance were determined by both parties to be appropriate to consummate the deal.

But the backdrop for such tense discussions was hardly calming. The United States was mired in a deep recession at the time, and the financial markets were fragile at best. Any failed deal, or even the perception of failure, could cause tremors in the stock market. It was under these circumstances that these merger terms came to fruition.

Nevertheless, some lawmakers questioned the role of federal regulators and their tactics.

“This committee should be most concerned … about financial vigilantes at the [U.S. government] who are dictating extralegal government directives through threats and intimidation to private companies,” Rep. Darrell Issa (R-Calif.) said in prepared remarks.

Towns plans to invite Paulson and Bernanke to testify on their role in the BofA deal in the near future.