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Bank of Amerrill Lynch. Something stinks in Charlotte

February 6, 2010

BofA’s senior executives have been accused of violating securities laws by not releasing the growing losses at Merrill Lynch to shareholders. In August, Rep. Kucinich sent Mary Schapiro, the Chairman of the Securities and Exchange Commission, a letter urging her to investigate the potential violation.

The govt should go after the $20 billion paid to Bofa to complete the merger.

I do not believe I am the first to propose the below idea, and I’ m certain a few smarter folks have been debating this on blogs somewhere on the interweb, but this is how I see the ML BOFA merger going down.

Ken Lewis threatened to walk away from the deal over mounting losses at ML unless the US government provided extra capital. The deal closed on January 1 after federal officials pledged their support. This was all posturing by Ken Lewis.  I feel the losses were fabricated as a ploy to sway the govt to pony up a shit load of tax payer dollars. By agressively writing down assets, particulary in the Mortgage and CDO book, BofA was able to make the financial condition of ML far worse than it actually was.  – the US Govt was duped into paying $20 Billion as well as protection against losses on $118 billion in troubled assets.   You tell the the Fed and the Treasury that you need some cash or the world will end and the check book opens wide.. Oh lordy, take my money, just make it stop.


Bank of America’s transition team arrived at Merrill  and bout 200 employees set up on one floor of Merrill’s headquarters, and Bank of America Chief Accounting Officer Neil Cotty moved into an office on the 32nd floor.

The group became involved in nearly every aspect of Merrill’s operations. By the end of November, Merrill’s losses were ballooning because of deteriorating market conditions and write-downs on various mortgage-related investments.  Still, the daily emails sent to executives at both companies summarizing the deal’s status said “status green”

Neil Cotty (BofA’s chief accounting officer) played an active role in preparing accounts and wielding influence with Merrill executives – who were set to report to him after the deal closed.

With Mr Cotty’s involvement in December, the people familiar with the matter said, Merrill took a fourth-quarter writedown of $1.9bn in leveraged loans and a $2.9bn reserve against an exposure to derivatives linked to asset-backed securities.

Mr Cotty also gave his blessing to a $1bn writedown of credit default swaps involving investment grade companies. The markdown of a position on the “high vol 4” index transformed a gain of $100m into a loss of $900m, said a source familiar with the matter.

In a statement issued by BofA, Mr Cotty said: “While BofA had access to Merrill’s financial information in the fourth quarter and had input into many accounting policy and valuation issues, Merrill management was responsible for these decisions regarding the marks and other valuations.”

Now ML almost certainly was not keen on BofA executives coming in, marking down their books and telling them their assets were all pieces of dog shit.  So BofA needed to soothe ML employees by assuring them big fat bonuses in spite of the “reported” losses.  ML got paid by BofA and BofA got paid by the feds.  Everybody is happy.

Now BofA needed only to get the shareholders to approve the merger – even with the losses at ML which would soon be disclosed.  BofA did not want the lossed at ML to spook the shareholders – so they simply decided not disclose the losses to the shareholders.

BofA understood the implications of  releasing the  “Merrill losses” to BofA to shareholders…  November 20, Joe Price, Bank of America’s CFO, had a meeting with his attorneys about the question of whether to disclose the Merrill losses to Bank of America’s shareholders before the December 5 vote. On his copy of the November 12 “forecast” — the document that omitted any write-downs for November and December in the CDO portfolio — Price wrote that “Concluded [per] Tim [Mayopoulos] and Ed [Herlihy] that no pre “meeting disclosures are necessary.”

After the merger closed and the losses were reported shareholders wanted blood over the bonuses paid to ML employees resposible for the losses.  No problem, Bank of America pinned then ML CEO, Mr. Thain as the person responsible for distributing billions of dollars of bonus money despite Merrill’s huge losses.

A FT  article quoted a Bank of America spokesman saying that Mr. Thain had “decided” to speed up the payments. Bank of America “was informed of his decision,” the spokesman said. Mr. Thain says he wasn’t given a chance to review Bank of America’s statement, but that he would have strongly objected to it. On the morning the article was published, Mr. Lewis flew to New York to ask for Mr. Thain’s resignation” “The board blames you for the fourth quarter, and this is not going to work out,” Mr. Lewis told Mr. Thain -WSJ

“Bank of America’s spokesman says the merger agreement “allowed for the bonus payments to be paid, but did not require it.” – WSJ  Mr. Lewis set out to make Thain the scapegoat for problems related to the Merrill takeover. Mr. Thain says the bank’s statements have left the impression he was hiding information.

Chief Executive Kenneth Lewis agreed in writing that the bonuses could be paid before Bank of America’s acquisition of Merrill closed.
Here is the timeline

Since the deal closed on Jan. 1, almost all of Merrill’s top executives, including President Gregory Fleming and Robert McCann, head of Merrill’s giant brokerage force, have left.

First-quarter results at Bank of America showed Merrill had a profit of $3.7 billion, representing nearly 90% of Bank of America’s overall net income for the quarter.

Big fucking surprise…  Merrill’s assets miraculously appreciated from the levels marked by Mr. Cotty.

Fuck the disclosure lawsuit. Go after the 20 Billion.

2 Comments leave one →
  1. debaseface permalink
    April 15, 2010 8:42 pm

    Bank of America will post – another – quarterly profit based solely on its acquisition of Merrill Lynch

    “BOA is using the purchase of Merrill Lynch & Co to cushion losses in Bank of America’s home-loan and credit-card units. The Merrill Lynch capital-markets and stock-brokerage businesses are helping offset writedowns on credit-card and home-equity loans of up to $6 billion per quarter


    WHEN Bank of America swooped on Merrill Lynch in September 2008, BofA’s boss, Ken Lewis, was applauded for rescuing the investment bank from the same fate as Lehman Brothers. The shotgun wedding created America’s biggest bank by assets. But it soon began to resemble the marriage from hell.

    Merrill’s spiralling mortgage-related losses forced the combined firm to take an extra $20 billion of public money, raising the total to $45 billion and branding it a recipient of “exceptional” federal assistance. Shareholders fumed that Mr Lewis had overpaid for a lemon—the price tag was $50 billion in BofA shares—and had not been upfront about bonuses paid to the acquired firm’s “stars”. The bank was hit with a series of probes, one of which ended, after much toing and froing, in a $150m settlement with regulators. A war-weary Mr Lewis limped into retirement at the end of 2009, earlier than planned. He was succeeded as chief executive by Brian Moynihan (pictured), who joined BofA in 2004 when it bought his employer at the time.

    Though the outrage has ebbed in recent months and BofA has repaid the $45 billion it got from the taxpayer, the perception lingers that the Merrill deal was a stinker. But after a difficult start the combination is starting to pay off in some areas. There are many risks, but Mr Lewis’s prediction that Merrill would come to be seen as “a thing of beauty” no longer looks risible.

    The deal gave Merrill access to a giant balance-sheet funded with stable deposits. BofA got a pile of noxious mortgage securities, but also top-notch securities-trading and underwriting businesses, and Merrill’s “thundering herd” of brokers and wealth managers, the jewel in its crown. The early months were messy. As the two firms’ investment banks were crunched together, over a third of those units’ employees were either laid off or left for rivals. For some at Merrill, answering to bosses in Charlotte, North Carolina, who had done little to disguise their suspicion of Manhattan’s Porsche-drivers was simply too much. Many brokers left too, cutting the herd’s size from 18,000 to 15,000. “We had our share of instability,” says Tom Montag, head of global banking and markets.

    Even though the New York firm was in a position of weakness. It kept Merrill’s name and iconic bull, spending an extra $20m to promote them (though, as one Merrill man complains, saying “Bank of America Merrill Lynch” without running out of breath is a challenge). To the relief of brokers, it resisted the temptation to merge them with the wealth managers at US Trust, a firm BofA had bought in 2006. Some put this restraint down to lessons learned from the multiple mergers that created BofA.

    These efforts are bearing fruit. The stampede has slowed to a trot—the attrition rate for “top producers”, brokers who bring in $1m or more, hit a ten-year low in the fourth quarter of 2009. In a recent poll by Registered Rep, a trade publication, 75% of the firm’s brokers saw themselves as likely still to be there in two years, compared with 61% at the newly merged Morgan Stanley Smith Barney (MSSB) and a mere 45% at UBS. BofA hopes to capitalise on the continuing turmoil at the Swiss bank’s brokerage operation, which is being overhauled by Bob McCann, a former head of the thundering herd.

    Just as important, Merrill’s brokers are, once again, held in high regard by those who use them. They accounted for 317 of the top 1,000 financial advisers in America in the latest ranking by Barron’s, a financial weekly, whereas MSSB’s bigger brokerage force accounted for 231. In capital markets, too, the combined firm is a formidable force. According to Dealogic it was number two in global investment-banking fees last year, behind JPMorgan Chase, which posted another strong set of trading and investment-banking profits on April 14th. Alone, BofA was a lightweight.

    In 2009 Merrill’s businesses buoyed group results, which would otherwise have been dragged deep into the red by losses in credit cards and mortgages (see chart). BofA’s consumer operations continue to weigh on it. The bank was expected to post quarterly profits well below the 44 cents per share it earned a year earlier, on April 16th, after The Economist went to press. Moreover, Merrill is seen as a cornerstone of a strategic push into new markets. Its brand is strong abroad: it has three times more relationships than BofA does in Europe, Asia, Africa and the Middle East (though it has made less headway in China than some of its Wall Street rivals).

    Nonetheless, some of the merger benefits Mr Lewis touted look real enough. With the worst of the mortgage losses behind it, BofA can focus on the good things that Merrill has brought: strength in several (relatively) fast-growing businesses and a platform for global expansion. The challenge will be to convince markets that financial conglomerates still make sense. Dick Bove, a veteran bank analyst with Rochdale Securities, thinks the group could fetch $53 per share in a break-up. That is almost three times its current worth.


  1. Lessons learned « Ruder Forms Survive

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