Category Archives: Bank of America

Former Bank of America CEO Ken Lewis is in a category all by himself. Following the Feb. 4 filing of civil fraud lawsuit by New York Attorney General Andrew Cuomo filed, Lewis became the highest ranking banking official to face charges of wrongdoing as part of the financial industry’s meltdown.

Cuomo’s lawsuit accuses Lewis, former Bank of America CFO Joe Price (who now runs the bank’s consumer banking division) and Bank of America itself of manipulating both investors and the government by not disclosing the full extent of massive financial losses occurring at Merrill Lynch before shareholders voted on the firm’s pending acquisition. The suit says Bank of America then used Merrill’s financial predicament to get additional bailout funds from the government.

“Ken Lewis is the poster child – or scapegoat – for the excesses of the past,” said Mark Williams, executive-in-residence at Boston University and a former bank examiner in a Feb. 5 article in Bloomberg. While Lewis didn’t push as deeply as some rivals into mortgage-backed securities, “he made bad strategic decisions” by overpaying for Merrill Lynch and subprime home lender Countrywide Financial Corp., Williams said.

According to Cuomo’s complaint, Bank of America was given advice by its own legal counsel, Timothy Mayopoulos – as well as outside counsel – as early as November to tell investors about the current and predicted financial losses of Merrill Lynch. Deloitte and Touche, Merrill’s auditing firm, also suggested disclosure, the complaint says.

“ . . . Bank management failed to disclose that by December 5, 2008, the day Bank of America shareholders voted to approve the merger with Merrill Lynch, Merrill had incurred actual pretax losses of more than $16 billion. Bank management also knew at this time that additional losses were forthcoming and that Merrill had become a shadow of the company Bank of America had described in its Proxy Statement and other public statements advocating the merger,” the complaint reads.

Corporate Treasurer Jeffrey Brown also “urged Price to make a disclosure to no avail,” according to the complaint. “When Price dismissed the Treasurer’s advice, the Treasurer warned, ‘I didn’t want to be talking [about Merrill’s losses] through a glass wall over a telephone.’ ”

“Astonishingly, Price seemed to have forgotten this dramatic exchange,” according to the lawsuit.

Lewis also was aware of the disclosure issues, because Price updated him on disclosure and loss issues.

More of what Lewis did or didn’t know will likely come to light in the coming days and weeks ahead. In the meantime, however, the opening summary of Cuomo’s lawsuit may sum up the situation best: “Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them. Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

Bank of America execs, including former CEO Ken Lewis, are gearing up for a heated legal battle with New York Attorney General Andrew Cuomo. On Feb. 4, Cuomo charged Lewis of defrauding investors and the U.S. government when he helped put the wheels into motion for Bank of America to buy financially troubled Merrill Lynch & Co.

Specifically, Cuomo alleges that Lewis, as well as BofA’s former chief financial officer Joe Price, failed to tell shareholders about the $16 billion in losses that Merrill had incurred before it was bought by Bank of America. After shareholders approved the acquisition, Cuomo says Lewis then demanded government bailout funds to keep the deal afloat.

In total, the government injected $45 billion into Bank of America via the purchase of preferred shares, including $20 billion approved after the merger in January 2009.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Separately, the Securities and Exchange Commission (SEC) announced that it had reached an agreement with Bank of America over the company’s decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008. BofA agreed to pay a $150 million fine to settle the matter.

Synthetic collateralized debt obligations, or CDOs, are complex mortgage-linked debt products that have been blamed for bringing Wall Street to its knees and pummeling millions of investors in the process. It was in the fall of 2007, when the financial markets first started to become unhinged, that these high-risk instruments found their way into the public’s eye.

Today, CDOs are a hot topic on Capitol Hill, where members of Congress and regulators like the Securities and Exchange Commission (SEC) are trying to determine exactly how and why synthetic CDOs created the financial tsunami that they did.

As reported Dec. 24 in an article by Gretchen Morgenson and Louise Story for the New York Times, regulators are said to be looking at whether current securities laws or rules of fair dealing were violated by the investment firms and banks that created and sold CDOs and then turned around to bet against clients who purchased them.

“One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded,” the article says.

Pension funds and insurance companies are some of the institutional investors that lost billions of dollars on synthetic CDOs – investments they thought were safe investments.

The New York Times article devotes space mainly to the synthetic collateralized debt obligation business of Goldman Sachs and, specifically, mortgage-related securities called Abacus synthetic CDOs. Abacus CDOs were developed by Goldman trader Jonathan Egol, who had the idea that they would protect Goldman from investment losses if the housing market ever collapsed.

According to the article, when the market did tank, Goldman created even more of these securities, enabling it to pocket huge profits. Meanwhile, clients of Goldman who purchased the CDOs – and who thought they were solid investments – lost big.

One can easily infer from the article and other news reports on the subject that Goldman put the best interests of clients in harm’s way with Abacus because it not only served as the structurer of the deals involving the product, but also held onto the short side of those same deals. In other words, the company would be advising clients to buy assets that, in turn, it was betting to fail.

Goldman certainly is not the only investment firm that employed this strategy. Others banks created similar securities that they sold to clients and then bet against the future performance of those assets.

Goldman and other investment banks will soon have to answer tough questions about accountability and fiduciary duty. In the meetings being held on Capitol Hill, the Financial Crisis Inquiry Commission – a group that has been compared to the 9/11 Commission – plans to call several panels of investment banks to appear as witnesses. Among them: CEOs of Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Bank of America.

Former BusinessWeek writer Matthew Goldstein hit the nail on the head in his Aug. 11 blog about the Securities and Exchange Commission’s so-called “scared-straight” campaign to clean up Wall Street. Goldstein appropriately calls the SEC’s latest round of enforcement actions, including those against Bank of America, General Electric and former American International Group CEO Hank Greenberg, “an attempt by regulators to clean-up the docket so the litigation papers can be sent to cold storage.” 

The Bank of America/SEC settlement is a perfect example of what Goldstein is talking about. Under the agreement announced Aug. 3, Bank of America would pay $33 million to settle charges by the SEC that it lied to shareholders about billions of dollars in bonuses promised to Merrill Lynch executives. Judge Jed Rakoff, the federal judge overseeing the case, has now nixed that deal, and on Monday, got BofA’s lawyer to reveal that in agreeing to the SEC’s settlement it didn’t believe it did anything wrong by deceiving shareholders. 

And therein lies the problem – and a very basic flaw in how the SEC operates. By allowing entities like Bank of America and others to simply pay a fine for an alleged offense without also publicly admitting their wrong doing, accountability becomes non-existent. The message is sent loud and clear that actions really don’t have consequences when it comes to Wall Street, and bad behavior, fraud and the like can continue on in full force.

The SEC and its new chairman, Mary Schapiro, purport to have a renewed sense of urgency for righting the wrongs of Wall Street. If that is the case, then the regulator needs to get serious about accountability. That means issuing a new mandate, one that requires individuals to admit liability before the SEC will sign off on any civil enforcement action. If the individuals in question refuse to admit their alleged offenses, then the SEC needs to put tough talk into action and proceed with legal recourse.

A federal judge is saying “no” to the $33 million settlement between Bank of America (BofA) and the Securities and Exchange Commission (SEC), refusing to sign off on the agreement and demanding answers as to why the regulator accepted what he calls a “small penalty.” Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York made his remarks at an Aug. 10 hearing, where he also asked Bank of America for the names of the executives allegedly involved in lying to investors about plans to pay billions of dollars in bonuses at Merrill Lynch, which BofA acquired during the height of the financial crisis.

“If Bank of America misled the shareholders, as you assert about a multibillion dollar matter, isn’t there something strangely askew in a fine of $33 million?” Rakoff asked the SEC’s lawyers during the Aug. 10 hearing. “It is very difficult for me to see how the proposed settlement is remotely reasonable.”

Without Judge Rakoff’s consent, the BofA/SEC settlement cannot move forward. As it stands, the judge has asked for further filings and information by Aug. 24, and says a settlement wouldn’t be approved before Sept. 9. 

On Aug. 3, Bank of America, without admitting or denying the SEC’s allegations, agreed to pay $33 million to settle charges that it misled investors about Merrill Lynch’s plans to pay executive bonuses as it prepared to report fourth-quarter losses totaling more than $15 billion. In turn, those losses affected the fiscal health of Bank of America, which acquired Merrill Lynch in January 2009.

The SEC alleges that Bank of America promised shareholders that Merrill Lynch would not pay year-end bonuses and incentives without first getting BofA’s consent. In reality, however, the SEC says the bank already had given that approval, authorizing Merrill Lynch to pay nearly $6 billion in extra compensation. 

As reported Aug. 10 by the Washington Post, Judge Rakoff had harsh words for BofA lawyers during the hearing, demanding to know the names of the individual or individuals who decided what to reveal to shareholders in a November proxy statement. According to the article, the judge specifically asked whether Bank of America chief executive Kenneth D. Lewis and former Merrill Lynch chief executive John Thain were involved.

“Was it some sort of ghost?” Rakoff asked. “Who were the people? . . . If you are correct that this proxy statement was materially misleading, then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that, yes?”

The Securities and Exchange Commission (SEC) has charged Bank of America (BofA) of lying to investors and misleading them about billions of dollars in bonuses being paid to Merrill Lynch executives at the time of its acquisition of the firm. Bank of America, which bought Merrill earlier this year, agreed to settle the SEC’s charges and pay a penalty of $33 million.

According to the SEC’s complaint, Bank of America was in violation of securities laws when it allegedly told shareholders in November 2008 that year-end bonuses would not be paid without its consent.

“In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008,” the SEC said in a statement. “The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.”

As reported Aug. 3 by the Washington Post, New York Attorney General Andrew Cuomo and Bank of America have been at odds with each over the bonus payments. In February, Cuomo subpoenaed the bank to obtain the names of all bonus recipients, contending that Merrill Lynch accelerated the payments before the announcement of a $9.8 billion fourth-quarter loss.

Bank of America reportedly is operating under a secret and strict U.S. regulatory sanction, one that mandates an overhaul of the BofA board and addressing perceived risk-management and liquidity issues. The Wall Street Journal first reported the story on July 16, 2009.

According to the WSJ, the sanction comes in the form of a “memorandum of understanding,” or MOU, which is a formal regulatory statement that gives financial institutions a chance to work out their problems without public scrutiny. For companies that fail to resolve the issues in question, harsher penalties may be invoked, including a cease-and-desist order.

It was two months ago, following results of the government’s stress tests on major U.S. financial institutions, that federal regulators initially informed Bank of America it needed to take immediate steps to address its $34 billion capital shortfall. At the same time, federal officials urged the bank to revamp its board and bring in more individuals with extensive banking experience.

Bank of America now faces a series of deadlines to meet various requests by regulators. Some of those deadlines take place later this month, according to the Wall Street Journal.

A group of public Ohio and Texas pension funds will lead a securities class-action lawsuit on behalf of investors against Bank of America (BofA) and the acquisition of brokerage firm Merrill Lynch.

On June 30, Judge Denny Chin of the U.S. District Court for the Southern District of New York granted lead plaintiff status to the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System and the Teachers Retirement System of Texas. They are joined by two European pension funds: Fjärde AP-Fonden and Stichting Pensionfonds Zorg en Welzijn. 

Investors in the case allege Bank of America purposefully misled them about the fiscal health of Merrill Lynch before the purchase on Jan. 1, 2009. In its fourth quarter, Merrill reported a loss of $15.4 billion. 

As reported July 2 by the New York Times, the BofA/Merrill Lynch merger has prompted Congressional hearings into why Bank of America failed to back out of the acquisition or disclose more information about Merrill’s financial status. In addition, lawmakers want to know the extent to which federal regulators may have pushed Bank of America to close the deal.