Something's Fishy

I have a great deal of experience in the financial industry, much more on the trading side than banking, but plenty of experience none-the-less. I don't follow the market on a regular basis however because there's simply no need to. I pay attention to the headlines and keep a lazy eye on the market, but I have confidence it will correct itself. I hadn't really looked at what happened with the BofA-Merrill Lynch merger in-depth, but an eye-catching headline on Ken Lewis stating that government regulator's forced BofA from granting full disclosure to their shareholders was enough to make me look into it a little more.

Here is the article:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aO.aUfdswPrM&refer=worldwide

This sounds very troubling to me. Number one, mergers and acquisitions have to follow rules. In the finance industry, you always lean on the side of full-disclosure. To hear that Paulson...and possibly Bernanke...tried to manipulate senior management to withhold information from the shareholders who actually make the decision is deplorable. If Bernanke did so, he should be forced to resign; there's simply no excuse for this.

I understand their fear that if Merrill Lynch fell, it would cause a ripple effect throughout the industry. Merrill Lynch was absolutely HUGE amongst their peers and just like Bear Stearns, they were a driving force in the industry. However, you cannot put the responsibility on shareholders to correct a market problem with their pocketbooks. No matter how I slice this, they violated the rights of all BofA shareholders to protect their assets if the story is true.

I take special issue with the claim that they threatened BofA's 'management'...I assume executive management instituted by the board...that they would be replaced if they did not comply. What the article misses telling me is how. The government can't replace workers at a company. There are sort of roundabout ways to do so, but the power is ultimately held by the Board and the shareholders who vote for the Board. You might be able to publicly disgrace an officer, or show negligence or a failure in compliance that could lead to a removal, (e.g. a CFO violates an accounting law and loses his CPA status and would probably end his CFO career), or maybe even make it difficult to receive loans from the Fed and blame it on an officer, forcing the Board to oust them. However even with the steep regulations banks face, all companies are given autonomy to decide who is on their payroll. It normally would have been a threat without teeth, or one where the regulators were threatening an ousting by manipulating major shareholders and the Board. I know of no law that would allow the Federal Government to 'replace management'.

Regardless of what Federal regulators did, Mr. Lewis' actions don't seem like he was looking out for his shareholders best interests. I can make guesses as to what he means when he says systemic risk to the market, in particular the loss of Consultants from Merrill Lynch that give business to BofA or revenue loss from 'deals' if Merrill and BofA were partnering a lot on initial and secondary offerings, but these are merely guesses. Even still, that doesn't justify withholding vital information to shareholders so they can make a proper decision.

I am surprised to hear that Congress has not requested a more thorough investigation. This is definitely something that should be brought before the Banking and Finance committee in full public hearings. Perhaps some watchdog group can get more information using the Freedom of Information Act, although it sounds like most of what happened was never written down and so we may never know. That still doesn't mean that we shouldn't be outraged if the Federal Government overstepped its bounds.


Update - Apparently, the lawmakers agree with me. Since posting the article this morning, Congress is already looking into the matter as reported here:

http://money.cnn.com/news/newsfeeds/articles/djf500/200904291258DOWJONESDJONLINE000767_FORTUNE5.htm

And no, it isn't because they read my post.