PrefBlog

It appears that we will be treated to the spectacle of a regulatory cat-fight in the States. Andrew Cuomo has released a letter to Congress in which he discusses the BofA / Merrill Lynch merger:

Immediately after learning on December 14,2008 of what Lewis described as the “staggering amount of deterioration” at Merrill Lynch, Lewis conferred with counsel to determine if Bank of America had grounds to rescind the merger agreement by using a clause that allowed Bank of America to exit the deal if a material adverse event (“MAC”) occurred. After a series of internal consultations and consultations with counsel, on December 17,2008, Lewis informed then-Treasury Secretary Henry Paulson that Bank of America was seriously considering invoking the MAC clause. Paulson asked Lewis to come to Washington that evening to discuss the matter.

At a meeting that evening Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Lewis, Bank of America’s CFO, and other officials discussed the issues surrounding invocation of the MAC clause by Bank of America. The Federal officials asked Bank of America not to invoke the MAC until there was further consultation. There were follow-up calls with various Treasury and Federal Reserve officials, including with Treasury Secretary Paulson and Chairman Bernanke. During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement. We do not yet have a complete picture of the Federal Reserve’s role in these matters because the Federal Reserve has invoked the bank examination privilege.

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.
…
In an interview with this Office, Secretary Paulson [argely corroborated Lewis’s account. On the issue of terminating management and the Board, Secretary Paulson indicated that he told Lewis that if Bank of America were to back out of the Merrill Lynch deal, the government either could or would remove the Board and management. Secretary Paulson told Lewis a series of concerns, including that Bank of America’s invocation of the MAC would create systemic risk and that Bank of America did not have a legal basis to invoke the MAC (though Secretary Paulson’s basis for the opinion was e,ntirely based on what he was told by Federal Reserve officials).
…
Notably, during Bank of America’s important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark. Indeed, Secretary Paulson informed this Office that he did not keep the SEC Chairman in the loop during the discussions and negotiations with Bank of America in December 2008.

The proper thing for Lewis and the board to do, of course, was to back out and get fired with honour; the claim is made that this would have increased systemic risk and they were craven in the best interests of the global financial system.

Now, Bloomberg reports that:

Bank of America Corp. Chief Executive Officer Kenneth D. Lewis may face scrutiny by the U.S. Securities and Exchange Commission for failing to disclose mounting losses at Merrill Lynch & Co. because of pressure from federal regulators to complete the takeover.

“We have been actively reviewing the disclosure surrounding the merger between Bank of America and Merrill Lynch,” said agency spokesman John Nester. “The issues identified in New York Attorney General Andrew Cuomo’s letter are part of our review.”

Sounds like Ken Lewis will be hung out to dry. While I think he made the wrong decision, he certainly has my sympathy; I know very well that being a mouse in a roomful of angry elephants is not a lot of fun.

One of the Master Asset Vehicle notes has been placed under Review-Negative:

In addition to the potential impact of the interest shortfall, the following factors contributed to DBRS placing the rating of the MAVII A-2 Notes Under Review with Negative Implications:

(1) On March 16, 2009, DBRS was advised that MAVII’s credit default swap transactions with Canadian Imperial Bank of Commerce (CIBC) were terminated due to the failure of MAVII to post additional collateral to meet a margin call. The termination resulted in losses of $107,742,597 (or approximately 1.1% of the assets of MAVII). As a result, the enhancement available to the MAVII A-2 Notes has been reduced by 1.1%, whereas the enhancement percentage for the MAVI Class A-2 Notes was unaffected.

Sorry that this is being published so late, folks, but I had an engagement Friday night.

The market was up today, FixedResets and PerpetualDiscounts gaining about 15bp each total return, but volume was down sharply to below-average levels, something that might be considered significant by the chartists among us (yes, there are still a few!) but not considered significant by right-thinking people.

This entry was posted on Saturday, April 25th, 2009 at 9:58 am and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.