Cuomo vs Bank of America
Research for Online Investors

by John Dalt

9/16/09

A year ago, Bank of America agreed to buy Merrill Lynch in a shotgun wedding orchestrated by the FDIC and U.S. Treasury.  The deal occurred in the middle of the financial meltdown.  BAC had received $25 billion in bailout funds, and an additional $20 billion to absorb the losses in the Merrill Lynch purchase.

Ken Lewis, CEO of BAC, considered backing out of the deal by invoking the material adverse change (MAC) clause of the contract. This caused heartburn in the government. Merrill losses were mounting, and BAC had a shareholder meeting to approve the purchase on December 5, 2008 BAC is facing shareholder lawsuits for not disclosing the Merrill Lynch losses and the questions management had concerning the investment bank.

Management had a fiduciary duty to share all material information with the shareholders.  In addition to the shareholder suits, it is a crime if Cuomo can prove that the board and/or Lewis withheld information.  The very fact that the board considered backing out of the deal may have required disclosure.  Paulson told Lewis he did not want anything in writing concerning losses at Merrill or future backstops the Treasury may offer.  This was to avoid a “reportable event.”

Lewis testified before a grand jury in February in New York that he felt threatened by Paulson and Bernanke.  Treasury’s Hank Paulson told Lewis that a failed deal would destabilize the nation’s banking system and call into question the capability of BAC's board.  Bernanke tag teamed Lewis with a caution that if BAC backed out of the deal, management and the board of directors may be replaced as a condition for BAC to receive any more bailout funds or consideration from the government.

The New York Attorney General, Andrew Cuomo has filed paperwork to depose directors of Bank of America (BAC) concerning the acquisition of Merrill Lynch.  We covered this story when Ken Lewis’s testimony was leaked on April 23, 2009 in our article, “BOA, Shut Up and Buy It.”

Lewis was called before congress, followed by Paulson and Bernanke.  The fire was fanned, but all parties were very careful in their testimony.  Cuomo won’t give up.  He is trying to make a name for himself.  He seems to be on a mission to be on TV more than his brother who hosts Good Morning America on ABC.  I think he wants to run for daddy’s old post and live in the governor’s mansion.

Max Baucus (D. MT) filed his bill with the Senate to overhaul the nation’s health care.  The “gang of six” senators have been working on this bill.  It is more sausage, costing $856 billion in the first ten years.  To get the cost this low, the taxes start immediately, but benefits are phased in through 2013.  This gets the democrats through the next two elections without people realizing how bad the program is, or how much it costs.

Baucus’s bill would extend coverage to 95% of the population, leaving about 15 million uninsured. Something is wrong with the math, why spend $856 billion to cure half the problem? That is spending over $9,500 per additional insured person per year (six years). Only in Washington. You can read my simple plan for health care reform from July 28, "Health Care, A Plan." Moreover, I think it would be revenue neutral.

Life is stranger than fiction, Linda McMahon of World Wrestling Federation is going to run for Senate against Chris Dodd (D. Conn). One of her Republican primary opponents said, "I am going to run a campaign Connecticut can be proud of, no head-butting, eye-gouging or hair-pulling."

“Good article! Good writing...certainly keeps my attention, thanks.”---subscriber C.H.

Thanks for the compliment C.H., even a blind man can hit a golf ball once in awhile.—John Dalt

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Home Page

Back to Top