Bank of America (BAC) announced that it would buy Merrill Lynch for $50 billion on September 15 of last year. It was one of the largest M&A transactions in the American banking industry, but to hear the press, Congress, the Fed, the Treasury department, and the bank’s management talk, no one knew any of the details of the transaction.
Bank of America’s board and its lawyers appear not to have been told that Merrill Lynch employees were to get $5.8 billion at the close of 2008. The bank’s shareholders got a proxy to approve the transaction which said, among other things, that B of A would approve any Merrill incentive compensation. No one seems to understand why the document contained these provisions. The payouts had already been approved. The SEC was troubled by this discrepancy and after a brief investigation of the bonuses and proxy material, agreed to let the bank walk away from the issue for a $33 million fine.

The arrangement between the SEC and B of A had to be approved by a federal district court judge. He turned the agreement down based on his concern that very few people knew what the facts of the case were. The SEC did. The bank did. The bank’s shareholders and the taxpayers who had provided bailout money did not. The judge appears to have objected to the secrecy. He said in his written comments about the case that “Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint.”

One important member of Congress does not want to wait for the court to get to the bottom of the details about the bonuses. Ed Towns, the head of the powerful House Oversight Committee has asked Bank of America, and specifically its CEO Ken Lewis, for details about what he and the management of the bank knew about Merrill’s deteriorating financial health and the compensation packages paid to the brokerage’s top employees.

It is now ten months since Merrill accepted the bank’s buyout proposal and, based on the comments of the judge working on the SEC case and the Congressman looking into related matters,  almost nothing is known about what actually happened when one of the largest banks in the world bought one of the largest brokerage houses. That would indicate that a good deal of information about billions of dollars in losses and bonuses were kept from all but a few people, which, at a bank dealing frequently with auditors, regulators, board members, and lawyers, would seem nearly impossible. Ken Lewis could not possibly have kept all of these details from his board without some of the executives who worked for him bringing it to the attention of at least one board member or one person working for the general counsel. The proxy statement issued by a firm as large as B of A is reviewed by scores of people. No one knows why the error about Merrill Lynch compensation was not caught, and the SEC was planning to allow it to stay that way. The entire matter makes it appear to the public that Bernie Madoff was running that bank’s M&A transaction with Merrill.

The public and especially citizens who pay taxes know that there is something really wrong with this series of events.  People who run companies that have received billions of dollars in federal support surely don’t just bungle their way through the simplest parts of running a large financial corporation. The public asks itself how people who make millions of dollars a year can possibly be so stupid, or, how the board members and lawyers whose job it is to keep the system fair let anything so substantial as paying people billions in bonuses without formal board approval and notification of stock holders make it through the normal course of check and balances.

Frequently the press and pollsters try to answer the question of why the average citizen does not trust American business. The assumption is that people believe that executives are corrupt and greedy. That may be true, but there is just as good a chance that the truth is that men like Ken Lewis have only an average intelligence. Lewis is just a man who worked at banks most of his life and understands banks but understands nothing else.  He and others like him do not have the mental capacity to keep track of their businesses in a crisis and are simply unable to make decisions because they do not have the cognitive ability to analyze and respond to the huge flow of information that often accompanies a catastrophe.

It has not occurred to many people, at least not yet, that Lewis is a bank branch manager who was promoted a dozen too many times.

Douglas A. McIntyre

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.