Updated to include detail on testimony. WASHINGTON ( TheStreet) -- In the game of hot potato that Bank of America ( BAC)- Merrill Lynch merger inquisition has become, the bank's former top lawyer, his replacement and two board members are being interrogated by lawmakers today on Capitol Hill. Though the 14-page statement of former general counsel Timothy Mayopoulos appears more candid and forthcoming than BofA's current brass, don't expect any of them to take decisive responsibility for the deal. Mayopoulos makes some interesting disclosures -- Warning: He uses the term "Wild Ass Guess" twice to describe Merrill's loss estimates -- most of his testimony evokes a picture of a bewildered man, who did nothing wrong ethically or operationally, received brilliant performance reviews, but was ejected from BofA's Charlotte, N.C. headquarters without reason.
He did advise BofA that it didn't have the legal standing to invoke a material adverse change, or MAC, clause to walk away from the deal. However, his understanding was that Merrill expected to lose at the most $9 billion, not the $15.3 billion it would ultimately lose. (The losses estimates accelerated from $5 billion to $7 billion to $9 billion over a period of less than a month, although this apparently wasn't a concern.) "
B ased on information already disclosed to shareholders, a reasonable investor would have been on notice that Merrill Lynch might well suffer multi-billion dollar losses in the fourth quarter of 2008," Mayopoulos writes in his prepared remarks. He goes on to note that proxy statement and other public documents explicitly state that the markets were, well, in a "Wild Ass" state, and there was no telling what could happen. Terms like "adversely affected," "unprecedented," "unparalleled," and "difficult market conditions" peppered the filings, as they do in most financial statements from that time period.
|Timothy Mayopoulos, former general counsel at Bank of America, is now an executive at Fannie Mae.|
Mayopoulos also mentions that, because BofA never provided shareholders with an initial estimate of Merrill's losses, it had nothing to update. He notes, correctly, that all estimates through Dec. 3 "turned out to be materially incorrect" and that if BofA had disclosed them, "shareholders would have likely sued the company for misleading them." Unfortunately, the bank wasn't able to avoid that fate, as several lawsuits have already been filed, not to mention the litany of regulatory investigations. And though there may not have been legal precedent for such a tumultuous situation, one has to wonder: Don't materially adverse times call for materially adverse disclosures? Of course there are merits to Mayopoulos' arguments, and three current members of BofA's executive team and board will highlight the benefits of the Merrill deal. Brian Moynihan -- once Mayopoulos' boss, who replaced him as general counsel and now leads consumer and small business banking -- says simply that BofA and Merrill "acted in good faith" and consulted with a "premier law firm," namely Wachtell Lipton Rosen & Katz, over disclosure issues. Moynihan asserts that BofA acted in "an open and honest manner" and that ultimately, taxpayers, shareholders, depositors and the broad financial system have benefitted from the deal. Moynihan also sheds some light on Mayopoulos' firing, which the former general counsel describes as a mystery that was never explained when he was asked to turn in his BlackBerry, identification, company credit card and keys. Moynihan chalked up the decision to "downsizing" in the executive suite, which trimmed 10% of senior managers last year. "I think it's clear that that's what drove the decision," he said during a question-and-answer session following his testimony. Prepared testimony of directors Charles "Chad" Gifford and Thomas May provide little of substance, either. All three gave cheerful, generic statements written in lockstep that give a brief identification, thank taxpayers or discuss the wonders of the combined BofA-Merrill franchise.
Mssrs. Moynihan, Gifford and May are sure to be interrogated by lawmakers on the House Oversight and Government Reform Committee over what they knew, and why certain decisions were made. But they're also likely to toe the same line as the three key decision makers whose appearances preceded theirs: Soon-to-retire CEO Ken Lewis, former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. Essentially, Bank of America's defense is that leaders and top regulators found there was not enough reason to invoke a MAC clause, based on legal advice and their own assumptions. They also believed that walking away from the deal would cause more harm to shareholders than good. So far, they say, the deal has born fruit, even if BofA is still on the hook for an extra $20 billion in government support to have closed it. While it may not receive much attention, Mayopoulos also provides a telling revelation about Merrill Lynch's huge year-end bonuses -- absent of which, this hearing probably wouldn't be taking place. While asserting that he had "no role in this issue" as far as disclosure, timing of awards or bonus amounts, he did provide Chief Administrative Officer Steele Alphin with some words of advice. Mayopoulos told Alphin that Merrill was responsible for determining the bonuses, since it remained an independent company until the deal closed. But he also said Alphin ought to make clear to Merrill's board that, given the investment bank's tragic performance, were BofA in a similar situation, it would not distribute year-end bonuses to its senior executives. Mayopoulos also said it would be "inappropriate" for then-Merrill CEO John Thain to receive any award. Where the discussion went from there is unclear. But, in what seems to be another "unprecedented" move, Merrill sped up its schedule to distribute bonuses before the deal closed at year-end, when typically they were handed out in January. Thain requested $10 million from a bonus pool whose limit was set at $5.8 billion. When this, and Merrill's losses, were revealed, Thain was chastised into rescinding his request and a lesser $3.6 billion was ultimately distributed to others. Appearances by Herlihy, Demmo, Alphin or Thain on the next witness docket should come as no surprise. But it seems that most of the proverbial cats have been let out of the bag. -- Written by Lauren Tara LaCapra in New York