BofA Scandal – Getting it wrong on The Street

Michael Collins

So this is how it’s going to be. They’re circling the wagons.

Lauren Tara LaCapra of The.Street.Com offered one of the first responses to the fraud lawsuit by New York State against the Bank of America (BofA) (Pondering Cuomo Vs. Bank of America).

LaCapra states categorically:

As it stands, no evidence has been presented that Lewis & Co. understated or mischaracterized Merrill’s losses at any given time. LaCapra

This is simply wrong. “Mischaracterized” is putting it mildly when you review the complaint by Attorney General Andrew Cuomo. Defendants Kenneth Lewis, former BofA CEO and president, and Joseph Price, former CFO (still with BofA), understate Merrill Lynch losses to the bank board by over 40%. Cuomo presents a time line and evidence to support that.

The following chart shows the losses known and forecasted based on bank records. They’re alarming. Aside from what this says about due diligence, the numbers show a rapid acceleration in known and forecasted losses over just a five day period prior to the shareholders vote on the merger on December 5 and the BofA board meeting on December 9.

The numbered paragraphs below are from the attorney general’s complaint:

138. (Corporate Treasurer) Brown voiced this concern to Price before the shareholder vote, saying that he believed the losses ought to be disclosed to shareholders. Brown told Price that “I felt that we should disclose; that the losses were meaningful enough.” He explained that “at this point it’s about a $9 billion after tax number. That’s a fairly significant loss for a corporation to experience in one quarter, and withholding that could potentially result in items like we’re discussing today.” After Price dismissed Brown’s concerns, Brown offered an unforgettable warning: “I stated to Mr. Price that I didn’t want to be talking through a glass wall over a telephone.” (pp. 39,40)

These section headers indicate the evidence Cuomo presents : “BofA Lawyers Initially Decide to Disclose Merrill Losses to Shareholders but Then Reverse Course” (pp. 17-20). LaCapra may have missed this too: “December 5: Bank Management Learns of Additional Losses Before the Shareholder Vote” (p. 38). And this: “Known Losses to Date at Merrill Top $16 Billion by the End of the Day (p. 40).”

But here’s the proof that the defendants deliberately understated losses. From the complaint:

151. On December 9, 2008, Bank of America held a Board of Directors meeting. According to the minutes, Price “reported on Merrill Lynch’s projected income for fourth quarter, noting the forecast of a net loss of $9 billion and the factors to which such loss is attributed.” (p. 43)

When you know that the loss forecast is $16 billion and you present a $9 billion loss, that’s called fraud.

And while Lewis ultimately accepted more bailout funds to go forward with the acquisition, he didn’t ask for them; Paulson and Bernanke decided to offer them. LaCapra

As for the claim that Lewis “didn’t ask for them” (bailout funds), Cuomo has evidence that Lewis told Paulson and Bernanke that BofA would scuttle the whole deal without bailout package like the CitiBank deal. Lewis knew he couldn’t stop the deal at that point but made the threat anyway; misrepresented Merrill’s losses once again, this time exaggerating them to Paulson and Bernanke; and strong armed the bailout money to cover the banks bad deal. Lewis did more than ask for bailout money, he offered the feds a deal they couldn’t refuse.

Cuomo’s statements may be confident and aggressive, but his case is not. It doesn’t require proof of intent, and if he had any, he almost certainly would have flaunted it. LaCapra

Lewis, Price, and the bank are not being charged with intent to commit fraud, they’re charged with committing fraud. What more does she want from the complaint? If you understate losses by 44%, losses that you reviewed, that indicates intent. But if you really want intent to defraud, consider this congressional testimony by former CEO, president, and chairman Lewis:

Question: So you are saying that you really weren’t aware of the substantial loss before the shareholders [sic] meeting on December 5th?

Lewis: No ma’am. We saw losses, but they seemed consistent with what we were hearing about in the marketplace and consistent with what we were seeing at our company. It was only when they – when we saw the acceleration that – when we got the reports when we did – that caused the alarm. (p. 46, 47)

As indicated in the chart above, the acceleration was from December 1 through 5, prior to the shareholders vote and board meeting in early December. This is based on Bank of America’s numbers. Mr. Lewis is lying to Congress just as he lied to the board. There’s no need for Attorney General Cuomo to flaunt anything. He has the right charge, fraud, which implies intent.

One can agree or disagree with the decisions made by Lewis, but it would be interesting to know how Cuomo would have handled the same situation, and what the outcome might have been. LaCapra

This is truly bizarre. Why would it matter what the Attorney General of New York might do in a similar situation. Has anyone alleged that Andrew Cuomo has the knowledge or inclination to have any opinion other than this, were he to answer: ‘I would have told the truth as obligated by my position as an officer of the corporatoin and the law.’

LaCapra did get one very important point right.

…it will be the first high-profile prosecution of a controversial crisis-era situation. It involves not just bankers, but the government, which was intricately enmeshed in crisis-era deals — especially this one. LaCapra

Years into the scheme to create the derivatives market, the pitchmen who pushed the real estate bubble, and the near destruction of the economy, we finally have charges against one group of perpetrators. The once venerable Bank of America has been taken low by it’s over hyped management since leaving California. The case presented and supported in Cuomo’s complaint show a pattern of the very worst business practices and outright deception and fraud. BofA is not unique among the reckless and greedy institutions and individuals responsible for the current mess. They’re just first in line for some justice. And it’s about time.


This article may be reproduced in part of in whole with attribution of authorship and a link to this article.

Also see: Cuomo Takes on the Money Party – Bank of America Looks Like First of Many


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