Bank of America's Fraud Charges are Very Serious

Bank of America agreed to a $150 million settlement with the SEC -- five times the original amount -- the same day New York Attorney General Andrew Cuomo slapped the bank with a long-expected lawsuit for concealing crucial information from shareholders. There are three main accusations in the lawsuit. I'll tell you if I think they'll hold up:

1) Before the shareholder vote in December, BofA concealed Merrill's losses from shareholders.

2) After the shareholder vote, Bank of America forced the government to save the merger with taxpayer assistance after discovering losses only slightly higher than previously known.

3) BofA did not disclose Merrill's bonus timing or amount possibly on numerous occasions.

Let's begin with (1): that BofA purposefully concealed huge losses from shareholders. The timeline of events (see graph -->) makes this perfectly obvious. On Dec. 3, BofA revised Merrill's loses $2 billion. It considered this update "not material", using perhaps the most liberal interpretation of the word material I've heard. On Dec. 5, BofA shareholders, ignorant of this new internal forecast, approved the deal. Two weeks later, Merrill's quarterly loss increased by another $2-3 billion. More than "material," this revelation was so horrifying that CEO Ken Lewis went to Washington to void the deal entirely! To review: a $2 billion write-down was immaterial. Another $2 billion write-down was a dealbreaker. That looks very bad, indeed.

On accusation (3) it's equally obvious BofA misled shareholders about Merrill's bonuses. Former Merrill CEO John Thain was reportedly fired in January for paying $15 billion in bonuses to his employees. But in the SEC suit last summer, BofA acknowledged in a brief: "It Was Widely Understood From Merrill Lynch's Public Disclosures that Merrill Lynch Intended to Pay Multi-Billions of Dollars in Year-End Incentive Compensation" dating back to October 2008 -- three months before Thain's resignation. Once again, BofA concealed information to ease the epic merger through the shareholder vote.

Now about accusation (2) that BofA defrauded taxpayers for an additional $25 billion to help the Merrill merger ... I honestly just don't know. Everything I've read suggests that after the second $2-$3 billion write-down, Ken Lewis freaked out and legitimately wanted out of the merger. My understanding was that he only stayed in with the threat of the board being liquidated by Treasury, and some extra loans. My understanding was that if there was foul play, it government intimidation of Wall Street rather than the other way around. I'm interested to see how the evidence shakes out.

The irony is that from 2010's vantage point, this merger is actually in danger of working out very well! Merrill retained one of the best wealth management programs in the world. Ten months after the deal, Merrill was hauling in 30 percent of BofA's profits. Last year I spoke to a source on the Merrill side close to the merger during the bad honeymoon period. Here's what he said:

So what do you think Ken Lewis was thinking [when he went to the government for money], I asked. "I think he panicked. He could have said, 'These are bad losses but Merrill wouldn't have needed to be bought if the losses weren't terrible. We still believe going forward that over the next 3, 5 10 years, this is great deal.' Instead of doing that, he panicked."

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Editor's note: Much of this blog post draws on reporting from last year in the following articles. Here I spoke off the record with a Merrill source. Here I traced the timeline above. And here I elaboated on why maybe we shouldn't blame BofA as much as Cuomo would like us to.