Yesterday, Bank of America fired off one of their biggest settlements yet, spending $2.4 billion to quiet claims with investors over their purchase of Merrill Lynch.
As Lehman Brothers failed in September 2008, Bank of America agreed to buy Merrill Lynch. But in the weeks after that agreement, the bank tried unsuccessfully to scrap the deal. Merrill Lynch generated more than $15 billion of losses and its executives agreed to award employees up to $5.8 billion of bonuses.
Bank of America’s shareholders voted to approve the deal in December 2008. After the merger closed, Bank of America shares fell sharply, and investors sued, saying Merrill’s losses and bonuses should have been disclosed before the vote.
Bank of America denied the lawsuit’s allegations, but CEO Brian Moynihan said the bank agreed to settle to remove uncertainty and put the case behind it.
This was outright securities fraud, and I’m more than surprised that the investors plaintiffs, led by public pension funds in Ohio and Texas, accepted this. BofA clearly withheld information from their shareholders that caused a material loss; the stock is down 2/3 since the Merrill deal, even while the bank returned to profitability (though not this quarter, as we’ll see). But the investors had little leverage. The SEC should have been all over this, but they settled over the acquisition in 2009, in a settlement so bad that the judge made them rework it. In the end, the SEC got just $150 million for their settlement, and the fact that the investors got 16 times as much should truly embarrass them.
Incidentally, Ken Lewis was specifically sued in this case and would have been personally liable for withholding information, but BofA will cover his costs in the settlement, so he won’t have to pay a dime.
This is just the latest in a long line of settlements BofA has managed to negotiate over a string of fraudulent and abusive activity since 2009. In all, BofA has paid out over $29 billion, including the $11.8 billion in cash penalties and “credits” from the foreclosure fraud settlement. The other big number included in that, the $8.5 billion settlement with mortgage backed securities holders for repurchases, hasn’t been finalized yet. But it’s clear that Bank of America has become a waystation for abused parties to take out settlement money, rather than a lender allocating capital efficiently. And of course, given the inadequacy of these settlements, the real cost of Bank of America’s practices in the economy are much, much higher.
In fact, between this settlement, some tax charges and litigation expenses (none of that $29 billion includes legal fees), BofA expects to book a loss for the third quarter, years after the end of the financial crisis. While Merrill Lynch at least provided investment banking revenue, that acquisition and the Countrywide acquisition have been extremely problematic for the bank. Countrywide in particular has been the main cause for a loss in BofA’s mortgage business of $35 billion.
If it weren’t for a massive sell-off of assets and a government lifeline, there would not be a Bank of America today. And policymakers should ask themselves why they propped up a zombie bank so it could pay off its legal exposure and not much else.