Thursday, July 16, 2009

Jack McHugh on BAC and Ken Lewis

It's amazing how our largest bankers are in the process of rewriting history to show that, at worst, they experienced a minor hiccup last year and never really needed any of the assistance provided by the government. This is obscene. Although I believe that these banks should have been temporarily nationalized in one fell swoop, there is little doubt that many of them would have failed were it not for the money and guarantees provided by the government. Jack McHugh offers some solid commentary on Bank of America's latest ploy to avoid paying the U.S. taxpayer for the government guarantee they clearly benefited from following their announced deal to acquire Merrill.

Jack McHugh:

Your word is your bond; a deal’s a deal. We all learn these lessons well before we become adults and pursue various ambitions. Even bankers live by this credo, especially when they are on the collecting end of a contract. Now comes Ken Lewis and the Bank of America, looking the American people straight in the face while claiming a deal isn’t a deal without a signed contract. I’m referring to the U.S. government guarantee of the assets BAC assumed after acquiring Merrill Lynch. Negotiated in the dying light of the Bush administration in January of this year, BAC trumpeted the news during a press release on January 16, containing, among other things, an awful Q4 earnings report (see stories below). The assets receiving this taxpayer-funded backstop amounted to $118 billion. It cushioned the blow of the earnings report and helped buy BAC the time it needed to raise fresh equity (which it did in May).

Coffers replenished, Mr. Lewis and his behemoth bank are trying to claim there is now no need for this guarantee, and besides, no full contract was ever executed. BAC wants to renege on paying the $4 billion it owes the taxpayers for the backstop, line of credit, insurance policy, or whatever we want to call it. “We didn’t draw on it, so we don’t owe anybody anything” seems to be BAC’s defense. I wonder if a similar defense would work if I decided not to pay my insurance premiums this year because my house has yet to burn down. And yet, the Charlotte-based banking house Mr. Lewis helped build was indeed smoldering, if not on fire back in January when he agreed to the deal and announced the following:

“In view of the continuing severe conditions in the markets and economy, the U.S. government agreed to assist in the Merrill acquisition by making a further investment in Bank of America of $20 billion in preferred stock carrying an 8 percent dividend rate.
“In addition, the government has agreed to provide protection against further losses on $118 billion in selected capital markets exposure, primarily from the former Merrill Lynch portfolio. Under the agreement, Bank of America would cover the first $10 billion in losses and the government would cover 90 percent of any subsequent losses. Bank of America would pay a premium of 3.4 percent of those assets for this program.
“On a pro forma basis, this additional capital would boost the company’s Tier 1 capital ratio to approximately 10.70 percent.” (source: BAC press release, January 16, 2009)

Remember these reassuring words you sent zinging around the world, Mr. Lewis? You wanted everyone to know that Uncle Sam stood behind you and that Bank of America would be one of the government’s hand-picked survivors of the financial crisis. Your stock closed at $8.32 on January 15, the day before this press release. This lifeline helped you raise fresh capital and your stock closed today at $13.42 — a tidy gain of 61%. And now you say you owe us nothing for this help, even though you announced the payment terms in your press release? What are you trying to claim — that you are invoking some sort of Material Positive Change clause?

Your “no signed contract” defense won’t wash, either. As any lawyer will tell you, contract law is based every bit as much on what two parties promise to do and how they perform on those promises. A signed piece of paper simply memorializes the deal and helps fading memories should a dispute arise at a later date. As your press release so clearly shows, we all know the agreed upon terms. We the People performed in allowing our leaders negotiate on our behalf; We let you make the claim We were behind you; and you used this claim to help ward off the demons that sank companies like Lehman Brothers. We performed; you and your company benefited. That, my friend, is a contract.

But if you still are unclear as to what I’m talking about, let me give you an example that hits close enough to home for you to understand. When BAC issues a company a revolving line of credit or a standby Letter of Credit, BAC receives both an upfront fee and an annual maintenance fee — WHETHER OR NOT THE LINE OF CREDIT IS EVER DRAWN UPON. If a client tries to renege on paying these fees because the line isn’t used, you would take them to court and demand payment.

Isn’t it bad enough that your poor stewardship of one of America’s premier banking franchises contributed to the mess we now find ourselves in? The financial crisis has cost taxpayers trillions of dollars and cost millions of workers their jobs. You’ve kept your job, Mr. Lewis, so do yourself, your shareholders, and the American people a favor and pay up. It shouldn’t require a U.S. Congressman to tell you it’s the right thing to do. Bank of America’s founder, A.P. Giannini, hated Wall Street in part because of behavior like this. I’m guessing he would be appalled to see what you’ve done to what he used to call “the people’s bank”. For Mr. Giannini, a deal was most certainly a deal, and his word was always his bond. Care to reconsider now, Mr. Lewis?

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