Commentaries

Ken Lewis and customer service

One of the problems with big bank mergers, the kind Ken Lewis championed throughout his career as CEO, is the lack of concern about customer service.

Invariably, customer service at banks gets worse–and often more costly–the bigger a bank gets. And that certainly was the case with Bank of America.

My personal beef with BofA and its customer service concerns it ATMs.

I became a BofA customer after the Lewis-led bank bought FleetBoston Financial in 2004. (I became a Fleet customer when it acquired New Jersey-based Summit Bancorp in 2000–but that’s another story).

One good thing Fleet did with its ATM machines–in New Jersey, at least–was sell postage stamps. It was nice convenience and a customer perk that eliminated trips to the Post Office. Email may be king, but sometimes you still need to send an old-fashioned snail gram.

So what was one of the first things Lewis and BofA did after acquiring Fleet and rebranding all the branches–it stopped selling stamps at the ATMs. I recall asking my branch manager why the ATMs didn’t sell stamps and anymore and she responded, “that wasn’t Bank of America’s practice.”

So in Borg-like fashion, Lewis and BofA assimiliated Fleet and took away a customer perk simply because BofA customers never had it.

from Rolfe Winkler:

Good news: Another bailout ends

For $425 million, Bank of America has canceled its loss-share agreement.  WSJ:

Bank of America Corp. has agreed to pay $425 million to shelve a tentative loss-sharing pact designed to help the bank digest securities firm Merrill Lynch & Co., according to a person familiar with the situation...

When the pact was announced in January, officials said it would cover $118 billion in assets, with about 75% of the total from Merrill and 25% from Bank of America. But the bank and government never signed a final contract amid disagreement about what it could cover, and Bank of America said in May that it wanted out...

The U.S. government asked the bank to pay an exit fee, but Bank of America balked at the idea, saying its positions had never actually been covered. Regulators argued the bank benefited from the implied protection.

The most visible bailout measures may be disappearing -- think TARP -- but other, larger bailouts remain in place. I'm thinking in particular of the Fed's emergency lending facilities as well as very aggressive monetary stimulus designed to prop up asset prices and protect bank balance sheets.

BofA’s lawyers are very busy indeed

Is that seat hot enough for you yet, Mr. Lewis?

The CEO of Bank of America has another legal headache, the Charlotte Observer reports. The Justice Department and the FBI in Charlotte, N.C., are investigating the bank’s star-crossed acquisition of Merrill Lynch. the paper says. The report has few details about the investigation, other than it has been under way for six months:

The FBI involvement opens up the possibility of criminal charges, although the scope and possible outcome of the probe remain unclear.

On top of investigations by the Securities and Exchange Commission and the New York attorney general into disclosures by the bank about Merrill’s bonuses and losses, the criminal inquiry would seem to ramp up the pressure on the bank and its recently revamped board.

The bank has said that there is no basis for charges from any of the investigations against the company or its executives. But it is high time for shareholders, including the U.S. government, to demand that someone currently at the bank — John Thain can no longer be used as a punching bag — be held accountable for the Merrill mess.

from Rolfe Winkler:

Rakoff throws down the gauntlet

Judge Rakoff has rejected the settlement deal between the SEC and Bank of America. He clearly wasn't happy with it to begin with, and subsequent briefs from the two parties did nothing to allay his concerns. At the end of the day, he hated the idea that B of A shareholders, on whose behalf the SEC actually brought the case, would end up paying the fine for executives' wrongdoing.

So what's the next step? According to the Reuters story, "Rakoff directed the parties to prepare for a possible trial that would begin no later than February 1, 2010."

That doesn't mean there will be a trial. The parties could come back with a settlement more to Rakoff's liking.

But presumably that would have to involve naming names. Who were the executives responsible for misleading shareholders? B of A has refused to answer that question and the SEC seems to think it doesn't have the leverage to force it out of them.

I'm happy to see this development. I'm on-record saying the SEC should pick more fights. The truth of the matter is that we need more accountability at the top. The point behind Sarbanes-Oxley, for instance, was that executives would take more responsibility for their misdeeds, in this case Ken Lewis and John Thain.

Too often, "The Corporation" gets the blame and pays the fine. But that isn't justice, nor does it deter bad behavior.

(Here's the PDF of Rakoff's full order)

Wall Street is being judged

Capitol Hill has yet to get its act together on financial regulatory reform. But another arm of the federal government, the judiciary, is emerging as the new best friend of investors.

It started a few weeks ago when Judge Jed Rakoff refused to approve the Securities and Exchange Commission’s wimpy $33 settlement with Bank of America over the bank’s failure to come clean with shareholders about its acquisition of Merrill Lynch.

The judge ordered the SEC to explain why it didn’t hold anyone at Bank of America personally accountable for Merrill’s decision to pay nearly $6 billion in bonuses before the merger was completed.

Now Judge Shira Scheindlin, who works in the same federal courthouse in lower Manhattan as Rakoff, has picked up the torch of investor rights.

Just before the start of the Labor Day holiday weekend, Scheindlin issued two decisions that could hold Wall Street accountable for more of its actions. In separate rulings, the judge sided with investors bringing lawsuits against a prime broker and two major credit rating agencies.

The prime broker case stems from the $1 billion hedge fund fraud perpetrated by Michael Lauer, who once managed money for Britney Spears, the University of Montreal Pension Plan and Morgan Stanley, among others.

Scheindlin ruled that the hedge funds’ offshore investors can press ahead with an aiding-and-abetting claim against Bank of America, which had been the prime broker for Lauer’s long defunct Lancer funds.

from Rolfe Winkler:

Bailout “profit” is taxpayers’ loss

Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.

That's a nice chunk of change, but taxpayers shouldn't be fooled into thinking this -- or any other bailout -- is a good deal.

A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.

"As big banks repay bailout, U.S. sees profit" read the headline in the New York Times on Monday. The story was parroted on evening newscasts.

The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.

So when those recipients pay back TARP -- at a decent profit for taxpayers -- bailouts all of a sudden don't seem so bad.

But the bailout was much larger than TARP. There is FDIC's debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve's emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don't know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.

from Rolfe Winkler:

The infamous “disclosure schedule”

At the bottom is the SEC's latest brief for Judge Rakoff.

Having gone through BofA's, one finds --publicly disclosed for the first time -- the "disclosure schedule" that outlined bonuses BofA had agreed Merrill could pay:

“Variable Incentive Compensation Program (‘VICP’) in respect of 2008 ... may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date value of long-term incentive awards)...

It's also on page 10 of the SEC's brief.

Why does this matter?  Because this is the language that BofA conveniently forgot to include in the SEC filing detailing the merger before it was approved.

BofA's argument is that even though the filing said Merrill couldn't pay bonuses without its consent, the fact that the filing referenced the disclosure schedule means shareholders should have been aware Merrill would pay bonuses anyway.

You'd think shareholders would want to see something like that. So why wasn't the schedule included in the SEC filing?

from Rolfe Winkler:

SEC should get tougher with BofA

In the Bank of America Merrill Lynch bonus imbroglio, the SEC has proposed a settlement in which, once again, the defendants neither admit nor deny wrongdoing.

Once again, the corporation would pick up the fine while responsible individuals escape uninjured. And once again, the public would be left wondering what actually happened. This isn't justice, nor will it deter fraud.

These were the frustrations expressed by Judge Jed Rakoff in court yesterday. He refused to approve the settlement because he wants to know the truth: Who was responsible for misleading shareholders, and how did they settle on a fine of $33 million?

He told both sides to return to court with more details in two weeks. For the public's sake, it's a good thing he did.

In this case, it isn't just shareholder's money at stake. It's taxpayers'. Our bail-out cash saved the bank, and we deserve to know what went on.

What the judge can accomplish isn't clear. But the simple exercise of forcing the SEC to provide more details of its case would be very valuable.

The SEC's eagerness to settle without naming names is particularly frustrating. It insists Bank of America, not executives, misled shareholders about Merrill bonuses by deliberately omitting relevant documents from its public filings.

The SEC is still lame

Don’t believe the hype about the new sense of “urgency” at the Securities and Exchange Commission.

The Wall Street Journal reports that the SEC’s recent string of enforcement actions against Bank of America, General Electric and former AIG chieftain Hank Greenberg is part of a new get tough campaign by SEC Chairman Mary Schapiro. But don’t believe it.

Settling investigations that are so old that the case files are getting green mold on them isn’t the sign of regulatory toughness. It’s simply an attempt by regulators to clean-up the docket so the litigation papers can be sent to cold storage.

Sure, the SEC gets some credit for moving quickly on the Merrill Lynch hidden bonus investigation. But the $33 million fine that Bank of America has agreed to pay to resolve the matter is chump change. And BofA CEO Ken Lewis has an incentive to settle, as he tries to sweep last year’s messy merger with Merrill under the rug.

But as US District Judge Jed Rakoff showed during a Monday court hearing, the SEC’s proposed $33 million settlement with BofA is nothing more than business as usual for the nation’s top securities cop. Rakoff got BofA’s lawyer to acknowledge that in agreeing to the settlement, the big bank doesn’t believe it did anything wrong in failing to disclose to investors that Merrill paid big bonsues to some of its employees.

The admission by BofA’s lawyer reveals a fundmental flaw in how the SEC goes about settling high profile cases. By allowing parties to pay a fine without “admitting or denying” the alleged regulatory offense, the SEC is nothing more than a collection agency.

It’s high time for the SEC in signature cases to require a bank, broker or rogue Wall Street executive to admit some liability before settling a civil enforcement action. And if that condition is a dealbreaker, then go ahead and sue ‘em.

from Rolfe Winkler:

Judge Rakoff wants facts! Notes from yesterday’s hearing

Hopped over to courtroom 14-B at 500 Pearl Street yesterday afternoon where I saw Judge Jed Rakoff hammer SEC and Bank of America lawyers over the proposed settlement regarding Merrill Lynch bonuses.

The news is that Rakoff refused to approve the settlement.  He ordered the lawyers to get to the bottom of the "who/what/where" of the case, saying the settlement "seems to be lacking in transparency."  He's asked them to file briefs answering those questions on the 24th, and then responses on September 9th.

The hearing itself was very interesting.  Rakoff was clearly very skeptical of the arguments presented by both legal teams, which seemed rather unimpressive.

The judge wondered immediately why, given the "serious questions" raised in its complaint, the SEC wasn't going after more facts.  If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn't the SEC trying to figure out who is responsible?  "Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?" said Rakoff.

David Rosenfeld, lead lawyer for the SEC, meekly replied that they haven't made any allegations against specific individuals.  This clearly didn't satisfy Rakoff who argued that to make the complaint, they "must have determined who physically committed these acts."

[By the way, Rosenfeld struck a few of us in the gallery as badly prepared.  He seemed to stumble a lot, and the judge and court reporter repeatedly told him to speak up.  He wasn't familiar with specifics so frequently had to defer to another SEC lawyer.  Even though the hearing revolved around BofA's proxy filing, Rosenfeld and his team didn't have a copy of the document with them.]

So who led the merger negotiations when the discussion of bonuses came up?  The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill.  Of which the SEC says it has only spoken to one: Fleming.