Report:US Government Didn't Advise Bank Of America On Merrill Losses
October 05 2009 - 12:31AM
Dow Jones News
Federal Reserve and Treasury Department officials did not advise
Bank of America Corp. (BAC) to withhold publicly disclosing
mounting losses at Merrill Lynch & Co. last year, according to
a government watchdog.
The special inspector general for the U.S. government's $700
billion financial rescue plan said in a report that investigators
found that officials did pressure Bank of America to complete the
acquisition, but did not tell officials to keep quiet on the
losses. Bank of America CEO Kenneth Lewis, who this week announced
he would leave the bank by year's end, told investigators that "no
such instruction was given to him" by then-Treasury Secretary Henry
Paulson or Fed Chairman Ben Bernanke.
Investigators also revealed that Bank of America did not think
it was required to disclose the losses.
"Bank of America's legal counsel informed [investigators] that
he believed that the bank was under a legal obligation to announce
those losses at the end of each quarter, not mid-stream," the
report from special inspector general Neil Barofsky's office
said.
The government's role in ensuring Bank of America completed its
deal for Merrill, and whether the bank should have publicly
disclosed the Merrill losses ahead of a shareholder vote, have
sparked concern on Capitol Hill and led to a number of ongoing
investigations. Barofsky is currently conducting a criminal
investigation into the matter.
More broadly, the new report warned that federal officials need
to be careful when announcing new government programs, particularly
in cases such as the dramatic interventions in the financial
markets of the last year. Investigators said that the government
hurt its own efforts to promote public confidence by changing the
goals and focus of its programs and by describing as "healthy"
financial institutions that federal officials had serious concerns
about.
"Treasury and the TARP program lost credibility when lending at
those institutions did not in fact increase and when subsequent
events ... demonstrated that at least some of those institutions
were not in fact healthy," the report said.
Paulson, the report said, acknowledged that some of the initial
nine banks to receive TARP funds were healthier than others, and
that he was concerned that one of the nine firms "was in danger of
failing."
Barofsky's office warned that inaccurate statements could have
the long-term effect of eroding public confidence in future
government programs.
The Fed, in a written response to the report, acknowledged the
importance of transparency in government programs, and said
effective communication is paramount "especially during a financial
crisis."
The Treasury, in a separate written response, defended the
statements made by officials last year. "While people may differ
today on how the contemporaneous announcements ... should have been
phrased, any review of such announcements must be considered in
light of the unprecedented circumstances in which they were made,"
Herbert Allison, Treasury's assistant secretary for financial
stability, wrote to Barofsky.
Barofsky's office has been conducting a number of investigations
and audits of the government's rescue of the financial system. The
report said that a review of American International Group Inc.'s
(AIG) controversial payments to its counterparties is expected to
be released within the next 30 days.
-By Michael R. Crittenden, of Dow Jones Newswires; 202-821-2159;
michael.crittenden@dowjones.com