Sunday, January 18, 2009

Corporate Governance Loses Out to Big Government

On the 5th of December, Bank of America shareholders voted to approve the big bank's acquisition of Merrill Lynch. Existing securities law requires that BofA (and Merrill Lynch) inform voting shareholders of "all material facts" regarding the acquisition before the vote. The law also stipulates that "no material fact" may be "omitted." Were the voting shareholders of BofA provided the required information? Clearly not. BofA senior management approached treasury officials before the vote and warned them that BofA was considering pulling out of the acquisition because of "material adverse change" in conditions. BofA management knew that Merrill Lynch was bleeding and wanted out. Treasury pushed BofA management to go forward and, implicitly, to mislead the shareholders of BofA who, days later, would unwittingly vote to acquire a company that had, at a minimum, $ 15 billion in undisclosed losses on their balance sheet.

After the acquisition, BofA went back to the Treasury to get additional funds to support the ML acquisition claiming that the Treasury had promised this support as a quid pro quo for BofA's proceeding with the Merrill acquisition. But what of the poor BofA shareholders?

On December 5th BofA stock was trading at $ 15 per share. With no knowledge of the problems at Merrill, shareholders voted to approve the acquisition. Now the market knows and so do the poor hapless BofA shareholders. Now, BofA trades at $ 7 per share, just one month later. The loss to BofA shareholders was nearly $ 40 billion.

What should have happened? The law should have been followed. BofA shareholders should have been apprised of the situation at Merrill before the vote. The loss to BofA shareholders is nearly $ 40 billion. This number is in Madoff territory and the crime is similar.

Securities law was simply tossed out the window by BofA management and the Treasury for, what in their eyes, is the "greater good." In the name of protecting the economy, BofA shareholders were blindsided in true Madoff fashion. Only this time the government itself is the perpetrator. Hopefully, there will be redress for BofA shareholders in the courts and those who conspired to defraud BofA shareholders will be prosecuted to the full extent of the law.

One wonders whether the rule of law will survive the new crisis management government that we have had imposed upon us.

1 comment:

Mark said...

Totally agree w you ETB. I am stilled stunned that more investors have not begun shouting and starting the lawsuits. And btw, when will C ever disclose exactly what is in the 300B of protected badassets?
Having been involved in a merger that closed in the 4Q, I know what it is like to be Thain and push for comp when your clients are decreasing revs since your sales guys are leaving. But is has to be disclosed. Please.