BofA
Bank of America takes new crisis-era hit
Bank of America Corp. agreed to pay $2.43 billion to settle claims it misled investors about the acquisition of troubled brokerage firm Merrill Lynch & Co., in the latest financial-crisis aftershock to rattle the banking sector.
The payment is the largest settlement of a shareholder claim by a financial-services firm since the upheaval of 2008 and 2009. It also ranks as the eighth-largest securities class-action settlement, behind payouts like the $7.2 billion settlement with shareholders of Enron Corp. and the $6.1 billion pact with WorldCom Inc. investors, both in 2005.
The deal is a sign that U.S. banks' battle to contain the high cost of the crisis continues to escalate, despite a four-year slog of lawsuits, losses and profit-sapping regulations. Bank of America's total exposure to crisis-era litigation is "seemingly never-ending," said Sterne Agee & Leach Inc. in a note Friday.
Is the era that produced all of this legal exposure "history?" the Sterne Agee & Leach analysts said. "Unlikely."
The settlement ends a three-year fight with a group of five plaintiffs, including the State Teachers Retirement System of Ohio and the Teacher Retirement System of Texas. They accused the bank and its officers of making false or misleading statements about the health of Bank of America and Merrill Lynch and were planning to seek $20 billion if the case went to trial as scheduled on Oct. 22.
BofA denied the allegations and said it agreed to the pact as a way of eliminating the uncertainty of protracted litigation.
The size of the pact highlights how hasty acquisitions engineered during the height of the financial crisis by Kenneth Lewis, then the bank's chief executive, are still haunting the company four years later.
Decisions to buy mortgage lender Countrywide Financial Corp. and Merrill have forced Bank of America, run since 2010 by Chief Executive Brian Moynihan, to set aside more than $42 billion in litigation expenses, payouts and reserves, according to company figures. The funds are meant to absorb a litany of Merrill-related lawsuits and claims from investors who say Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the crisis.
That total includes $1.6 billion taken in the third quarter to help pay for the Merrill settlement announced Friday and a landmark $8.5 billion agreement reached last year with a group of high-profile mortgage-bond investors.
The company's shares lost more than half their value between when Bank of America announced its late-2008 plan to purchase Merrill Lynch and the date the deal closed 3½ months later, wiping out $70 billion in shareholder value. The shares have fallen further since then, and investors who owned the shares won't be made whole by the settlement.
"We find it simply amazing the sheer magnitude of value destruction over the years," said Sterne Agee in the note issued Friday. And "the bill is surely set to increase" as the research firm expects the bank to reach other legal settlements over the next 12 to 24 months. Bank of America is still engaged in a legal clash with bond insurer MBIA Inc., MBI -1.27%which has alleged that Countrywide wasn't honest about the quality of mortgage-backed securities it issued before the financial crisis.
The move to buy Merrill over one weekend in September 2008 was initially hailed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. It also vaulted the Charlotte, N.C., lender to the top of the U.S. banking heap, capping a goal pursued over two decades by Mr. Lewis and his predecessor, Hugh McColl.
The Merrill deal, initially valued at $50 billion in Bank of America stock, was the "deal of a lifetime," Mr. Lewis said on the day it was announced.
But the agreement soon became a problem as analysts questioned whether Mr. Lewis paid too much and Merrill's losses spiraled out of control in the weeks before the deal closed. Investor fears stemming from the financial crisis sent shares of Bank of America and other financial companies into free fall, and the deal was worth roughly $19 billion at its completion on Jan. 1, 2009.
Mr. Lewis and his top executives made the decision not to say anything publicly about the mounting problems before shareholders signed off on the merger—a decision that formed the basis of a number of Merrill-related suits, including an action brought by the Securities and Exchange Commission. The bank also didn't disclose that it sought $20 billion in U.S. aid to digest Merrill, or that the deal allowed Merrill to award up to $5.8 billion in performance bonuses. When Bank of America threatened to pull out of the deal because of the losses, then-Treasury Secretary Henry Paulson told Mr. Lewis that current management would be removed if the deal wasn't completed.
The legal scrutiny surrounding the Merrill acquisition contributed to Mr. Lewis's decision to step down at the end of 2009. Mr. Lewis's lawyer declined to comment.
"Any way you slice it, $2.4 billion is a big number," says Kevin LaCroix, a lawyer at RT ProExec, a firm that focuses on management-liability issues.
Bank of America executives now say Merrill, unlike Countrywide, has become a big profit contributor, while the company continues to work to absorb massive losses in its mortgage division. The divisions inherited from Merrill produced $31.9 billion in net income between 2009 and 2011 and $164.4 billion in revenue. Bank of America's total net income over the period was just $5.5 billion, on $326.8 billion in revenue, reflecting in part the hefty losses tied to the Countrywide deal.
"I think it's clear that Merrill is a significant positive any way you want to look at it," said spokesman Jerry Dubrowski.
The settlement doesn't end all Merrill-related headaches. The New York attorney general's office still is pursuing a separate civil fraud suit relating to the Merrill takeover that began under former Attorney General Andrew Cuomo. Defendants in that case include the bank, Mr. Lewis and former Chief Financial Officer Joe Price. A spokesman for New York State Attorney General Eric Schneiderman declined to comment.
It isn't known how much all shareholders will receive as a result of the Merrill settlement announced Friday. The amount shareholders receive will ultimately depend on how long they held the shares and how much they paid. Mr. Lewis, also a shareholder, won't receive a payout because defendants in the suit are excluded from the class that the court certified.
But because the decline in Bank of America stock was so steep—the shares fell from $32 to $14 between Sept. 12, 2008, the day before the Merrill acquisition was announced, and the Jan. 1, 2009, closing—no shareholders can expect to recover their full losses.
Before the settlement was reached, a targeted recovery for at least three million shareholders who were part of the class was $2.52 a share, said a spokesman for Ohio Attorney General Mike DeWine. The State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, which held between 18 million and 20 million shares, now expect to recover $1.19 per share, or roughly $20 million.
PGGM Investments, which oversees pension funds for 2.5 million Dutch employees, expects to recover a "significant" amount of the tens of millions lost as Bank of America's shares declined, said Femke van't Groenewout, senior adviser for responsible investment at PGGM Investments.
"We are happy," she said.
(Published by WSJ - September 28, 2012)