The past weekend has been an interesting one for Wall Street and a stark reminder that, even though the financial markets in Asia, and the banking sector in particular, are buoyant, the subprime-sparked financial crisis is still haunting the US. The circumstances surrounding Bank of America's takeover of Merrill Lynch were once again in the spotlight as the office of attorney general Andrew Cuomo filed a law suit against Bank of America and its management, while Goldman Sachs sought to defuse tensions surrounding its image by paying its senior managers far less than it has in previous years.
Last Thursday, attorney general Cuomo, joined by special inspector general for the Troubled Asset Relief Programme (Tarp), Neil Barofsky, filed a law suit against Bank of America, its former chief executive officer Ken Lewis, and its former chief financial officer Joe Price "for duping shareholders and the federal government in order to complete a merger with Merrill Lynch".
The gist of the law suit is not new and Cuomo has already voiced most of the allegations contained in the suit, namely that Bank of America's management intentionally failed to disclose Merrill's losses of $16 billion to BoA shareholders in December 2008 so that a shareholder vote to approve the merger would sail through. The law suit goes on to state that, once the shareholders had approved the deal, the BoA management used this to benefit from $20 billion in taxpayer aid.
"The bank's management cannot explain why they did not disclose Merrill's massive losses to shareholders even though the merger with Merrill would have threatened the bank's very existence if there had been no taxpayer bailout," said the law suit.
Cuomo once again highlighted the $3.57 billion of bonuses that Merrill paid in December 2008, "distributed in a manner that was completely inconsistent with Merrill's prior practice and in the worst year in Merrill's history".
The 90-page law suit also raises the issue that Lewis and Price faced a conflict of interest between their own interests and shareholder interests when federal officials threatened to remove the duo from the BoA management, were they not to proceed with the Merrill merger.
"Shareholders were unaware of this conflict of interest and were deprived of a leadership team unencumbered by motivations of personal gain," alleges the suit. The lawsuit, which was filed in the New York State Supreme Court, is seeking monetary relief and injunctions from Bank of America, Lewis and Price.
Lewis resigned from BoA last year and the Merrill deal has started to yield some dividends for BoA. However, this seems to have done little to appease Cuomo. His office filed the suit the same day the Securities and Exchange Commission announced a proposed settlement with Bank of America whereby the Charlotte, North Carolina-based bank will pay $150 million and strengthen its corporate governance to settle charges that it "failed to properly disclose employee bonuses and financial losses at Merrill Lynch before shareholders approved the merger of the companies in December 2008". Cuomo and the SEC referenced each other in their statements, suggesting the SEC may have decided to leave it to Cuomo's office to fight this battle.
Then on Friday, Goldman Sachs announced that key members of its management team will receive a bonus of 58,381 Goldman shares for 2009. This bonus is payable to Lloyd Blankfein, chairman and CEO; Gary Cohn, president and chief operating officer; David Viniar, chief financial officer; and Michael Evans and John Weinberg, who are vice-chairmen of the bank. Based on Goldman's closing share price of $154 on the New York Stock Exchange on Friday, the five have been paid $9 million each for 2009 -- a year in which the Wall Street investment bank reported blockbuster profits.
In December last year Goldman announced that its top 30 managers would be paid their bonus entirely in stock. The 2009 stock award will convert into Goldman shares in three equal tranches in January 2011, January 2012 and January 2013. The shares have a lock-up until January 2015.
The Goldman bonus for senior management is down significantly, not only from what it paid the management for their performance in 2007 (a good year, but not as good as 2009), but also compared to what other US investment banks are paying their top brass. Analysts are speculating that Goldman's decision to limit bonus payouts is part of a plan to defuse the negative publicity the investment bank is facing with respect to its role in -- and since -- the financial crisis. Indeed, on Sunday Goldman issued a rejoinder to a New York Times story about the relationship between Goldman Sachs and AIG titled "Testy conflict with Goldman helped push AIG to edge". Goldman lists nine points on which it believes the New York Times reporting is incorrect.