Schapiro: BofA Had Duty to Disclose Losses

Securities and Exchange Commission chairman Mary Schapiro said it is "troubling" that the Securities and Exchange Commission "might have been deliberately excluded" in the Treasury Department's negotiations with Bank of America.

And Schapiro noted that "obligations to disclose information about losses...rests solely on the companies, not with the Treasury secretary or Federal Reserve chairman," speaking at the Society of American Business Editors and Writers conference in Denver, Colo.

Schapiro also says the agency is "looking closely at the quality, quantity, and the timing" of Bank of America's Merrill Lynch bonus disclosure.

FOX Business news director Ray Hennessey and FOX Business.com senior editor Joanna Ossinger reported the news on Schapiro's comments.

Schapiro's statements come fast on fresh disclosures from Bank of America chairman and chief executive Kenneth Lewis testimony under oath in New York Attorney General Andrew Cuomo's investigation into the acceleration of the Merrill Lynch $3.6 bn bonus payouts into December, rather than January.

Former Merrill Lynch CEO John Thain has told the Wall Street Journal that top management at BofA knew full well that the bonuses would be paid out in December, before BofA's deal to buy Merrill closed January 1 and after BofA shareholders voted for the deal on December 5^th.

FOX Business has learned that the Merrill bonus pool was part of the merger deal struck last September, a pool that was initially $5.8 bn. Lewis has said his team had 'urged' Merrill to cut the bonuses by 40%. The pool eventually dropped to $3.6 bn.

Lewis also told prosecutors that former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke told him not to discuss Merrill's deepening losses and the government's negotiations to help BofA buy Merrill. Cuomo's office has said the SEC was kept "in the dark" about the BofA negotiations.

Shareholders did not know about Merrill's eventual $15.8 bn in losses, nor that Lewis had tried to get out of the deal by going to the government, because BofA chose not to make these disclosures until the company's year-end earnings release in mid-January.

When asked by Cuomo's investigators whether he would have made the disclosures about the losses, Lewis said: "It wasn't up to me" and that Paulson "instructed that 'We do not want a public disclosure.""

BofA won a $20 bn TARP injection to help buy Merrill Lynch, as well as a $118 bn backstop to its bad assets, all funded by taxpayers. The $20 bn came on top of the combined $25 bn BofA and Merrill had already received in TARP money.

Paulson has since said that Lewis misinterpreted the Treasury's own disclosure guidelines as being the bank's own obligations.

The negotiations came after Lewis met with government officials in December to try to get out of buying Merrill Lynch. Lewis has said he wanted to invoke the 'material adverse' conditions clause which would have let BofA walk away from buying Merrill last December.

However, according to merger documents reviewed by Fox Business, the MAC clause appears to be ironclad, as BofA could not walk away even in the event of negative marks to Merrill's assets, losses at Merrill Lynch, a downturn in its stock price, or even in the event of a terrorist act or war (see prior column, "Does BofA's Story Hold Up?")

In addition, Thain had spent more than $1.2 million renovating his office and two surrounding conference rooms at the firm's lower Manhattan headquarters. Sources close to Thain and people at the company say media leaks about the office renovations are believed to have been made in order to make it easier to oust Thain, who was the heir apparent to succeed Lewis (indeed, Lewis told Thain as much, according to the WSJ).

Excerpts from Lewis's testimony:

Q: Wasn't Mr. Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?

Mr. Lewis: What he was doing was trying to stem financial disaster in the financial markets from his perspective.

Q: From your perspective, wasn't that one of the effects of what he was doing?

Mr. Lewis: Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over long term would still be an interest to the shareholders.

Q: So isn't that something that any shareholder at Bank of America who had less than a three-year time horizon would want to know?

Mr. Lewis: The situation was that everyone felt like the deal needed to be completed and to be able to say that, or that they would impose a big risk to the financial system if it would not.

Q: When you say "everyone," what do you mean?

Mr. Lewis: The people that I was talking to, Bernanke and Paulson.

Q: Had it been up to you would you have made the disclosure?

Mr. Lewis: It wasn't up to me.

Q: Had it been up to you.

Mr. Lewis: It wasn't.

Q: Why do you say it wasn't up to you? Were you instructed not to tell your shareholders what the transaction was going to be?

Mr. Lewis: I was instructed that "We do not want a public disclosure."

Q: Who said that to you?

Mr. Lewis: Paulson.

Mr. Lewis testifying as to what Mr. Paulson did not want a public disclosure of:

Q: A public disclosure of what?

Mr. Lewis: Of what they were going to be doing for us until it was completed.

Q: How about of Merrill fourth-quarter losses?

Mr. Lewis: That wasn't an issue that was being exchanged.

Q: Did anyone consider that the oral agreement was a commitment for financing, so under SEC rules there had to be a disclosure?

Mr. Lewis: I did not. That's all I can tell you.

Q: Between December 12 and the 1st of the year, did you have any conversations with anyone at bank of America or representing Bank of America, concerning whether Bank of America had an obligation to make any disclosure?

Mr. Lewis: I do not recall having any.