Bank of America’s chief should have shared more earlier

David Reilly

06/21/2009

Rules and lawyers sealed Kenneth Lewis’ lips.
That was the chief executive officer’s excuse before a congressional committee recently for keeping Bank of America Corp. shareholders in the dark for almost a month about gaping losses at Merrill Lynch & Co. and a pending government bailout.
If that was the case, we need to fix disclosure rules so the onus is on CEOs to clue in shareholders to important events as fast as possible. Executives should be erring on the side of transparency rather than hiding behind legalistic mumbo-jumbo about what can be disclosed when.
As Lewis showed during last week’s hearing on the Merrill deal, there is too much wiggle room for executives to parse disclosure rules in order to produce a sort of “need to know” list that excludes investors.
The sad thing is that the Securities and Exchange Commission updated such rules after corporate scandals earlier this decade. The intent was for investors to receive better information quicker about important developments.
Bank of America shows why more needs to be done. The bank’s stock lost about 50 percent between mid-December, when Lewis went to government officials detailing problems at Merrill, and Jan. 16, when shareholders officially learned of Merrill’s losses and a resulting Bank of America bailout.
That information gap followed a vote by Bank of America’s shareholders in early December to approve the acquisition of Merrill. Losses at Merrill prompted Lewis in mid-December to tell Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson that he may have to scrap the deal.
What transpired next, in terms of whether Paulson and Bernanke pressured Lewis to complete the acquisition, is a point of contention. What is clear is that Bank of America waited weeks to tell its shareholders of the problems and resulting negotiations for additional government aid.
Bank of America ended up receiving $20 billion in funds from the Troubled Asset Relief Program – on top of $25 billion it previously received – and the government agreed to backstop $118 billion of assets on the bank’s books. Lewis told the congressional committee that Bank of America didn’t say anything to shareholders until mid-January because there wasn’t a “disclosable event,” at least as defined by the bank’s attorneys and advisers.
That approach probably fits the letter of the SEC’s disclosure rules. Lewis had the ability to clue shareholders into what was happening, yet wasn’t expressly required to do so.
That isn’t to say that there aren’t other areas of securities law under which Bank of America may have had a duty to update investors. In terms of the SEC’s reporting rules, though, Lewis had room to maneuver.
These rules categorize specific events requiring disclosure that occur between more regular quarterly or annual filings. They also give companies leeway to tell investors whatever they feel is important, through a category called “Other Events.”
So Lewis probably had the opportunity to tell investors at a time of his choosing about the problems the bank was facing with the acquisition of Merrill and its need for government assistance.
Instead, Lewis in his testimony focused on how Bank of America and the government didn’t have an agreement until mid-January regarding the type of assistance the bank would receive. The SEC’s rules say a deal has to be disclosed only when there is a “material definitive agreement.”
When asked why the bank decided to focus on this disclosure requirement rather than pursue voluntary disclosure, a spokesman said Bank of America feels “comfortable that we followed the law.”
And Lewis’ testimony suggested that when it comes to disclosure, the buck doesn’t stop with him.
When pressed on his responsibility for such decisions, Lewis said, “I don’t decide on disclosure.”
As CEO, he should. &#8226