Bankers stand accused of misleading shareholders and government.
Yes, yes, I know we'll have to scrimp and save for years to pay for the bail out of the financial system, but wasn't it worth it just to see the look on the bankers' little faces on bonus day?
Well according to charges filed by New York's Attorney General, Andrew Cuomo, those bonuses were to the forefront of some bankers' minds while they were actually arranging the bailout under the US's TARP scheme.
Tricking shareholders and government
While Bank of America was going cap-in-hand to the taxpayer for more than $20bn to prop up Merrill Lynch, Merrill was actively pulling forward the payment of $3.6bn in bonuses before the year had even ended, changing the assessment criteria so that they would not be based on performance, and hiding this information from shareholders.
This is one of a series of allegations leveled against Bank of America, its former CEO Ken Lewis, and its former CFO Joseph Price; they stand accused of fraud, for "duping shareholders and the federal government in order to complete a merger with Merrill Lynch".
Specifically, Lewis and Price are accused of knowing about the huge losses at Merrill at the time of the shareholder vote to approve the merger, but hiding this information from shareholders. Shortly after the vote, they then claimed to the government that, due to the 'rapidly increasing' losses, the deal could not go ahead unless they received more than $20bn funding from the taxpayer, as if they had only become aware of the losses in the preceding days.
Closer to home
These charges will strike a chord with many who witnessed the shotgun wedding of Lloyds TSB and HBOS, to form Lloyds Banking Group (LSE: LLOY). The situations are not entirely parallel, but the question "who knew what" has been asked frequently in both cases, and often by shareholders who feel they were sold a pup.
Looking at the similarities, one contributor to our Lloyds discussion board commented, "I can think of shareholders of banks a lot closer to home who feel they also were duped [into the] over ambitious purchases of other banks - which turned out to be in much worse shape than they were led to believe".
The accusations appear to be different though -- whereas Lloyds is suspected of buying a pig in a poke, Bank of America is accused of deliberately misleading its shareholders about the losses at Merrill.
It's a matter for speculation, of course, but as Christopher Harvie, MSP, said to the Scottish Parliament's Financial Services Inquiry: "At the time of arranging the merger they [the Prime Minister, and Lloyds TSB Chairman Sir Victor Blank] seem not to have been fully informed, let us say, about the nature of the HBOS loan book, which was to blow up in their faces within a couple of months."
If the allegations in New York are to be believed, "from the moment the merger was announced, Merrill was transparent with Bank of America management about the losses Merrill was incurring", but Lewis chose to keep that information from their shareholders.
Whatever the truth, this will be big news as it works its way through the courts, and it will be followed in detail around the world. You can read the charges in full, all 90 pages of them, at this link.
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