tv [untitled] CSPAN June 13, 2009 4:00pm-4:30pm EDT
they were in pretty tough streets for a while. isn't that true? >> yes, sir. it is true. >> let me ask you. there are a couple of e-mails. they are very small. let me help you. one is from german bernanke -- from chairman bernanke to the board of reserve governors. this is december 21, 2008, all around the time that you were thinking about this material adverse change being existent or not. this is from chairman bernanke. "i think the threat to use the material adverse change is a bargaining chip and we do not see it as a very likely scenario at all. we need some analyses of that scenario so that we can explain to bank of america with some confidence why we think it would be a foolish move and why
regulators will not condone that." . actually sort of reinforces that and that is from jeffrey lacker, who was a president, i believe, of the federal reserve bank of richmond at that time and i think he's a voting member now. this e-mail was also cc to the chairman, i believe. chairman, i believe. just had a long talk with ben, ben bernanke, i presume, says they think the mac threat is irrelevant because it's not credible and tends to make it more clear that if they, meaning bank of america, play their card and then need assistance, management is gone, period. and then says forgot to tell them that kl, i believe that's
you, ken lewis is near retirement, close. the there's a different dynamic going on here. there is -- remember the context of all of this is the sky is falling, as mr. cummings said. and tremendous pressure on everyone. they think you're playing a game. they think you're throwing this thing out as a red herring in that they think what you're really trying to do and what some people suggest you might have been doing was to leverage taxpayer support by falsely putting this mac out there. the fact that you're going to let this deal crash, walk away, even asserting -- you don't have to win the mac, as you said before, you don't have to win it. this deal needs to stop and then i think the weight of all of the
forces that play there with lehman and everything else, were in some pretty deep trouble. so what i'm asking you is, was that your strategy here? did you use this mac as leverage to force bernanke and paulson to come in with taxpayer support. and i want to note your own firm was in pretty tough shape at the time. everyone seems to think you were the white knight and strong party, as mr. kucinich has indicated, you know, bank of america had its problems too at this time. but tell me what your strategy was and your negotiations there and what was the motivating force behind your decision to put forth this mac? >> thank you, and thanks for reminding us about -- we were in the middle of a pretty bad
financial crisis and we had people of good intentions despite what they've said about me. the -- we grew more and more convinced that there was a distinct possibility that we had a mac as a result of these accelerated losses. >> you didn't disclose that to your shareholders though? >> but the acceleration really took place about a week after -- that's when you saw massive acceleration, not necessarily those days but as a result of the forecast increasing and. so there was -- there was not some wild bluff. we thought we had the real possibility of a mac. >> okay. >> mr. chairman, i yield back. >> the chair recognizes mr. mchenry. >> thank you, mr. chairman.
were there specific details that the federal reserve and treasury told you not to disclose to your shareholders? >> no, sir, neither secretary paulson nor the chairman of the federal reserve, mr. bernanke, ever told me not to disclose something that we thought should be publicly disclosed. >> okay. mr. kucinich referenced e-mails and i wanted to get on the record, have you seen -- have you seen the e-mails before today? >> no. >> and i want to make sure we got inthat on the record, mr. chairman, with all due respect to you. as i asked earlier, you've been involved in a number of merger and acquisitions, your institution has been involved in dozens upon dozens over your career with the bank.
to your knowledge have there been material adverse change clauses included in previous deals of this sort? >> virtually every acquisition would involve some material adverse change clause and not totally uncommon to have them invoked. >> has your institution invoked this clause before? >> yes, sir, we invoked it on a deal with sallie mae. >> all right. >> looking at the list of federal reserve regulators who are second guessing your decision or your raising the issue of the material adverse change clause, it's possibly fair to say you've done more of these deals than they have in their careers as bure krats, that safe to say?
>> i'm sorry? >> is it safe to say you've done more deal that's include mac clauses than the bure krats that are second guessing your decision? >> i don't know their backgrounds. >> okay. i understand you're still regulated institution, no need to hit on the federal reserve and their staff there. but there have been reports to go to another subject matter, there have been reports about efforts of various banks to raise capital in the wake of stress test results. what's the status of your capital raising efforts? >> we were asked -- we were required to raise $33.9 billion and i'm pleased to say that we have raised that amount and we will raise more than that. that should be completed sometime toward the end of this month. >> okay. my constituents are concerned about access to credit. we have a mortgage foreclosure
issue that's widespread across this country. can you tell me about -- bank of america's actions as it relates to foreclosure mitigation and helping those folks that are facing the loss of their homes? >> one of the issues with the loan modification issue was that initially the banks were just not staffed up to handle that kind of volume and the different type things that were being asked. since then we've -- we have 7,200 associates that just focus on loan modifications. since july of 2008, so less than a year, we actually have already modified 311,000 loans. >> there's been a discussion about access to credit and whether or not institutions are lending. with the down turn in the economy, certainly institutions
have a more difficult time in a down economy to finds credit worthy individuals and make loans. can you discuss the loans that you've made over the last two or three quarters? >> well, it's -- it's a great question and it's also the key to us getting this country back on track. because the financial system doesn't make loans then we've got an issue. first, i would say i'm very proud that bank of america is the largest lender in the united states. i'm very proud of that. secondly, i can assure that we're making every good loan that we can make. simply put, banks take deposits and make loans. that's how we make money. it's in our enlightened self-interest to do that. if we don't, we don't openty miz our profits. in a recession this deep and this prolonged, you do get an
issue with demand. people start cutting back and spend less an companies expand less. i can't assure that that the loan increases will continue because of loan demand. what i can assure you is we're going to make every good loan there is to be made. >> thank you. >> the gentleman's time is expired. >> the chair recognizes mr. quigley. >> thank you, mr. chairman. good morning. there's been discussion of a new stress test as it relates to our financial institution. i guess the question comes, was the current test good enough, do we need a new one and would either this kind of stress test helped us understand or prevent these issues when all of these issues took place with your
acquisition? >> i do think the stress test was a good one and i think the fact that they probably used higher standards in terms of things getting worse than hopefully they will was helpful too because those things can happen. and so i would -- i thing it's -- i know it's caused us to look at our -- to look forward with a greater sense of possess mix, higher buffers of capital and that will show up in our internal objectives going forward. so i do think it was a very good thing. i don't see any evidence particularly as we talk about there being some signs of economy may be improving somewhat to put another stress test on top of that. if you think about the last two years, the industry had gone
through a significant stress test in actualalty and then getting a stress test on top of that. i think that's enough. >> but, you know what the stress test was that we just went through. if merrill had gone through that stress test and you had gotten the results prior to the board's vote, would it have affected what your board did? >> i don't know if the stress test, of course came after the fact of all of this happening, what we didn't project and what nobody that i know projected was the severity of the credit crunch or the credit crisis that occurred during that fourth quarter. it wasn't that we hadn't identified the instruments. we just didn't see the decline, the depth of the decline that happened during that quarter and most people didn't.
so if -- to answer your question, if in fact we had been able to predict that, no, we would not have done the deal because the hole would have been too big. >> so you don't think that this stress test would have indicated the problems that merrill was going to face because you couldn't have predicted the fourth quarter collapse? >> no sir. i don't know of anybody that would have predicted that. and actually you can see some evidence of that in the fact that virtually every major bank had an operating loss in the fourth quarter. and even the financial analysts were not predicting the losses pro inspectively. >> sure. switching ground for a second. you also acquired with the acquisition a significant ownership in black rock? >> yes,sir, 49.9%. >> i'm aware, they do have contracts with the federal reserve and the department of treasury, black rock?
>> yes, they do. i think they do. we don't manage them but -- >> i'm sorry? >> we don't manage the company, but i have heard they do have contracts, yes. >> you may not know then, were any of these contracts given to black rock in furtherance of financial support to bank of america from the government? >> no. there's a big distinction in the management of two companies and we in fact make it a point not to be part of the management team. >> but you could see the potential for a conflict of interest in -- you have to have some control over them? >> we actually don't. but i do see the cosmetics of the potential conflicts. >> and cosmetics are becoming important? >> yes, they certainly are. >> how about the appearance of conflicts or i am propriety in that vein? >> you make it very >> you make clear that we cannot
manage the company in the bylaws. >> thank you. >> we now move to senior members of congress in terms of service, not age. >> thank you, mr. chairman, very diplomatic. mr. kewilewis, thank you for appearing this morning. as you can tell, there are serious questions about how much you knew about merrill lynch's conditions and the condition of bank of america that you did or did not share with your shareholders. i would like to cast a wider lens on the pattern of bank of america, and perhaps other institutions in our country that some have dubbed carney capitalism that has led our nation to the press does it now faces. on august 20, 2007, the federal reserve reply to a bank of
america request to waive banking regulation that limited the amount that federally insured banks can lend to related brokerage companies to 10% of bank capital. 10% of bank capital. until that point, banking regulation was that banks with federally insured deposits should not be put at risk by brokerage activity. four months after that waiver was provided to bank of america, bank of america bought countrywide. which has proven to be the worst subprime lender in our nation and i would like to place in the record a report that documents that. and the question that i have is, who headed bank of america at the time the request was made of the fed to waiver that, to allow bank of america to enter into that brokerage activity? >> i was the chairman of -- and
ceo of the company. >> you were chairman and ceo. >> you made the request? >> i really -- i don't know of this particular request. >> but you are aware that bank of america then bought countrywide four months later? >> yes, ma'am. i am very aware of that. >> okay. what kind of due diligence was done on their portfolio? >> we did a great deal of due diligence on their portfolio. i'm proud to tell you that we bought them and changed all of their lending practices e they are now a prime lender. they are not doing subprimes. bank of america had gotten out of subprime in 2001. we were not doing it at all. we've turned that company around to a very reputable mortgage lender doing the right things. >> but you had to absorb all of their losses? >> no, ma'am. we -- in the no, ma'am, in the n
there's an accounting thing where you mark the assets down before you buy them. >> that leads to my next question. it has been stated that the bank of america in 2008 conspired with merrill lynch in a sweetheart deal to give out exorbitant bonus to merrill executives totalling over $4 billion. that's with a b. in december 2008. soon after, bank of america got major infusions from taxpayer t.a.r.p. money but in 2008 on its federal taxes, bank of america, though it earned $4.4 billion that year, apparently paid just $120 million in taxes and deferred $5 billion in taxes for 2008. some people are saying that bank of america acquiesced to the merrill bonuses because otherwise all of bank of america's 2008 earnings would have been consumed with bonuses
for merrill. how do you respond to that? >> well, the transaction with merrill took place on january 1 of this year. and until that time, they had a separate board and a separate compensation committee. we had enter sbod agreement which allowed us to cap the bonuses and to have influence on the bonuses but that the final decision would be made by their compensation committee and their board because it was still a separate public company. so there was not a connectivity fully until after they became is subsidiary of bank of america. >> but it certainly looks like, i don't want to use the word "hedge" but it looks like financial people inside your company were anticipating what might occur and those -- the deferral of taxes in 2008 seems most curious. >> well, i'm not a tax attorney
and i don't know exactly what the hedging was. but it was not, it was not, i don't see the connection to merrill because merrill was, the next year. >> i would sure appreciate, mr. lewis, if you could provide for the record what net effective tax your company paid in 2008. because to me it looks like you pay 1/50th of what you should and i would like to compare what tax rate was paid and the amount that was paid versus what the average middle class family in our country pays. i think the record will show you paid actually substantially less. i have a request, mr. chairman, if i could, for information for the record. mr. lewis, is it possible that in the spring of 2008, i have information that bank of america bought a portfolio of subprime loans from the federal deposit insurance corporation that had
been previously originated by superior bank of illinois. consequently, bank of america sold those same loans valued at hundreds of billions of dollars to investors who as of last year have now suffered major realized losses. has bank of america estimated the amount of those losses attributable to the acquisition of the superior fdic portfolio sold to bank of america? and can you provide that to the record? >> yes, ma'am, i would be happy to do that. >> thank you very much. >> thank you, mr. chairman. >> now, yield to congressman welch from vermont. >> thank you, mr. chairman and mr. lewis for being here. a couple of questions. my understanding is that the original transaction started out as a private deal between bank of america and merrill lynch, correct. >> yes, sir. >> and you did the due diligence, financial review, to make you come to the conclusion that it was in the best interest of the shareholders of bank of america to proceed, correct.
>> that's correct. >> and then some time after you made this decision, you became aware of the $12 billion additional hole in the balance she sheet, is that correct? >> yes, sir. >> and that was on december 14, 2008? >> that's when we saw the accelerating losses. >> well, that's when -- accelerating as in $12 billion additional? >> correct. yes, sir. >> now your shareholders had already voted to approve the merger based on information you had provided up to that point, is that correct? >> yes. >> but the $12 billion figure that you became aware of on december 14th was of such magnitude that it made you believe that in your capacity as the ceo you would have to consider invoking the mac clause, is that correct? >> yes, sir. >> and is it fair to say that the mac clause would be considered in effect a nuclear option? >> i don't --
>> here's what i mean, if you invoked the mac clause to get out of a deal that you entered into, then there's obviously reputationable consequences in litigation, correct. >> yes, sir, there is that possibility. >> if you lose in litigation, there are financial consequences to your shareholders, correct. >> yes, sir. >> so you wouldn't even consider invoking the mac clause unless there was something of enormous magnitude and consequence to the company and shareholders, correct? >> that's correct. >> in order to invoke the mac clause an avoid the consequences of perhaps losing, would it be prudent in the ordinary course to get financial advice from your financial advisers as to the impact of this $12 billion hole on the business plan that justified the original decision to enter into the agreement? >> well, we had finance people looking at all of that. so we were looking at that issue. >> well, obviously.
this is my question. if you found out about a $12 billion additional hole, whatever model you had about payback and value to the shareholders now was called into question, right? >> i tried to mention this before, but it extended the amount of time that you would get your payback, yes. >> it affected shareholder value, correct? >> yes. >> basically two questions. one, did you get a financial analysis that you reviewed before you made a decision to discuss with the treasury officials the invocation of the mac clause? >> there was financial analysis that i saw, yes. >> these are made available to you? >> they were, yes. >> and what was the conclusion of those financial analyses? >> the conclusion was that you pushed out your payback or your accretion because you had these preferred shares now that you were having to pay back.
>> but that's obvious. i mean the bottom line is was there a conclusion about what the viability of this transaction was? >> well, we still felt strongly that the -- all the strategy issues that were being addressed prior to merrill lynch were being addressed by the acquisition of merrill lynch. >> have you made these financial studies available to the committee for its review? >> i don't know. i don't know what the committee has. >> so what you're saying is you did review financial statements from your adviser, those being whom, by the way? >> our financial advisers are us. >> so all internal. and on the basis of that, you decided that despite the knowledge of the $12 billion hole, it was prudent to proceed, correct? >> yes, sir. >> so whatever threat or whatever word it is we're going to use for mr. bernanke and mr. paulson interactions, you had come to an independent conclusion on the basis of financial review by your people that it still made sense for your shareholders to proceed,
correct? >> no. as i recall, they were done in a context of the receiving the money. >> let's be clear. you're saying two things now, one you, did an independent financial analysis that said it would stretch out the payback time but it's still prudent to proceed but on the other hand, you had bernanke and paulson breathing down your neck so that was a factor? are you saying those two things? >> no, i don't think i a i'm trying to say that we -- >> okay, i don't understand that. because i think you have said those two things. another thing that is very important. i think to sharehold, $12 billion is a candidacy kwens to you, correct. >> yes, it is. >> did you tell your shareho shareholders you had come upon this information that the deal they had voted on was not the deal that was going through because baugh they had a $12 billion hole that was accelerated, did you tell them that? >> the $12 billion is what we discovered later. >> and you think after the fact
information is not of interest to investors? >> what i do know is that when our lawyers tell us we have a disclosable event, we disclose it. >> i have to interrupt. >> if i can just ask one final question. if there is an event that you consider so significant that it may allow you to invoke the material adverse consequence contract clause, do you not think that same event is of interest to shareholders and requires you in your duty fiduciary duty to disclose it? >> i would leave that zigdecisi to supreme court lawyer securid outside counsel. >> you're not ceo? >> i'm not a lawyer. >> we have others who have not had an opportunity. the gentleman from virginia. >> thank you for being here this morning. several questions. one is when did you decide gnth
the financial losses incurred by merrill lynch should be disclosed to your hair shlders? >> again, i don't decide on disclosures. we have securities lawyers and many times they talked to exterth counsel to determine that. >> well, presumably, i work for a company, you, as the ceo, are in on those conversations. >> no. they come to me and they are done. >> right. >> when did that happen? when was the decision made and how was it made to disclose or not to disclose to the shareholders of your company? >> we disclosed the losses at merrill lynch consistent with disclosing the agreement we had with the government and consistent with us announcing our earnings on june -- january 16th. >> january? why such a long delay? >> again, i'm not a securities
lawyer. that is when -- that is when we announced according to the schedules given to us by our lawyers. >> were you ever encouraged or pressured by anyone at the u.s. treasury or by the federal reserve not to disclose until january? >> no. we were working on a goal of getting everything done at once. >> i'm sorry, i cannot hear. >> we were working on a goal of getting everything done at once so we didn't have an announcement of something that would cause more damage to the economy. but nobody ever told us that we should not disclose a disclosable event. >> nobody at the federal reserve and nobody at the u.s. treasury urge you to consider the timing of this so the receipt of tarp money was all disclosed in january? >> the target was to do that
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