The Real Deal New York

Merrill Lynch’s bad mortgages were allegedly hidden from BofA shareholders before acquisition

June 04, 2012 03:00PM

Bank of America has been punished particularly hard over the last two years by losses and fines resulting from bad mortgages. But according to a federal lawsuit filed by shareholders cited in the New York Times, that could have been at least partly avoided had the firm’s leadership properly disclosed Merrill Lynch’s financial records — and the information on doomed mortgages contained within them — before purchasing it for $50 billion in 2008.

The court filings include sworn testimony from then-CEO Kenneth Lewis that he knew Bank of America’s estimated losses from the acquisition would be far greater than what had appeared in documents filed with regulators in the days leading up to the stockholders vote on the transaction. That vote is typically based on the aforementioned filings, in which companies must disclose all meaningful facts.

The statement filed to regulators estimated that the acquisition would reduce earnings by 3 percent in 2009 and wouldn’t affect the profits by 2010. But before the vote, Lewis’ outlook had changed: he expected the merger to reduce profits by 13 percent in 2009 and 2.8 percent in 2010 mostly because of bad mortgages. In the end BofA was hit with billions in losses and needed an additional $20 billion taxpayer bailout on top of one it had already received because of worthless mortgages assumed following the merger. At the time the true nature of the losses was revealed, shareholders lost a combined $50 billion in value, the Times said. [NYT]