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Boston Capital

Two takes on Merrill buy

By Steven Syre
Globe Columnist / February 5, 2010

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How did federal regulators and New York’s attorney general look at the same facts and produce such starkly different narratives describing Bank of America Corp.’s controversial 2008 purchase of broker Merrill Lynch?

That question is at least as interesting as the story about the big bank and its pursuit of a badly damaged brokerage. And that’s a pretty good story all by itself.

The Securities and Exchange Commission dumped its account into the public record yesterday with a $150 million proposal to settle charges Bank of America failed to disclose ballooning losses and big executive bonuses at Merrill as bank shareholders prepared to vote on the deal.

Within minutes yesterday, New York Attorney General Andrew Cuomo filed a new civil fraud lawsuit over the same events, more or less. He even added charges describing how American taxpayers were defrauded in the process.

Cuomo tells a distinctly darker story and produces a much better read. He knows how juicy details and clearly identified villains keep a plot moving. Most important, he names names. Recently retired Bank of America chief Ken Lewis and his former chief financial officer are defendants along with their bank.

Actually proving a lot of that story may be a challenge. If words could breathe on a page they would be hyperventilating through the entire Cuomo lawsuit. The attorney general pushes hard to tell a big, bold story. At moments, what Cuomo calls fraud sounds a lot like negotiation.

Bank of America’s purchase of Merrill Lynch was one of the crucial but murky business deals forged in the midst of the financial meltdown. Bank shareholders who voted to approve the deal weren’t told about mounting losses or big executive bonuses at the sinking brokerage. But Bank of America managed to wrangle $20 billion in support from the Federal Reserve and US Treasury to save the deal within a matter of weeks.

The SEC got off to a bad start investigating that story. It focused on the wrong things and stumbled into more trouble from there.

The SEC initially sued the bank only over its failure to disclose Merrill bonuses. It took a pass on the more important part of the story, about shareholders asked to vote without the knowledge of mounting losses. Then the judge in the case described a “cynical relationship’’ between regulators and the bank, refusing to sign off on a settlement. That’s worse than embarrassing.

The latest settlement covers that case and a subsequent SEC complaint over the bank’s failure to disclose the Merrill losses to its shareholders. Supporting documents describe a lot of bank activity leading up to the transaction.

But the Cuomo lawsuit does a better job laying out the details and establishes the most compelling fact of the case. Merrill’s losses had been considered small enough to avoid disclosure before shareholders voted. But after, Bank of America changed its tune, warning government officials the situation was dire. But in that time Merrill’s losses had actually increased only modestly.

How could that be? It certainly sounds like the bank was playing both ends against the middle, getting approval for its deal and $20 billion in federal support to make sure it didn’t fall apart.

Cuomo has a lot to prove, and his motives deserve scrutiny. But he convincingly explains how an important financial event could have happened and tries to hold real people accountable. That’s something the SEC rarely manages to do.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.