Archive for April, 2009

U.S. pressured BofA to complete Merrill deal: Cuomo (Reuters)

Thursday, April 23rd, 2009 | Finance News

NEW YORK (Reuters) –
Bank of America Corp CEO Kenneth Lewis was pressured by senior federal officials Henry Paulson and Ben Bernanke to accept a merger with troubled Merrill Lynch & Co or lose his job, New York Attorney General Andrew Cuomo said on Thursday.

In a letter to senior members of congressional committees and the head of the U.S. Securities and Exchange Commission, Cuomo said Lewis met then U.S. Treasury Secretary Paulson and Federal Reserve Chairman Bernanke in Washington in mid-December.

Cuomo said the SEC, which is charged with protecting investor interests, "appears to have been kept in the dark" about talks between the banks and federal officials that followed.

"During those meetings, the federal government officials pressured Bank of America not to seek to rescind the merger agreement," Cuomo wrote. "We do not yet have a complete picture of the Federal Reserve's role in these matters because the Federal Reserve has invoked the bank examination privilege."

A spokesman for Paulson said on Thursday that the Treasury and the Federal Reserve believed there was no reasonable legal basis for Bank of America to terminate the Merrill deal.

Lewis testified in a probe by Cuomo that Paulson wanted the Merrill acquisition to go through "to stem a financial disaster in the financial markets."

He also testified that Paulson and Bernanke pressured him to keep quiet about losses at Merrill, which rose to $12 billion from $9 billion in a matter of days in December. The fourth-quarter loss reported ultimately totaled more than $15 billion.

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," Fed spokeswoman Michelle Smith said in an email on Thursday in response to a question.

Bank of America, which got additional government bailout money after the deal with Merrill, halted its attempt to scrap the merger on December 21, the attorney general said.

Cuomo, who released testimony by Lewis, said his office uncovered details during a probe into the circumstances of $3.6 billion of bonuses paid to Merrill executives before the completion of the Bank of America takeover on January 1.

"As you will see, while the investigation initially focused on huge fourth quarter bonus payouts, we have uncovered facts that raise questions about the transparency of the TARP (Troubled Asset Relief Program), as well as about corporate governance and disclosure practices at Bank of America," Cuomo wrote.

Bank of America spokesman Scott Silvestri said in a statement: "We believe we acted legally and appropriately with regard to the Merrill Lynch transaction,"

The revelations are unlikely to relieve shareholder pressure on Lewis to give up his job as chairman, or even to step down as chief executive. A shareholder proposal at the bank's April 29 annual meeting calls for the bank to appoint an independent chairman to replace Lewis.

According to Lewis's testimony, made public on Thursday, Paulson told him the management and board of the bank would be replaced if it pulled out of the deal.

"I can't recall if he said 'we would remove the board and management if you called' or if he said 'we would do it if you intended to,'" according to the transcript.

Cuomo said that, in an interview, Paulson "largely corroborated" Lewis's account.

"Secretary Paulson's threat swayed Lewis," Cuomo said. The letter also stated that Paulson "has informed us that he made the threat at the request of Chairman Bernanke."

Researcher Beth Young of the Corporate Library corporate governance research group said if the government wanted influence it needed to be transparent about it.

"Ken Lewis is responsible to shareholders first," Young said. "He is a fiduciary to the company, not the U.S. economy, and if the government wanted to replace him, he should let that happen."

Cuomo sent the letter to SEC head Mary Schapiro, U.S. Senate Banking Committee Chairman Christopher Dodd, U.S. House Financial Services Chairman Barney Frank and Congressional Oversight Panel Chairwoman Elizabeth Warren. It was copied to Neil Barofsky, the inspector general of TARP.

In Washington, Barofsky said he was looking into the reports that Bank of America faced pressure to minimize public disclosure about the takeover of Merrill.

(Additional reporting by Mark Felsenthal in Washington)

(Editing by Andre Grenon, Steve Orlofsky and Tim Dobbyn)

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Freddie Mac executive faced pressure post-takeover (AP)

Thursday, April 23rd, 2009 | Finance News

McLEAN, Va. – By last fall, the heady days for mortgage giant Freddie Mac were over, and what was left for executives like David Kellermann were stressful days and long nights of picking up the pieces under the sharp scrutiny of regulators.

After taking the role of acting chief financial officer when the government seized control of the company in September, Kellermann worked for several weeks alongside federal regulators known as "shadows," who stood by executives' sides at all times, questioning their calls and turning them over for government approval.

Lately, the pressure seemed to be taking its toll. Neighbors said he'd lost weight. They began to suggest he should quit.

Kellermann was found dead in his basement this week in an apparent suicide, only a day after speaking to a human resource officer at the company and arranging to take time off because he'd been working such long hours. After seven months of trying to help the company emerge from financial disaster, some close to him wonder if it was just too much for Kellermann to try and pick up the pieces.

"If there was a reason it had to be the stress, the mounting stress and pressure of a company ... he worked so hard to help and resurrect and make good," said David Gorder, a movie producer living in Hollywood Hills, Calif., who was a fraternity brother of Kellermann's when they studied together at the University of Michigan. "Maybe he kept it inside too much."

It can be mystery what makes people — even those seemingly successful — take their own lives. But Kellermann had clearly been under immense stress at Freddie Mac, which has dealt with an unceasing torrent of bad news that began six years ago, when an accounting scandal forced the resignation of two chief executives.

Kellermann, 41, had risen through the ranks at Freddie Mac since beginning there as an accountant 16 years ago. Gorder, who shared an apartment with him when he first started at the company, remembered how much he cherished the job.

"He loved Freddie Mac to no end," Gorder said. "I never met anyone so dedicated ... to establish their career and excelling within the ranks of the company. He was enthralled with the work and being an accountant."

After the government's takeover last fall, morale at Freddie Mac sunk, employees watched their company stock holdings all but evaporate. Workers remain confused about what the Obama adminstration plans to do with Freddie Mac and sibling company Fannie Mae. Public outrage about retention bonuses and blame for the mortgage crisis also has taken its toll.

Freddie Mac, which owns or guarantees about 13 million mortgages, has been criticized for financing risky loans that fueled the real estate bubble and are now defaulting at a record pace. Last month, David Moffett, the government-appointed chief executive, resigned in frustration over strict oversight.

The pressure in jobs like Kellermann's was inescapable.

Amid the crisis last fall, the government regulators known as "shadows" made themselves at home in the offices of Freddie Mac executives including Kellermann, a move that hamstrung their ability to do their jobs, recalled one former Freddie Mac manager and professional friend of Kellermann's. The ex-manager spoke on condition of anonymity because he was not authorized to speak for the company.

Kellermann had near-daily evening meetings with Moffett, discussions that became a study in conflicting obligations, according to the former Freddie Mac manager.

Freddie Mac found itself caught between the policy goals of the government and the company's duty to its shareholders, who have suffered staggering losses.

As acting CFO, he oversaw a staff of about 500 at Freddie Mac's headquarters in McLean and had been working on the company's first-quarter financial report, due by the end of May. But he'd also been embroiled recently in a dispute between Freddie and the Securities and Exchange Commission over its financial reports, according to a law enforcement official who spoke on condition of anonymity because the person was not authorized to discuss the case. Freddie is also the subject of a criminal probe by federal prosecutors in Virginia, though there are no indications that Kellermann was considered a target.

Freddie Mac lost more than $50 billion last year, and the Treasury Department has pumped in $45 billion to keep the company afloat.

"Freddie Mac was just a huge part of his life," said Timothy Bittsberger, Freddie Mac's former corporate treasurer, who kept in touch with Kellermann after Bittsberger left the company last fall. "It's just unfortunate he had to deal with so many conflicting priorities which were unfairly and unnecessarily thrown upon him."

Neighbors saw the strain on Kellermann. Some had even advised him to quit, but Kellermann responded that he wanted to help the company through its difficulties, which include mounting losses, several open positions and intense political pressure to stem foreclosures.

And there were other worries, too. Neighbors noticed a security detail showed up at his sprawling suburban home in the upscale Washington suburb of Vienna after executives at Freddie Mac faced intense criticism for deciding to pay retention bonuses. Kellermann was to receive $850,000 paid out in four installments. He had already received $170,000 in December.

The company acknowledged the stress Kellermann was facing on Tuesday, when Freddie Mac's chief human resources officer asked him to take some time off because he'd been leaving work after 8 p.m. and sometimes, working at home for hours, said a person close to the company who spoke on condition of anonymity because the individual wasn't authorized to discuss it publicly. Kellermann agreed to do so, and his work responsibilities would be given to two employees, the individual said.

He never came back. On Wednesday, authorities responding to a 911 call found his body in the home he shared with his wife and 5-year-old daughter.

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Associated Press writers Pete Yost, Brett Zongker and Devlin Barrett contributed to this report from Washington. Jeff Karoub contributed, reporting from Detroit.

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Chrysler lenders preparing counter offer: sources (Reuters)

Thursday, April 23rd, 2009 | Finance News

NEW YORK/DETROIT (Reuters) –
Chrysler LLC's first-lien lenders are preparing another counter-offer to the U.S. Treasury that involves reducing the automaker's debt, sources familiar with the matter said on Thursday.

The U.S. Treasury on Wednesday offered the lenders $1.5 billion and a 5-percent equity stake in a restructured Chrysler in exchange for about $7 billion of debt they now hold.

The lenders' steering committee is preparing a counter-offer that would include better terms for the lenders, and the offer should be ready "soon," one of the sources said.

The lenders had initially offered to retain about $4.5 billion in debt and take a 40-percent stake in a new Chrysler supported by government investment and a deal with Italian automaker Fiat SpA.

That would have marked a much richer payout for the creditor group than U.S. officials first offered the banks, when they were asked to write off almost $6 billion in debt for no equity that would allow the lenders to benefit from a recovery from the automaker.

The committee representing Chrysler lenders includes the banks that helped finance Chrysler's 2007 sale to private equity firm Cerberus Capital Management: JPMorgan Chase & Co, Morgan Stanley, Citigroup Inc and Goldman Sachs Group.

The committee was broadened earlier this month to also include Oppenheimer Funds, Stairway Capital Management, Elliott Management and Perella Weinberg Partners.

BANKRUPTCY POSSIBLE

Chrysler has been loaned $4 billion in emergency funds by the U.S. government and has asked for another $5 billion to operate.

The White House-appointed autos task force has given Chrysler until the end of the month to reach agreements for an alliance with Fiat, a reduction in secured debt and resolution of labor issues with its unions.

Without those deals, the Obama administration has said it would cut off funding for Chrysler. The automaker has said such a move would send it into a bankruptcy to liquidate assets.

Separately, the New York Times said on its website the U.S. Treasury is preparing a Chapter 11 bankruptcy filing for Chrysler that could come as soon as next week, citing unnamed sources.

In response to the New York Times report, Chrysler said it would continue to work through the end of April to secure the support of the necessary stakeholders and reach a conclusion the Obama administration and U.S. Treasury "deems appropriate."

Meanwhile, the Treasury expects only a "small percentage" of recovery on the loans it has given to Chrysler in case the automaker liquidates its assets in bankruptcy, a report by the Government Accountability Office (GAO) said on Thursday.

"According to Treasury, in the case of Chrysler, the sale of the assets would result in cash equal to only a small percentage of the value of the loans," the GAO, the investigative arm of Congress, said in the report.

The Treasury was unable to obtain senior liens on most assets as they were already encumbered, the report said.

This is the first time the U.S. government has characterized the potential recovery of the loans it has given Chrysler, or laid out the rationale behind its decision to accept third lien credit behind banks and Daimler AG and Cerberus Capital Management.

(Reporting by Jui Chakravorty and Poornima Gupta; editing by Tim Dobbyn and Carol Bishopric)

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