The mood at the April 29, 2009, Bank of America (B of A) shareholder meeting was tense. Stock prices had plummeted from a high of over \($52\) in 2006 to a close the previous day of \($8.15.\) Although there was some consolation in that the stock was recovering from its recent low of \($2.53,\) the realization that even with this bounce, the bank’s stock had lost 85 percent of its value left little room for celebration. While some of the poor performance could be blamed on the economy as a whole, the Dow Jones Average was down much less at 33 percent;
as a result, shareholders were increasingly looking at the actions of management and questioning their wisdom.
By the time of the meeting, B of A had received approximately \($45\) billion in funding from the U.S.
government’s Troubled Asset Relief Program (TARP). This huge cash influx was initially justified by the government as needed to stabilize this bank that was deemed too big to be allowed to fail. The most recent installment of \($20\) billion was seen as protecting the earlier investments of \($25\) billion. In exchange for the TARP funding, B of A issued shares of preferred stock to the government and dramatically cut its dividend to the owners of common stock from what had been 64 cents a share in 2008 to one cent a share. While the decisions that led to the near collapse of the bank had shareholders upset, recent revelations concerning the bank’s merger with Merrill Lynch (ML) had focused their anger.
The previous September, the same month that brokerage house Lehman Brothers filed for bankruptcy and mortgage giants Fannie Mae and Freddie Mac were taken over by the government, the Treasury Department intensely negotiated a weekend deal for B of A to purchase troubled ML. The government justified this aggressive and rapid move as needed to stop a potential for multiple failures in the banking sector; and B of A, with Treasury assurances of support, complied with the government’s strategy.
After the negotiation, B of A CEO Kenneth Lewis, seeing a continuing decline of ML’s value, attempted to exercise a negotiated right to opt out of the deal.
Lewis claims when he did so Treasury Secretary Henry Paulson told him pursuing that option would cause the Treasury to move to remove the board and the management of the company. Lewis also claimed that Fed Chairman Ben Bernanke and Paulson insisted that ML’s losses (which grew to \($15\) billion)
be kept from the public.
Not surprisingly, the Treasury and Federal Reserve recount a different version of these conversations.
These agencies admit to seeing an urgent need to save ML from collapse but claim not to have threatened Lewis with his job or insisted on secrecy.
The government’s position was that they advised Lewis that the escape clause was not applicable and that an attempt to exercise it or pronouncements regarding ML would simply hurt the value of B of A.
Regardless of what was actually said in these high-level conversations, Lewis agreed to a deal that he knew was damaging to shareholders in order to help the government save the financial system. It appears that Lewis was confronted with at least three competing outcomes: protect shareholder wealth;
protect the financial system in general, which no doubt would have a negative impact on B of A if it failed; and appease powerful government officials.
Adding to the issue were concerns over ML’s questionable expenditures before the acquisition.
Even though ML was losing billions of dollars, it was only after pressure from the New York Attorney General that the company dropped \($200\) million in bonuses to three top executives. Perhaps showing the ultimate disconnect from the reality of the firm’s situation, the former ML CEO spent \($1.22\) million redecorating his office. Included in the CEO’s new office were a rug valued at \($87,784\) and a \($35,115\) commode. These acts suggest significant flaws in the decision-making processes of the ML leadership.
While the public was upset with ML for its excesses, B of A shareholders were dumbfounded as to why their company saved them.
Angered by Lewis’s actions, a large and organized group of shareholders promised to make the annual meeting exciting and vote out the entire board. The bank also prepared for the meeting by hiring two “proxy solicitors” to help canvass the votes in their favor and by making statements that the ML deal would be good for shareholders in the long run.

Questions 1. B of A CEO Kenneth Lewis, in approving the ML acquisition, made a decision that many believed was not in the best interest of the bank. Critique the decision to go ahead with the ML acquisition.
What would you have done?
2. Hired to help turn around a failing company, ML’s CEO spent over \($1\) million redecorating his office. What decision-making errors do you suspect occurred in that situation and what may have prevented them?
3. What ethical concerns do you have regarding the events of the case? How might the decision making processes have been modified to avoid these issues?