BetterTrades Analyzes Bank of America

Bank of America continues to remain in the spotlight of recent, as numerous accusations flood the public media. At the forefront is CEO Ken Lewis, who has become the center of attention and the target of blame for the debacle that has befallen the banking giant.

Lewis is currently under investigation from the Securities and Exchange Commission (SEC), Congress and New York Attorney General Andrew Cuomo. The head of BoA faces allegations from lawmakers that the CEO misled investors regarding annual bonuses paid to employees at Merrill Lynch & Co., just prior to BoA's acquisition of the floundering Wall Street financial institution late last year.

The SEC announced on September 21 that they were in position to "vigorously" pursue a case against Lewis regarding the bonus scandal. A representative from the SEC remarked, "As we alleged in our complaint last month, Bank of America did not provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees. We believe that this disclosure failure violated the federal securities laws."

The government agency is accusing Bank of America of not informing shareholders that the bank authorized ranking officials at Merrill to pay upwards of $5.8 billion in bonuses. The underlying controversy to the additional benefits allocated was that Merrill had lost $27.6 billion that year alone, which in the eyes of many shareholders, did not constitute a situation where bonuses should be paid to their employees.

The SEC later added, "We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court's permission to bring additional charges in this case."

A week prior to the SEC's announcement about pursuing further charges against BoA, New York Federal Judge Jed Rakoff rejected a proposed $33 million settlement from the bank for failure to disclose information to shareholders. Instead of the settlement, the judge set a February 1, 2010, trial date for Bank of America to face charges.

Rakoff responded to the bank's settlement offer, "It does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank's alleged misconduct now pay the penalty for that misconduct."

The judge later added, "The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."

So where does all of this leave Ken Lewis? The obvious answer is that the board of directors at BoA will most definitely need a fall guy, and Lewis is primed for that position. Scott Silvestri, a BoA spokesperson, commented, "The board has consistently expressed its support for Ken. There have been no charges, and we do not see any basis for charges against members of the management team or the company."

Nevertheless, the board has apparently already put into place a succession plan for the apparent departure of Lewis.

Lewis, back in February, testified under oath to New York's Attorney General that Fed Chairman Ben Bernanke and then-Treasury Secretary Henry Poulson had pressured Bank of America officials not to publicly discuss the bank's plans on purchasing financially troubled Merrill Lynch.

Bank of America quickly responded to Lewis' testimony stating that the financial institution had committed to all of the appropriate disclosures to their shareholders regarding the Merrill Lynch bonus allotments.

In other developing news, BoA announced that they have come to an agreement with the U.S. Treasury Department, the Federal Reserve and the FDIC, in that the bank is scheduled to pay $425 million in order to exit from their prearranged term sheet agreement, in respect to the $118 billion in guaranteed assets provided by the government.

The Federal Deposit Insurance Corp. (FDIC) granted Bank of America approval to exit the debt guarantee program under the Temporary Liquidity Guarantee Program monitored by the FDIC.

Under the initial agreement, the government would aid BoA in the acquisition process of Merrill Lynch in that BoA would incur the first $10 billion in losses from the purchase, while the government would absorb the remaining 90% of potential losses.

In return, Bank of America would issue $4 billion in preferred stock with an 8% dividend to the U.S. Treasury, along with paying 0.02% on the $118 billion in total assets between BoA and Merrill to the Federal Reserve, which amounted to $236 million.

In order to sustain operations while paying the government back, the bank is in the process of stepping up their Tier 1 capital by $40 billion. To achieve this goal, BoA will propose a $15.5 billion common stock offering and $10.9 billion in preferred stock exchanges and asset sales. The company also plans to issue $10 billion in non-government-backed debt in the public markets.

Responding to the recent moves by the company was Ken Lewis, "We are a stronger company than we were even a few months ago, and while we continue to face challenges from rising credit costs, we believe we have all the pieces in place to emerge from this current economic crisis as one of the leading financial services firms in the world."

By close of trading on September 29, shares of Bank of America (BAC) were down, concluding the session at $17.16 per share.