The omission of any projected write-downs for those CDOs in the computer model behind the November 12 document resulted in a "zero" being calculated instead of billions of dollars of losses -- as would become apparent a few weeks later -- making the projected pre-tax fourth-quarter 2008 loss in the computer model -- $8.942 billion -- far lower than the $18 billion pre-tax loss it would turn out to be less than a month later on December 10, five days after the shareholder vote. "Bank of America saw the deficiency in the document," Rep. Dennis Kucinich (D-Ohio) said at the hearing, "but they have not shown us that they actually did any actual analysis to make up for Merrill's omissions. On the contrary, the evidence we have suggests that Bank of America pulled a number out of thin air." (For his part, Nelson Chai, Merrill's chief financial officer at the time, told Kucinich's staff that the "document was not intended to be a valid forecast, despite its title.").The November 12 document is especially revealing not only for its omissions but also for the seemingly random tweaks Bank of America (BAC, Fortune 500) executives made to it as part of their internal deliberations about whether to make an announcement before the shareholder vote on December 5. At the bottom of a page described as "Merrill Lynch & Co. 4Q'08 Forecast," Bank of America's executives had upped the projected loss of $8.942 billion to $10.942 billion, an increase of $2 billion in projected losses.
Half of that additional $2 billion in losses, or $1 billion, came simply from something described on the document as "neil gut," or the "gut" guess of Neil Crotty, Bank of America's Chief Accounting Officer "rather than any actual analysis of Merrill holdings," according to notations on the document made by the Committee's staff prior to its release publicly last week. The Committee staff also noted that "Bank of America's top management and attorneys used" the seemingly randomly revised $10.942 billion in projected losses number "in making shareholder disclosure decision." That process of whether to make the disclosure to shareholders began in earnest on November 12 when Bank of America's general counsel Tim Mayopoulos called Wachtell Lipton attorney Nicholas Demmo to reveal that Merrill had lost "$7B in October," that "Nov, so far, is flat" and wondering "do we have to get the # out?" to shareholders.
At that point, after seven business days in November, Merrill had shown Bank of America a $227 million loss for the month but that number had not been adjusted downward for the write-downs in the CDO portfolio since no number had been included for that in the model. Bank of America executives seem to have based their decision-making on the faulty model and appear to have done no due diligence of their own. When Rep. Kucinich's staff asked Crotty about the November 12 document he said, according to Rep. Kucinich, that it was "of questionable validity" and that he did not have "time to delve deeply into the details of the forecast." Asked about whether the words "neil gut" on the document raised concerns to him, Tim Mayopoulos, Bank of America's general counsel at the time, testified at the hearing: "I understood that this forecast was in part a guess, that it was an estimate." http://money.cnn.com/2009/11/23/news/companies/bofa_merrill.fortune/index.htm?iid=EL
No comments:
Post a Comment