Cuomo to Bank of America: You Lied About Everything

(MoneyWatch)  New York AG Andrew Cuomo lowered the boom today in filing a lawsuit against Bank of America (BAC) and top former executives of the company over its 2008 merger with Merrill Lynch:

This merger has, in many ways, become a classic example of how the modus operandi of our nation's largest financial institutions led to the near collapse of our financial system. In order to complete its deal, Bank of America's management misled its shareholders by not disclosing massive losses that were mounting at Merrill Lynch so that the shareholders would vote to approve the deal. Once the deal was approved, Bank of America's management manipulated the federal government into saving the deal with billions in taxpayer funds by falsely claiming that they intended to back out of the deal through a clause in the merger agreement. Ultimately, this was an enormous fraud on taxpayers who ended up paying billions for Bank of America's misdeeds.

Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris and a palpable sense that the normal rules of fair play did not apply to them.

The civil suit makes juicy reading for anyone who ever wondered just how B of A, after agreeing to buy Merrill, suddenly discovered that the investment bank was sitting on more than $16 billion in losses. And forgot to tell shareholders about it.

Cuomo contends that Merrill was completely open with B of A regarding its financial problems. The investment bank allegedly provided Lewis and other senior B of A execs with regular updates about its deteriorating condition. The complaint also lets B of A's outside legal counsel at the time, Wachtell Lipton, off the hook, saying the banking giant alone decided to withhold information about Merrill's losses.

By contrast, former B of A CEO Ken Lewis, who's named in the suit along with ex-CFO Joseph Price, knew all along about the damage at Merrill, according to the complaint. And he and Price gulled the federal government into contributing $20 billion toward the cost of the deal by falsely claiming that they planned to abandon it.

It's always dangerous to speculate about the outcome of legal cases. Especially complex ones that hinge on matters of intent and timing (What did they know and when did the know it?).

But B of A and Mssrs. Lewis and Price face a real problem here. Because Cuomo's suit, stripped of its mind-numbing details regarding the Merrill merger, is straightforward in its allegations: B of A and its leadership lied to shareholders and to the government. They knew from the outset that Merrill was a financial disaster, and they withheld that information to engineer a taxpayer-funded bailout -- a bailout without which B of A would've sunk under the weight of Merrill's losses.

And clearly the political winds aren't blowing in the bank's favor, with the public in a lather over Wall Street's self-interest, greed and hubris (to borrow Cuomo's words).

B of A says the charges are "without merit" and that it will fight them. But here's betting that new CEO Brian Moynihan, who's presumably eager to put this chapter behind him, takes the safer course and opts to settle. A trial would take months, prolonging the pain. And losing in court could result in an even bigger monetary award against the company.