It turns out that losses at Merrill going into the BoA deal were so big that Merrill was essentially worthless. At least that’s the stock market judgment, since BoA’s stock market value in the wake of the deal has dropped more than the amount it paid for Merrill. Yet this story in yesterday's WSJ discusses how Thain didn’t clue the Merrill board in on the fact that the deal could have been in jeopardy.
There's a possible explanation for Thain's conduct in Dennis Berman’s column yesterday. The column deals with why BofA's Kenneth Lewis didn’t tell his shareholders about the Merrill losses. Berman wonders:
Did Mr. Lewis stay quiet on his own or at the request -- subtle or explicit -- of Messrs. Bernanke and Paulson? A person close to the Fed said no such request was made. Divining the government's intentions, however, still are murky. In a conference call last week Mr. Lewis said that "we spoke to and were in close coordination with officials from both the Treasury and the Federal Reserve," adding that "the government was firmly of the view that terminating or delaying the closing...could result in serious systemic harm." * * *
Corporate-law observers said the Merrill deal puts the federal government on an inevitable crash course with shareholders-rights attorneys. By Delaware laws, board directors' loyalties are to shareholders, not to the federal government or a vague national interest. "If it's harmful to your company, I don't believe Mr. Paulson could impose his will on you to act against your shareholder interest," said Jerry Silk, an attorney at plaintiffs firm Bernstein Litowitz Berger & Grossmann LLP.
Lawyers said that it is possible a new legal standard could eventually emerge from transactions like Merrill: that of a "national-interest" doctrine, absolving companies of governance actions that may be potentially harmful, but are important to an economic or defense emergency.
I’ve been writing a lot about the problems of shareholder voting as an aspect of the whole flimsy corporate monitoring structure. But here, informed shareholders might have acted effectively (though the activist hedge funds that might have intervened have their own problems lately). So this is one place where disclosure might have made a difference.
Would shareholder intervention to block the BoA/Merrill deal have been socially inefficient? Or is the market still the best guess as to what is socially efficient? I’m still betting on the latter conclusion. Perhaps more interesting for present purposes, the market's key role in resource allocation happens to be a foundational principle of the securities laws. Or at least that's what the government used to think.
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