Bank of America and Merrill Lynch - Ken Lewis' Moral Dilemma

The Bank of America and Merrill Lynch Merger: Ken Lewis' Moral Dilemma

May 25, 2009

Bank of America's CEO Ken Lewis was faced with moral dilemma that forced him to consider his fiduciary responsibilities of the shareholders compared to the well-being of the entire (global) financial system. Lewis felt pressured by the US government to avoid making public the extreme issues that Merrill Lynch faced, at the risk of pushing the global financial system into a total collapse. At the same time, Lewis felt that the board of directors and shareholders would back out of the merger with Merrill Lynch if more details were known.

The purpose of this essay is to analyze the case from an ethical standpoint. The essay will follow the eight step ethical decision process as described in chapter four of "Deciding What's Right: A Prescriptive Approach". Following the detailed decision making process, a recommendation will be made to specifically answer if Lewis should have disclosed the information surrounding the adverse affects of the Merrill Lynch acquisition.


At the peak of the financial crisis, Merrill Lynch & Co. was at the precipice of disaster. Without the help of the government or a white knight, Merrill would fail financially. During the weekend of the 13th and 14th of September 2008, auditors and other staff from the Bank of America performed due diligence prior to a potential merger. This 48 hour due diligence process was done in a stressful and time-pressured manner. A merger agreement was publically announced on the 15th of September, with Bank of America acquiring Merrill Lynch & Co. for $50 billion in stock. At the time of the announcement, Kenneth Lewis was both the CEO and the chairman of the board of Bank of America.

At the beginning of December information became known to Lewis. Merrill's losses were going to be far worse than expected. The anticipated losses were in excess of $13 billion dollars. Lewis sought advice and counsel from the Bank of America legal staff. Lewis sought legal grounds to declare Material Adverse Conditions (MAC). Under such conditions, the Bank of America has recourse to rescind the offer to acquire Merrill Lynch.

On December 17th, Lewis flew to Washington in an attempt to back out of the deal. Lewis met with Federal Reserve Chairman Bernanke and Treasury Secretary Paulson. Messrs. Bernanke and Paulson strongly urged Lewis to not back out of the deal. According to the two government officials, pulling out of the deal would create systematic risk to the U.S. economy. Furthermore, the officials stated that ending the deal would not be in the best interest of either Bank of America or of Ken Lewis personally.

On December 21st, Lewis was warned that the government would consider replacing the board of directors and management if Bank of America back out of the deal. The officials also suggested that if Lewis backed out, then any future government assistance would be much more difficult to obtain. At this point, Lewis gave up in his efforts to back out of the deal.

Over the next four weeks, the government and Bank of America negotiated a deal that included another $20 billion dollars in direct aid. The government also pledged assurance to back an additional $118 billion to cover potentially bad assets held by Merrill Lynch.

None of the above mentioned communications between the government and Lewis were communicated in an official (written) manner. The government did not want public disclosure, at the risk of causing systematic issues within the overall financial system.

Lewis and the board of directors did not disclose the additional losses to the shareholders. According to Lewis, this decision was not his to make; instead, the government had directed Lewis to keep the information private.


As the chairman and CEO of the Bank of America, it was the responsibility of Lewis to inform the shareholders of the MAC (material adverse conditions) that were present in the Merrill Lynch merger. Furthermore, any additional government assistance would dilute shareholder equity.

However, Lewis was also responsible to the overall well being of the U.S. and global financial system. Another major crisis to the financial system would also have adverse impacts upon both Bank of America shareholders customers.

Based upon the threat of Messrs. Bernanke and Paulson, Lewis was also faced with a dramatic change in the corporation's leadership. If the government forced a change in the board of directors and management, then shareholder value would likely take a major hit.


The people impacted by Lewis's decision can be viewed from both a micro and macro level. On a micro level, the main characters in the story are Messrs. Bernanke and Paulson representing the U.S. government; and Ken Lewis and the board of directors representing the Bank of America. Stepping back from the individual players, the story has far greater implications.

From the point of view of the government, another major collapse from a Wall Street corporation would likely cause an enormous crisis in an already unstable financial climate. The overall economy of the United States was at risk; there were fears that a deep depression could result in untold damage to the citizens of the country. Even without a total economic collapse, the tax payers were certainly at risk in taking on the financial obligations of a failed Merrill Lynch. The affected parties were not limited to himself and the board of directors.

The millions of shareholders clearly had a major stake in the decisions facing Lewis. The CEO must also take into account the interests of the nearly 200,000 employees and contractors.


The short term consequences are more clearly identified. Should the deal fall through, then the overall economy would undoubtedly be adversely impacted. On the flip side, if the deal is allowed to go through, then the shareholders would take an economic blow in terms of diluted value. Lewis estimated that it would take two to three years for the deal to bring economic value to the corporation. So, any shareholders that were on a short term horizon would suffer. As both the chairman and CEO, Lewis faced a serious threat to continuing his dual role.

The long term impacts are more difficult to accurately predict. One could argue that letting Merrill fail would result in a total collapse; but one could also argue that allowing the free market to take it natural path would be in the best interest of the public.

Public disclosure would have an immediate impact upon Lewis and the board of directors. The government stated that the board of directors and the management would be forced out. However, this impact would likely have a largely symbolic role to the leaders themselves. Lewis and the board members are all in a financially secure position; thus losing their jobs would not have a financial impact. However, the corporation would undoubtedly suffer from a government forced change in leadership.

Lewis was faced with the unknown consequences of keeping information secret. The real dilemma for Lewis was deciding whether secrecy or disclosure would result in more impactful consequences.


Lewis has indisputable obligations to the corporation and the shareholders as the chairman and CEO of the Bank of America. However, as the leader one of the largest financial services company in the world, Lewis was also obligated to the overall financial system. Interestingly enough, the shareholders are a subset of the global obligations. The following quotation by Lewis is perhaps the best illustrations of the obligations held by the Bank of America leader:

"Bank of America helps build strong communities by creating opportunities for people - including customers, shareholders and associates - to fulfill their dreams."


'Doing the right thing' might easily be interpreted as disclosing the information to the shareholders. However, this action could also have severe impacts on the entire country. No matter what, Lewis was going to do the right thing and the wrong thing. With either approach, people would be impacted by the decision. This is not a black and white decision that can easily be resolved by a moral code.


As CEO and chairman, Ken Lewis represented both the board of directors and the company. As such, he didn't really have the option of pushing the decision to another person.

He really had only two choices: continue with the deal and keep quiet, or pull out of the deal and inform the shareholders of the material adverse conditions of the Merrill Lynch acquisition. There are not any 'in between' solutions to the dilemma.


It is no easy task putting myself in the shoes of Ken Lewis. He was faced with enormous consequences without an easy out. No matter what, Lewis would have to choose an action that would impact a large number of people. The best choice is likely to be to minimize the damage. I am not suggesting a 'damage control' strategy; rather that what seems like the best choice is to seek the greatest good.


From the utilitarian philosophy of ethical decision making, we can break the decision problem down based upon which choice will have a greater impact. Failing to disclose the information will have a direct financial impact on the shareholders. Publically divulging the materially adverse conditions would have potential impact upon the entire financial system. This systematic risk would also impact the Bank of America shareholders. As such, purely from a utilitarian aspect, keeping silent appears to be the better choice.

Ethical decision making can also be based upon the duties and obligations of the decision maker. In this case, Lewis has obligations to both the shareholders and to the overall well being of the U.S. financial systems. On an abstract level, Lewis has a duty to consider the overall well-being and greater good of the entire country. This duty does not omit his obligation to the shareholders, but the universal appeal of the good of the community has a stronger pull than to the individual shareholders of the corporation.

Lewis's reputation was on the line. Ultimately, this decision would likely be the defining moment in terms of his sense of integrity and honor. Lewis was faced with failing his certain fiduciary responsibilities. However, by speaking out, the shareholders would face uncertain (but perhaps more drastic) consequences.

Ultimately, my decision is based upon seeking the greater good. It might be more accurate to say that I suggest choosing the lesser evil. Holding back the information would have certain consequences; however we can draw a certain boundary around these consequences. Yes, the shareholders will be affected in the short term. However, the deal may turn out to be profitable in the long term.

Disclosing the information is a much more dangerous choice. The adverse impacts are certain; but the sheer scale of the fallout could only be guessed. The damage would not only impact Bank of America and its shareholders, it could also easily have global ramifications.

In the best interest of the corporation, shareholders and the well being of U.S. citizens, I strongly urge Ken Lewis to continue on with the acquisition of Merrill Lynch without publically disclosing the material adverse consequences.


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