Was 'screw the shareholders' BofA's attitude?

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NEW YORK (Fortune) -- Today, Congress may finally be closing in on an answer to one of the great open questions from the Crash of 2008: Why did Bank of America management not tell its shareholders about the mounting fourth-quarter losses at Merrill Lynch a few weeks before shareholders voted to approve BofA's $50 billion acquisition of Merrill on December 5, 2008? Some members of the House Committee on Oversight and Government Reform think they finally have found their smoking gun in a series of previously unseen documents that recount BofA's deliberations on whether to tell shareholders about the Merrill losses. The documents are said to include the advice BofA management received from its law firm, Wachtell Lipton, on the issue. Additional, fireworks may come from Tim Mayopoulos and Brian Moynihan -- former and current BofA executives, respectively -- who are expected to testify before Congress today.

The betting on Wall Street is that the documents will contain some juicy evidence concerning what BofA (BAC, Fortune 500) executives and Wachtell lawyers relied upon to reach their collective decision not to release the growing Merrill losses. The Wachtell lawyers as well as Mayopoulos and Moynihan were among those interviewed by Congress, in private. The speculation is that BofA management and the bank's legal team at Wachtell started out thinking that the bank would have to disclose the growing Merrill losses. This was reportedly the plan through October, but after reviewing documents about the projected losses provided to them by Merrill in November 2008, BofA's leaders changed the plan and decided not to report the losses.

The questions hanging in the air -- and that will likely be answered today and in the days following the hearing -- pertain to the accuracy and the reliability of the Merrill forecasts about the losses looming in their portfolio of toxic assets: Did BofA executives and Wachtell's lawyers use the Merrill documents as a reliable forecast even though they knew there were flaws in them? Did their guesswork about the Merrill losses form the basis for their conclusion that shareholders did not need a disclosure of the mounting losses? Did their guesswork masquerade as a thorough analysis of the potential losses? Was there even any analysis by BofA of the losses?

The reason that answers to these important questions are finally coming to light now has to do with a cache of documents that were turned over to Congress and to Andrew Cuomo, the New York State attorney general, on October 16 after months of legal wrangling between the banks and the politicians. BofA claimed that the advice it received from Wachtell was subject to attorney-client privilege and had no intention of waving that privilege. But under intense pressure from Congress and from Cuomo, the bank relented and turned over boxes of documents and emails, said to number in the thousands.

Some of these documents will likely be released at today's hearing -- as has been the Committee's custom -- and some may be released subsequent to the hearing should the congressmen on the Committee choose to pursue further the matter with the SEC of whether securities laws were violated. Rep. Dennis Kucinich (D-Ohio) for one has been particularly outspoken about pressing the SEC about whether BofA's outgoing CEO Ken Lewis broke securities laws. In August, Rep. Kucinich sent a letter to SEC chairman Mary Schapiro urging her to thoroughly investigate the issue.

BofA said in a statement that the bank has done nothing wrong. "We are confident the record demonstrates what we have said all along: Throughout the deliberations around our acquisition of Merrill Lynch, Bank of America acted in good faith and consulted with one of the premier law firms in the United States to work through tough issues in the face of unprecedented economic conditions. Despite the challenges, the transaction has turned out to be a success for our customers, for our shareholders, and, ultimately, the taxpayer."

Getting past the rhetoric and getting to the bottom of whether BofA management misled shareholders is essential, of course, because it is the largest bank in the country and Merrill Lynch is one of the world's largest investment banks. Taxpayers have now lent BofA $45 billion in TARP funds and countless more billions in the form of guarantees. The men and women at the top of these organizations get paid millions of dollars a year to evaluate the potential risks to which they ended up exposing not only their shareholders and creditors but also, now, the American taxpayers.

Some emails and documents have already leaked out, and they do not paint a pretty picture. One January 15, 2009 email chain between two members of the BofA board of directors, who are buddies -- Chad Gifford, a former CEO of FleetBoston Financial, a bank acquired by BofA, and Thomas May, Chairman and CEO of NSTAR, a Boston-based utility -- may not sit well with John Q. Public. While Lewis was briefing them about the government's new bailout for BofA seems to sum up well the overriding theme of the deal, from at least one perspective. The two men were joking around as they were hearing the news, via a board conference call, and when Gifford encouraged May to pay closer attention instead of emailing him, May wrote Gifford: "Screw you." To which Gifford responded, a minute later: "Unfortunately, it's screw the shareholders!!" Gifford and May are also expected to testify today.