The Financial Meltdown of 2008 and the Government's Intervention: Much Needed Relief or Major Erosion of American Corporate Law? the Continuing Story of Bank of America, Citigroup, and General Motors*

By Kerr, Janet E. | St. John's Law Review, Winter 2011 | Go to article overview

The Financial Meltdown of 2008 and the Government's Intervention: Much Needed Relief or Major Erosion of American Corporate Law? the Continuing Story of Bank of America, Citigroup, and General Motors*


Kerr, Janet E., St. John's Law Review


INTRODUCTION

The year 2008 found the American public following two dramatically different news stories: the divisive, yet exciting, presidential campaign and that of the struggling American economy. Housing prices were plummeting, leading to a meltdown in the sub-prime mortgage lending arena, Lehman Brothers filed for bankruptcy, and the government found itself watching several other American institutions on the verge of collapsing. Instead of allowing the economy to recover on its own, the government stepped in and attempted to revive many corporations, and in turn, the economy, on a much grander scale than what the American people generally expect of their government.1 One way in which the government began this attempted revival was through the passage of the Emergency Economic Stabilization Act of 2008 (the "Act"), which was signed into law on October 3, 2008.2 The Act was created to help stabilize the American financial system and prevent further damage-a goal it sought to accomplish through the creation of the Troubled Asset Relief Program ("TARP"), among other measures.3 Through TARP, the government ultimately lent up to $700 billion to many financial institutions in the hopes of saving them from collapse.4 The government gave billions more to other corporations in the form of mortgage-backed security purchases, direct investments, loan guarantees, and loans, totaling over $1.33 trillion.5 The government then became a creditor of many major corporations, as well as a majority or controlling shareholder in some situations.6 A year after the crisis started and on the anniversary of Lehman Brothers' collapse, President Barack Obama addressed Wall Street bankers, advising them to "embrace serious financial reform, not fight it."7

In the case of Bank of America, the government simply loaned money, first through TARP to help it survive, and later lent more to help it buy another failing financial institution, Merrill Lynch.8 In September 2008, Bank of America agreed to purchase Merrill Lynch, and the shareholders approved the transaction on December 5, 2008.9 In agreeing to the transaction and in persuading shareholders to approve it, Bank of America's board of directors relied on representations made in September 2008 as to Merrill Lynch's financial condition.10 However, in mid-December 2008, Bank of America's board of directors learned that Merrill Lynch's financial condition was not as it was represented to them in September 2008.11 In fact, it was significantly worse.12 Nevertheless, Bank of America went forward with the transaction, allegedly under pressure from government officials to complete the transaction and not disclose the information concerning Merrill Lynch's financial condition to shareholders.13 Alleging that such omissions were material, the Securities Exchange Commission ("SEC") filed suit against Bank of America and began investigating why Bank of America did not disclose Merrill Lynch's deteriorating financial condition sooner.14 While Judge Jed Rakoff dismissed the first settlement proposed by the parties because it unfairly punished the shareholders,15 he eventually-albeit reluctantly-approved a $150 million settlement in January 2010.16 Indeed, Judge Rakoff harshly criticized the settlement and chastised the bank for "hiding material information from its shareholders," claiming that the actions of Bank of America amounted to "fraud."17 Furthermore, although the SEC refused to file a suit against any individual executives, the settlement approval did not thwart a similar suit from New York Attorney General Andrew Cuomo, who charged the bank and two top executives with civil securities fraud.18 While many conflicting accounts exist, this transaction between Bank of America and Merrill Lynch raises important legal questions regarding the government's interaction with and influence over the private sector. Saving a corporation or multiple corporations from failure is certainly commendable, especially when these efforts may significantly help the overall American economy. …

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The Financial Meltdown of 2008 and the Government's Intervention: Much Needed Relief or Major Erosion of American Corporate Law? the Continuing Story of Bank of America, Citigroup, and General Motors*
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