NEW YORK — As President Barack Obama traveled to Wall Street on Monday and chided bankers for their recklessness, across town a federal judge issued a far sharper rebuke, not just for some of the financiers but for their regulators in Washington also.
Giving voice to the anger and frustration of many Americans, Judge Jed Rakoff issued a scathing ruling on one of the watershed moments of the financial crisis: the takeover of Merrill Lynch by the now-struggling Bank of America.
Rakoff voided a $33 million settlement that Charlotte-based Bank of America reached with the Securities and Exchange Commission over whether the bank adequately disclosed the bonuses paid by Merrill before the merger, which was completed last December at regulators' behest as Merrill began to founder.
He accused the SEC of failing in its role as Wall Street's top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders, and the taxpayers who bailed out the bank at the height of the financial crisis.
The sharply worded ruling, which invoked justice and morality, seemed to speak not only to the controversial deal but also to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.
Implicit in the judge's remarks were broader questions that are swirling as Wall Street marks the anniversary of one of the most tumultuous weeks in its history: What do the giants of finance owe their shareholders and the investing public? And who will adequately oversee these behemoths? Congress is pondering these issues as it prepares to reshape the power structure of financial regulators in Washington, including the SEC.
Obama is pushing lawmakers to pass tougher regulations this year that would touch everything from bonuses to the structural soundness of Wall Street's most powerful banks, even as some Democrats fret that the health-care debate makes it unlikely that financial reform can be achieved.
Rakoff had demanded that the SEC and the bank explain which executives were responsible for failing to tell the bank's shareholders about the payout of Merrill's bonuses. That information, together with evidence of large losses at Merrill that also were not disclosed, might have led shareholders to reject the merger at a time when the government wanted to forestall a worse meltdown of the financial system.
You scratch my back ...
The judge accused Bank of America and the SEC of concocting the settlement to effectively absolve both sides of further responsibility.
"The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger," the judge wrote, and "the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators."
The ruling echoes a longstanding criticism that the SEC has largely failed to prosecute cases against corporate executives, opting for quick settlements in which companies themselves are penalized instead of their leaders.
It comes as the agency, under its new chairwoman, Mary L. Schapiro, is struggling to revive its reputation as an effective watchdog of Wall Street after presiding over a near-collapse of the financial markets and failing to catch the $65 billion Ponzi scheme run by Bernard L. Madoff.
Rakoff called the proposed $33 million settlement unfair and inadequate, and ordered Bank of America and the SEC to prepare for a possible trial that would begin by Feb. 1.
Both the bank and the SEC said they disagreed with the judge's decision and were evaluating their legal options. Experts said the SEC could decide to appeal the case to a higher court or drop the charges altogether instead of going to trial, but they noted that the agency was unlikely to exercise those options. Some analysts argued the case itself was irrelevant given that Bank of America's takeover of Merrill had increased the bank's profits, resulting in a surge in its stock price.
The deal also saved Merrill from impending collapse and arguably prevented a greater financial calamity from unfolding in the immediate aftermath of the Lehman Brothers bankruptcy.
Who's the victim?
"I'm having a difficult time understanding who was harmed here," said Richard X. Bove, a banking analyst with Rochdale Securities. "Why is this company being put into court over a series of events that benefited the nation, its economy, its financial system, the shareholders of Bank of America and the bank itself?"
In forcing the two sides to argue their case in court, Rakoff hopes to expose the truth about whether Bank of America lied to shareholders about billions of dollars paid to Merrill's executives before the deal closed.