ML loss data reports to BofA. had misleading ("anachronistic") labels

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The excerpt below from the Complaint describes the ML reports to BofA. I have not seen any of these reports, but the complaint (quoted below) in (64.) states the reports uses out-of-date ("anachronistic") labels. Many of the actions and decisions by those at BofA make a lot more sense if those involved had thought they were dealing with full-quarter projections.

From just the Complaint, I can't tell if someone expecting to see a full-quarter forecast would immediately see that it was only to month-end, not quarter-end. I suspect not.

I believe I know how all this happened, using information in the Complaint, hidden in plain sight. BofA hired J.C. Flowers, Inc. to help with their due diligence of ML, in part because Flowers had prior experience wrt ML from Q4 2007 and was already familiar with the ML systems, etc. (Footnote p 13). That experience was before ML changed the content of the reports, while retaining the same labels (e.g. Forecast, Projection). Since the DD for BofA was in September, the end-of-month vs end-of-quarter distinction would be nearly impossible to detect.

Because of the various end-of-month adjustments, etc., the surprisingly large Oct loss by ML would trigger a closer look at the reports in Nov, but it would still not be obvious that the reports were not full quarter, though there were certainly clues. The November report delivered by ML to BofA after the vote plus the Dec dailies suddenly made it clear what was going on and that the losses at ML were much greater than BofA had thought when the vote was taken.

This is just speculation on my part, but it would explain certain items being part of the Complaint and why those at BofA made certain decisions. No idea if and to whom ML might have explained their changes to the content of the reports or how prominent its conveyance.



http://www.ag.ny.gov/media_center/2010/feb/BoA_Complaint.pdf

63. The fourth quarter 2008 reports of Merrill’s financial condition on which Lewis, Price and the Bank relied almost entirely reflected real losses to date; they were not forecasts or predictions. By the time the merger was announced in mid-September, Merrill had a process in place whereby it tracked actual losses on a daily basis. Due to Merrill’s losses at the start of the financial crisis in late 2007, Merrill stopped forecasting and simply tracked its losses.

64. Merrill’s Head of Corporate Planning, Nancy Meloth, who oversaw the process, explained that before the financial crisis her group had put “greater focus on all kinds of things like three-year plans and forward projections,” but that after the crisis struck, “the focus became much more on day-to-day results and how we were doing.” Thus while the reports contained anachronistic labels like “forecast” and “projection,” they in fact tracked actual losses.

65. The reports documenting Merrill’s financial condition during the fourth quarter stated these day-to-day losses in columns titled “actual,” which reflected month-end numbers that only rarely changed (and even then in immaterial ways) after they were booked.

66. The reports also contained a column for estimates known as BTG (Balance To Go), a reference to days remaining in any given period. But as Meloth testified,

BTG "could possibly be a budget or an expectation that had been there for how the core businesses should perform in an environment that we weren’t in anymore. And for lack of something better than that, we just left it there, but certainly no one would have relied on this for any sort of decision-making purpose, in my opinion."

67. In addition to day-to-day losses, the reports reflected changes in the valuations of securities and trading positions held by Merrill, known as “marks.” Typically, marks were not included in the day-to-day losses reflected in the “actual” column until the end of each month. During the fourth quarter of 2008, Corporate Planning finalized marks at the end of each month, adding them to the monthly results to reach the total actual monthly figure. Setting the marks involved financial analysis and conversations between Corporate Planning and business heads, sometimes even rising to senior executive levels. For the past 16 months, Merrill had averaged a loss of least $3.2 billion in marks each month.

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1. More support for alternative narrative wrt Cuomo v BofA complaint

I have confirmed that the firm of J C Flowers was only employed by BofA for the initial due diligence of ML, mostly during that weekend in September, and that Flowers had no part in any evaluation of ML by BofA during Q4 and no access to the ML reports relied upon by BofA in making its decisions.

Most of what BofA initially knew about the various internal ML reports was based on the experience with them when J C Flowers did its own DD in Q4 2007 while evaluating its own involvement with ML. The reports they saw in Sep 2008, nearing the end of Q3, apparently gave them no indication of having changed in meaning since their prior experiences just three quarters before.

With almost no experience with the ML reports, those at BofA would still be getting up to speed using the ML reports and not likely to detect that they been changed and were not as learned by J C Flowers in Q4 2007 and conveyed to BofA in September. This would most certainly have been the case with the senior executives at BofA involved in this complaint. Someone at Flowers with more experience might have noticed sooner that something was amiss with the ML reports, but even that might have taken several weeks.

Probably BofA middle-level and technical groups working with their ML peers would learn the details of the data in these reports at some point, but not see any reason to conclude that others might not already know.

I can easily see where conversations where some thought the numbers full-quarter and others, through month end, might give nothing indicating the confusion, except by raising questions of the competence and ethics of others based on decisions and statements.

I know almost nothing that indicates whether any confusion regarding the ML reports at BofA was by accident or in anyway deliberate. Maybe some at BofA were fully aware and failed to inform their fellow employees. Hard to know.

If should have been easier for someone aware the reports had changed to detect that someone else still believed the numbers reflected the full quarter than for the reversed situation. In several conversations involving Thain, I find it unlikely that he would not have noticed that some at BofA seemed unaware of any changes to the reports and the data being tracked. No reports than anyone at either firm made any efforts to make public or otherwise address this problem.

More soon.