Econ 2009

[ewmayer]

"Hopiness you can believe in" or "Glimmers of nope"? Time will tell:

[ewmayer]

How Hedge Funds work:

[ewmayer]

C-SPAN's Sunday evening "Q&A" installment last night was an interview with author and structured-equities specialist Janet Tavakoli, who had some very incisive and not-too-flattering things to say about the giant Ponzi scheme that is Wall Street Big Finance - great stuff.


The ZeroHedge blog (which has quickly become one of my favorites since I started visiting it a few weeks ago, mainly because it gives a traders-eye perspective on much of the seemingly bizarre market action of late which none of the macro-economic blogs do nearly as well) has one items of extreme interest currently: the untold story of GE Capital:

One of the biggest threats to the financial system currently is neither Citi, nor Bank Of America, nor any other pure play bank. Over the past month the administration has made it clear that the U.S. would rather print ever more money (and funnel them directly to Citi`s coffers) and potentially face default dangers, than allow another Lehman-type event. Right now, the biggest weakness, in my opinion, is the parent company of General Electric Capital, GE Corp, which incidentally is also the owner of such consistent market bottom callers as CNBC`s Jim Cramer and Mark Haines.

[Lots of very scary numbers elided - read the article in its entirety for details]

The last issue is a topic Zero Hedge previously wrote about in depth, discussing the potential ticking time bomb hanging over GE Capital in the form of a ratings agency downgrade and how that could be an immediate and terminal end for the finance subsidiary.

How did the finance arm of the company, which for generations has been seen as the cornerstone of the U.S. economy, find itself in such a quandary? A quick look at its various operating segments courtesy of BofA gives some preliminary insight into just which divisions have historically provided both revenues and profit, and why both the top and the bottom line at GECC may both be significantly impaired.

...It is notable that GECC has extensive exposure to Eastern Europe, which in this author`s view, will likely be the next major shoe to drop from a global fundamental perspective. As the IMF has lately become more and more antagonistic to the US` rosy worldview, once either Poland or Hungary ends up in default, the forced rapid revaluation of GECC`s portfolio could become the catalyst for the fair pricing of this highly overmarked portfolio, and a result in huge charges flowing through the income statement, killing earning per share metrics.

So while most eyes are looking at Vikram and Lewis and applauding their one time benefits from the massive governmental "bank stimulus program", the maker of your parents` microwaves and refrigerators could be lurking in the shadows, waiting to launch the next chapter in the law of unintended consequences.

My Comment: Especially telling is that the scary balance-sheet numbers cited by the article come from the extremely well-respected industry newsletter, Grant`s Interest Rate Observer. The toxic combination of extreme leverage, rapidly deteriorating loan portfolio and threat of ratings-agency downgrade (which would cause borrowing costs on all that leverage to spike) is exactly the same mix which did in AIG.


A 'Copper Standard' for the world's currency system?: Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

China`s State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan`s TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year`s commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We`re very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China`s pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.

Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.

While Beijing`s fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America`s debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.

This is slightly disingenuous. China has the world`s largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China`s surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth`s crust is gradually depleting its accessible ores. Above all, such a policy safeguards China`s industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".

My Comment: You can try to inflate your way out of debt, but that has "unexpected" consequences such as these. Increased demand for hard commodities due to investors and nations seeking to hedge against a devaluation of the dollar is going to make many raw materials more expensive for everyone. thus causing an effective devaluation of all paper currencies. Higher commodities prices will also prolong the global recession.

[cheesehead]

Originally Posted by ewmayer

A 'Copper Standard' for the world's currency system?: Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

... but failing to mention the metal lithium, which is currently a key component of batteries for hybrid and all-electric cars.

http://ergobalance.blogspot.com/2008...-supplies.html

http://www.sterlinggroupventures.com...erickmetal.pdf (which, while never mentioning batteries, has lots of info on properties and the other uses of lithium)

http://evworld.com/article.cfm?storyid=1180

However, as the first commenter to the ergobalance/energybalance article points out, there are competing energy-storage technologies which might sometime surpass lithium-using batteries in importance. Perhaps China is not concerned with stockpiling lithium because of that (not to mention that refined lithium metal is tricky to store).

[fivemack]

Lithium metal would be hard to store, but I think it's generally shipped as the carbonate. The big lithium hope is Bolivia - there are some salt pans with high lithium concentrations on the altiplano - but I believe there's reasonably similar geology in Tibet so it may even be available indigenously.

[ewmayer]

Originally Posted by fivemack

Lithium metal would be hard to store, but I think it's generally shipped as the carbonate. The big lithium hope is Bolivia - there are some salt pans with high lithium concentrations on the altiplano - but I believe there's reasonably similar geology in Tibet so it may even be available indigenously.

Wikipedia indicates that you are right about the "available indigenously" in China, but in a form more akin to that commonly used here in the U.S.:

"China may emerge as a significant producer of brine-based lithium carbonate around 2010. Potential capacity of up to 55,000 tonnes per year could come on-stream if projects in Qinghai province and Tibet proceed.[31]"

Note the other caveat a few paragraphs above the foregoing quote:

There are widespread hopes of using lithium ion batteries in electric vehicles, but one study concluded that "realistically achievable lithium carbonate production will be sufficient for only a small fraction of future PHEV and EV global market requirements", that "demand from the portable electronics sector will absorb much of the planned production increases in the next decade", and that "mass production of lithium carbonate is not environmentally sound, it will cause irreparable ecological damage to ecosystems that should be protected and that LiIon propulsion is incompatible with the notion of the 'Green Car'".[31]

[ewmayer]

Geithner Says `Vast Majority' of U.S. Banks Have More Capital Than Needed: Treasury Secretary Timothy Geithner told a congressional panel that the “vast majority” of U.S. banks have more capital than needed.

My Comment: Terrible Timmay just can`t stop lying - any "excess" capital most of the banks have is "borrowed" money courtesy of the U.S. taxpayer (which Timmy and his pals at Treasury are busily figuring out how to magically turn into "nonborrowed" money courtesy of the U.S. taxpayer - make no mistake, this is the biggest looting operation in history, going on right before our eyes, folks), and the biggest troublemakers have yet to set aside anywhere near the loan loss reserves that would be required to offset the likely eventual losses from their bad-loan portfolios. Of course they really can`t do the latter, because it would render them instantly and obviously insolvent. So we muddle on, and the government hopes that simply continuing to throw more money at the biggies and looking the other way as they crank up rates and fees on every transaction made by the same taxpayers who are bailing them out will allow them to gradually shore up their balance sheets, so when the housing market bottoms (really soon, they hope) and the economy turns around (ditto) and the flood of foreclosures abates, they will have staved off insolvency (only just) at the cost of a couple trillion dollars of front- and back-door bailout money and continue with their normal pillaging and privatized-profiteering-and-socialized-risk-taking operations. But let`s hear from one of the chief crooks benefitting from the looting operation himself:


Citigroup's Pandit Says He Will Repay `Every Dollar' of TARP Rescue Funds: Citigroup Inc. Chief Executive Officer Vikram Pandit, addressing shareholders after his stock price tumbled 88 percent in a year, said the company will recover and vowed to repay “every dollar with interest” of the $45 billion the bank received in government bailout funds.

My Comment: In recent weeks the banks have been falling over themselves in their rush to proclaim "they want to repay the TARP money". What they of course refer to is merely the "front door" bailout money, which (in relative terms) is chump change compared to the "back door" bailouts. Using Citigroup as an example, the latter include the recent conversion of preferred shares the government purchased as part of a large capital injection into common shares - at 3x the prevailing market price. Then there is the matter of the $300 billion in Citigroup loans the government is guaranteeing ... and the government using the FDIC as a slush fund for the banks, by having FDIC guarantee hundreds in billions of dollars of added capital-raising borrowings by the banks, a below-market-borrowing-cost subsidy which Moody`s chief economist Mark Zandi described thusly in a recent NY Times article:

“I don’t know how you measure that subsidy,” said Mark Zandi, the chief economist at Moody’s Economy.com. “That’s why they say it’s invaluable. It’s an infinite subsidy. It’s their franchise value.”

And note a key difference between the "front door" and the "back door" bailout money: The TARP money comes with severe (at least by Wall Street standards) limits on executive compensation; the FDIC subsidy carries no such restrictions.


Quote of the day: This pithy summing-up managed to sneak in between the bull v bear flames and counterflames on one of the Yahoo MBs:

"We cannot save this economy.........we can only prevent a crash landing of catastrophic proportions........think about it....we make virtually nothing....consumer economy....and the consumer is FINISHED......gimme a break this will end three ways badly... really bad... or......poof"


Cartoon of the day: Hilarious installment of Chip Dunham's Overboard yesterday has the ship`s mice discussing high and low finance:

[ewmayer]

U.S. Home Prices Rise 0.7% in First Back to Back Monthly Gain in Two Years: U.S. home prices rose 0.7 percent in February from January, the first consecutive monthly gain in two years, a sign that low interest rates may be moderating declines in real estate values.

My Comment: Indications of a genuine bottom or merely a pause in the slide induced by last fall`s temporary foreclosure moratoria (now lifted, with predictable consequences) and massive government subsidies to lower mortgage rates to below market?


ZeroHedge has an interesting Q1 report from the Friedberg Mercantile Group (a Quant hedge fund) - I excerpt only the macroeconomic bits below:

The US is heading towards an astronomic $3 trillion fiscal deficit, an amount that represents 21% of GDP and that exceeds the entire 2008 budget. Clearly, the Feds have overdone it, and in a big way. There is no possible way for the US Treasury to fund, uneventfully, this amount in a stabilized economy, that is, an economy no longer experiencing the type of free fall seen during the last quarter of 2008 and the first couple of months of 2009. At present rates, domestic savings would be woefully insufficient, especially if they are called upon to finance normal business requirements, and foreign savings will certainly not be forthcoming, at least not on that scale. That leaves the Treasury with two bad choices, one worse than the other: substantially higher long term rates or Fed monetization. Please note: stock prices have been on a tear recently, not because the market expects significant gains in economic growth/productivity and a surge in earnings. That will not happen under this administration. The true reason for this mini bull market is that the market senses a huge rise in inflation. Better to own businesses and tangible assets, it reasons, than fixed income pieces of paper. This is true. But, we suggest, it’s better yet to own the tangible assets directly, gold and commodities.

Surplus countries will see their currencies appreciate. This will be bullish for China and Asia in general, though their international reserves will initially be mauled. Others, too, will benefit. Upward floats and the accumulation of tangible international assets instead of other nations’ liabilities will change Bretton Woods II forever.

My Comment: I`m not one of the goldbugs who keep crying that gold will hit $2000, $5000, $10000 per ounce any day now when the US $ "collapses", but do think roughly 10% tangible assets (bullion or collector coins) should be a standard portfolio hedge against the worst case hyperinflationary scenario, which IMO is still only a remote possibility, but a lot less remote than it was before the Treasury and Fed embarked on their unprecedented monetization binge last year.


Mish asks, What if Commercial Real Estate Imploded and No One Paid any Notice?

The Commercial Real Estate Time Bomb has gone off but it has been lost in the euphoria of economic cheerleading and bottom calls based on dubious (at best) earnings reports from banks.

...The sentiment expressed by Paul La Monica at CNN reminds me of the the optimism in residential real estate that lasted for close to a year before the bottom fell out of the market. Now, even though it is widely understood that commercial real estate follows with a lag, optimism reigns supreme. Check out the subtitle: "Even if commercial real estate weakens further, the market probably won't collapse."

I disagree. Many regional banks that avoided the residential debacle, are now left holding the bag on commercial loans.

...America's love affair with the mall is not coming back. Boomers headed into retirement dependent on the real estate bubble have now taken a massive hit on both their houses and their stock portfolios. Neither is coming back soon. Retirement plans will be scaled back to include less travel, fewer toys (boats and cars), and less shopping in general. Moreover, a new wave of frugality has hit the children of boomers.

...And so a tsunami of commercial real estate bankruptcies is just offshore, fueled by a change in consumer attitudes. Few have bothered to take note. Complacency in commercial real estate is not justified nor will it be rewarded.

Soaring U.S. Deficit Means Billions in Bond Sales as Tax Receipts Collapse: Millions of lost jobs mean billions in lost tax revenue for the U.S. government, and billions in additional Treasury debt to fund a federal budget deficit that may soar to more than four times last year’s record $454.7 billion.

With spending on unemployment insurance and other safety net programs rising, the deficit is already at a record $956.8 billion six months into the fiscal year. To help close that gap, the Treasury Department has more than quadrupled borrowing, pushing the government deeper into debt.

“Tax receipts are just collapsing,” said Chris Ahrens, head of interest rate strategy at UBS Securities LLC in Stamford, Connecticut, one of 16 primary dealers required to bid at Treasury auctions. The need to sell more debt “is a big issue in the Treasury market and it is ongoing. The surging budget deficit is the primary cause.”

The government will have to sell $2.4 trillion in new bills, notes and bonds in fiscal 2009, according to UBS. From October through December, the Treasury sold a record $569 billion, up from $82 billion in the same period a year earlier, and auctioned another $493 billion in the last quarter, up from $156 billion. That helps to make up for the drop in tax receipts, pay for the rise in spending and refinance maturing debt. Along with the principal, the sales add additional interest costs to the deficit for years to come.

My Comment: Things are no better in fellow debtor nation the UK:

Darling Plans Record Budget Deficit, Higher Taxes on Motorists, Smokers: Chancellor of the Exchequer Alistair Darling raised taxes on motorists, smokers and the rich as he forecast the worst recession since World War II and the biggest budget deficit in the Group of 20 nations.

The Treasury will borrow 269 billion pounds ($392 billion) more than estimated in November. It will raise taxes by 3.2 billion pounds on people earning above 100,000 pounds a year and 6 billion pounds through duties for alcohol, tobacco and gasoline, Darling said in his annual budget in London today.

The moves left Prime Minister Gordon Brown’s government little room to stimulate the economy before the next election, which must be held by the middle of 2010. Darling’s expectation that growth will resume by the end of this year is too optimistic and suggests taxes will rise again, said Andrew Smith, chief economist at the accounting firm KPMG.

“Even though Darling insists that the end of the recession is in sight, we are still looking at eye watering budget deficits,” Smith said. “Plans for repairing the public finances are long on ambition but short on detail. Significant additional tax hikes will ultimately be necessary.”

My Comment: Notice the collective mass delusion (or perhaps coordinated lying in a desperate attempt to turn the lie into a self fulfilling prophecy) on the part of economists and policymakers: Worst is behind us, we see green shoots (are you sure those aren`t Marijuana buds?), glimmers of "hopiness", recovery in 2nd half of 2009, blah, blah, blah. Compare and contrast with the litany of lies, false prophecies and utterly wrong-headed "analyses" on the part of the same cabal last year. The words may have changed slightly to fit current events, but the song remains the same.

[ewmayer]

Michigan Governor: Bailed-out banks killing Chrysler: Gov. Jennifer Granholm joined those denouncing creditors of Chrysler LLC for their unwillingness to make concessions on outstanding debts, specifically targeting financial institutions that have accepted loans from the federal government.

Among Chrysler’s chief lenders are JPMorgan Chase, Citibank, Goldman Sachs and Morgan Stanley. They have asked for 40% ownership and a seat on the Chrysler board of directors in exchange for reducing their debt from $6.9 billion to $4.5 billion.

“Who knew that bailing out the banks would mean that they could kill the auto industry,” she told reporters at an unrelated event. She said the livelihoods of thousands of families are in the balance.

The institutions are playing “a very risky game” by proposing what amounts to a windfall for them, rather than accepting a market-based settlement proposed by the Obama administration.

My Comment: Perhaps this game of chicken is less risky for the banks than it would seem - after all, they know full well that the game is heavily rigged in their favor. The huge disparity in the government`s treatment of the banks and automakers provides ample evidence of that bias. Oh, and did I mention that the U.S. Treasury is for all intents and purposes a division of Goldman Sachs? I did get a chuckle out of the oxymoronic phrase, "market-based settlement proposed by the Obama administration", however.


Freddie's Acting Finance Chief Is Found Dead - WSJ Online: RESTON, Va. -- David Kellermann, acting chief financial officer of Freddie Mac, one of the housing-finance companies backed by the U.S. government, was found dead at his suburban Washington home early Wednesday.

Mr. Kellermann's wife, Donna, told local police he committed suicide, local television station WUSA reported, citing sheriff's deputies in Fairfax County. Police wouldn't confirm that the death was a suicide, only saying the body was unattended and that there were no signs of foul play.

In a statement, Freddie Mac's interim CEO, John Koskinen, said, "The Freddie Mac family is truly saddened by the news this morning," and that Mr. Kellermann's "extraordinary work ethic and integrity inspired all who worked with him." Treasury Secretary Timothy Geithner, in prepared text, said, "Our deepest sympathies are with his family and his colleagues at Freddie Mac during this difficult time."

Mr. Kellermann became Freddie's acting finance chief in September, succeeding Anthony S. Piszel amid a broader overhaul of top management. He had previously been the company's controller and principal accounting officer.

Mr. Kellermann's job made him responsible for financial controls and reporting at Freddie Mac, which is based in nearby McLean, Va. He had been with the company for more than 16 years, starting as a financial analyst and auditor in 1992, according to the company's Web site.

Investigators from the Securities and Exchange Commission and Justice Department have been questioning officials of Freddie Mac about possible accounting violations and other matters in recent months, the company disclosed in March.

Freddie disclosed in the recent SEC filing that in September it received a federal grand jury subpoena from the U.S. Attorney's Office for the Southern District of New York seeking documents related to accounting, disclosure and corporate-governance matters. That subpoena was later withdrawn, Freddie has disclosed, and the investigation was taken over by the U.S. Attorney's Office for the Eastern District of Virginia.

"We know of no connection between this terrible personal tragedy and the ongoing regulatory inquiries discussed in our recent SEC filing," said David Palombi, Freddie's chief spokesman.

My Comment: Hmmm ... This ones bears watching for further developments. My condolences to his family, in any event.


China's economic outlook brightens: People's Bank of China, Goldman Sachs and other prognosticators say government stimulus efforts are working.

My Comment: "Prognosticators" here appears to equate to "interested parties", in the sense of having a financial interest. Speaking of "interest", I found it "interesting" that nowhere in the article does the word "export" appear. It`s mostly a mishmash of official government spokespersons and Goldman Sachs pumpers spouting off about the "target GDP growth figures" - these are the ones that nearly always just get met or exceeded and whose "measurement" is entirely up to the Chinese government - and miscellaneous smoke-blowing about "inflation expectations" and "green bamboo shoots". What a load of horse pucky. Interestingly, while the banksters and brokerage types quoted in the article are almost uniformly bullish, one senior-official-not-working-for-a-bank had the guts to at least hint at the true state of things:

Lou Qinjian, deputy minister of industry and information technology, said overcapacity, including in the steel and auto sectors, was intensifying due to weak domestic and global demand.

"We can not easily conclude that the economy has bottomed out. The industrial situation remains serious," he told a forum.

Translation: "Our export economy has collapsed, and any domestic demand growth to counteract that will only come at the price of a breakneck consumer-credit expansion". That is of course followed by more banker/broker-dealer BS:

Paris-based Michala Marcussen, head of strategy and economic research at Societe Generale's asset management unit, said she shared concerns about a possible rise in sour loans and fretted that part of the 35% rally in Shanghai stocks so far this year had been fueled by breakneck credit growth.

"Having said that, I also believe Chinese equity market is attractively priced and I still believe that to be the case," Marcussen told reporters in Singapore.

My Comment: Translation: "There are clear signs of yet another huge equities bubble about to pop - but we encourage our customers to keep bidding up prices on the Bubble, so we can continue to rake in commissions and margin fees."

[ewmayer]

Banks to Get Results of "New, Tougher" Stress Tests Friday: U.S. banks will be briefed by regulators as early as Friday on how they performed in government "stress tests," before the results are made public later, The Wall Street Journal reported, citing government officials.

Some estimates of banks' likely losses that were used in the stress tests were tougher than expected, the newspaper said.

"Under a more adverse scenario, which assumes a 10.3 percent unemployment rate at the end of 2010, banks would have to calculate two-year losses of up to 8.5 percent on their first-lien mortgage portfolios, 11 percent on home-equity lines of credit, 8 percent on commercial and industrial loans, 12 percent on commercial real estate loans, and 20 percent on credit card portfolios," the paper said, citing a confidential document from the Federal Reserve.

The Fed declined to comment.

These assumptions could result in losses equal to more than half of Tier 1 bank capital, investment bank Westwood Capital estimated. Tier 1 capital is a measure of capital relative to assets, accounting for how risky the assets are.

For a group of 13 stress-tested banks -- including JPMorgan Chase & Co, Citigroup Inc, Bank of America Corp, and Wells Fargo -- Westwood Capital forecast $240.2 billion in losses, or 56 percent of their total Tier 1 capital.

"This a very disturbing bit of leaked information," Westwood Capital wrote in a research note on Wednesday.

My Comment: B..b..but, Timmay G said just yesterday that banks were flush with capital and doing just great. You`re totally harshin` my buzz here, man.

I must admit I`m still stunned at the apparent fact that the stress tests may have actually been rejiggered (the originally quoted "worst case scenario" was a complete joke) to something with a semblance of actual stressfulness.

[ewmayer]

...for possible conspiracy to commit securities fraud:

Bank of America Pushed by Paulson to Complete Merrill Purchase, Cuomo Says: Bank of America Corp. Chief Executive Officer Kenneth D. Lewis failed to tell shareholders about mounting losses at Merrill Lynch & Co. because of pressure from federal regulators to complete the takeover, according to New York State Attorney General Andrew Cuomo.

Henry Paulson, who was Treasury secretary last December, may have threatened to remove the management and directors of the Charlotte, North Carolina-based bank if they didn’t comply, Cuomo wrote in a letter to Congress that was released today. Lewis also was told not to disclose his opposition to the Merrill deal because of “staggering” deterioration at the brokerage, or the regulator’s action, according to Cuomo.

Lewis and the board of the biggest U.S. bank by assets are under fire for not telling shareholders that New York-based Merrill’s fourth-quarter loss was spiraling toward $15.8 billion before they voted to approve the deal in December. Shareholders cast ballots April 29 on whether to re-elect directors including Lewis and split his roles as chairman and CEO. Some investors are calling for the 62-year-old Lewis, CEO since 2001, to resign.

My Comment: Karl Denninger claims Paulson`s pressuring Lewis to keep mum about the losses a Merrill constitutes a conspiracy to commit fraud, in the sense that it was Paulson telling Lewis to violate his fiduciary responsibility to BofA shareholders. Mish echoes this in a post today:

New York State Attorney General Andrew Cuomo's letter to the SEC and Senate Banking Committee on the Bank of America, Merrill Lynch Merger provides strong evidence of coercion to commit securities fraud by former Treasury Secretary Paulson and Fed Chairman Ben Bernanke, and actual securities fraud by Bank of America CEO Kenneth D. Lewis.