Shotgun Merger: Bank of America and Merrill Lynch

Almost without exception, the press would lead you to believe that the banks are the real culprits behind the financial crisis.   The media coverage implies, assumes, or outright states that it was the banks who first asked the government for a bailout.  And because the banks asked, the argument goes, the government has every right to tell them what to do.  But, to my knowledge, the banks did NOT "go to the government and ask for help," and I have been trying to make that very point to every local and national reporter who's talked to me on the topic for the last several months, without success.  

 

I have very reliable information (including the Fall 2008 memos from Hank Paulson to Bank of America, among others, revealing that the banks were required to take the TARP money whether they wanted it or not) that it was the bailout architects who first approached the strongest banks about taking bailout money to help ease the financial crisis.  Bank of America initially declined.  In very short order, however, the regulators' request became an outright order; Bank of America would take the bailout money, or else.  Or else what?  Read on.

Back in January of this year a reporter for a newswire service asked me if I thought Ken Lewis should be fired because of the negative stock price reaction to the Merrill Lynch deal.  My answer was no, because I thought that BAC had generated a healthy return for its stockholders over the years under Mr. Lewis' watch. I noted that Mr. Lewis now had a very difficult job in trying to both appease the Treasury Department and keep shareholders happy. It's like having two Gods -- which do you follow? The exact quote is:

 

"Ken Lewis is in a very difficult spot," said Sherry Jarrell, a business professor at Wake Forest University in Winston-Salem, North Carolina. "He cannot please the political interest that the government role entails and the market interest in maximizing value for
shareholders."

 

It was evident to me at the time that BAC had significant conflicts about revealing what it knew about Merrill Lynch's problems to the public in accordance with its fiduciary responsibilities, versus obeying "suggestions" from the Federal Reserve and the all-powerful Treasury Department about proceeding with the deal.  

 

Shortly after this story appeared, Ken Lewis' testimony in a New York AG investigation into the Merrill Lynch bonuses was released.  In it, he stated that Bank of America was told by the Treasury and the Fed to go forward with the Merrill Lynch deal, even though BAC sought to kill the merger bid when they discovered negative new material information about Merrill's performance.  I wondered, "or else what?"

 

Until today, it was just a guess on my part that the "or else" meant that the CEO or board member(s) would be fired.  Today, my suspicion was confirmed.  In testimony in Washington, Ken Lewis, ex CEO of  Bank of America, stated that the regulators essentially told him in December of 2008 that if Bank of America did not proceed with the Merrill Lynch takeover that he and certain board members would be replaced.  (Turns out that this was reported in a February 5th Wall Street Journal article but I have to admit that I missed it then! Apparently I wasn't alone.)

 

I have to say I'm relieved that the "or else" didn't involve more explicit corruption on the part of government officials, like drumming up fake criminal charges with the threat of jail time.  Sad to say, but at this point, I wouldn't be surprised. 

Comments

[chris kwong]

smoke and mirrors. If we put enough stuff out there, sooner or later we will hit something that everyone is "interested" in. The problem is will anything ever really get done?

[Brandon Hartsell]

This is consistent with what I heard from a former Wachovia chairman. They were told what they were going to do by the government against their protests. None had the will to say 'well what if we don't do what you tell us'.

Citizen need to be asking more questions and getting more involved.