What if our leaders had done something really bold last December, like told everyone the truth about Merrill Lynch problems, but then said the Bank of America merger would go through for the good of the financial system? Ironically, I think that could have bolstered confidence. Or at least done no more damage than JPMorgan’s shotgun marriage to Bear Stearns.
That’s what screams out at me after reading the documents on the merger released this afternoon from New York State Attorney General Andrew Cuomo. It’s a quick trip through a time machine. As bad as things seem now, they seemed much scarier less than six months ago. No one was sure whether the economic downturn would spiral completely out of control. Nonetheless, it’s shocking to read about a US Treasury Secretary threatening a CEO of a major bank under the guise of protecting the system. Ken Lewis, the Bank of America CEO, registers his shock in his testimony about the merger with Merrill Lynch.
In this section of his deposition, Lewis explains why he agreed to Henry Paulson’s demand that he stick to the Merrill deal even though he could legally kill it by invoking a “materially adverse event” (MAC). Paulson, among other things, threatens to fire the BoA management and board (can he really do that??). Here’s the exchange between the AG lawyer and Lewis:
Q. … did you consider whether you should also put in the response about Mr. Paulson’s communication to you that if you did invoke the MAC he would replace the management and the board?
A. No. Because that was not the reason that we went ahead with the deal. As I said, the threat wasn’t as meaningful to us or to me and the board as the severity of it. Meaning, that if they felt that strongly, that that should be a strong consideration for us to take into account.
Q. So the communication that Mr. Paulson made was, in fact, the turning point for you in terms of your decision-making?
A. The seriousness of the statement more than the threat itself.
Mr. Liman: What do you mean by “the seriousness of the statement”?
THE WITNESS: The fact that somebody would say that to the CEO of Bank of America at a time that it was in good standing just
showed to me that they had a deep belief that we should not call the MAC.
Lewis says he wasn’t afraid of losing his job, but he was willing to sacrifice the interest of his shareholders without giving them a choice. Later, he lamely says that shareholders would be hurt only in the short run, maybe three years.
So here’s the pecking order, according to the documents: Fed Chairman Ben Bernanke pressured Paulson who twists Lewis’s arm; Lewis puts the pressure on the board; and the shareholders? They don’t even make it into the pecking order.They just get to pay for everything. My sympathy for the policymakers is waning. Earlier today, I wrote about inadequate disclosure. The Feds clearly didn’t — and still don’t — think we can handle the truth.
So what would have happened if Paulson, Bernanke, and Lewis had put out an announcement saying Bank of America was going to buy Merrill Lynch, which unexpectedly lost $15 billion in the fourth quarter? Then they could have explained in detail how this plan would save Merrill and the financial system. Would this have set off a panic or restored confidence more quickly to the system? Sure, many would have sold BoA shares. But they tanked later anyway. The bank and the financial system, thankfully, are still standing.