The definition of commitment, from the Latin committere – to connect, entrust — just got an update from Ken Lewis, CEO of Bank of America.
Commitment is the pivotal word in the frenzied if not frantic dealings of Lewis with Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson last December — a time when it looked as if the world of finance was about to collapse. Lewis was having second thoughts about completing the purchase of Merrill Lynch, which he says unexpectedly posted $12 billion in new losses in the last weeks of 2008. Lewis still had time to scotch the deal or at the very least renegotiate the terms. The feds went ballistic when he informed them that he was thinking about invoking a material adverse change.
As Lewis said in testimony Thursday before the House Committee on Oversight and Regulation, the regulators feared spooking the market any further. The question many of our honorable representatives wanted answered: Did the feds agree to shell out billions of taxpayer money to fill the hole Merrill Lynch was burning through BoA’s capital in exchange for Lewis’s silence?
Lewis, nervously running his tongue across his teeth throughout his testimony, acknowledged that he had a “commitment” from the Federal Reserve and the US Treasury for help. Was this the “gotchya” moment?
No, Lewis corrected. On December 8, he had a commitment “to work toward a solution.” He added that that is not the same as an “agreement… as I would think of it as a businessman.”
There was no pay-to-play agreement, Lewis basically said — although there sure was a lot of pressure to go forward. It was his decision alone to go through with the Merrill deal. And based on the emails the House Committee released yesterday, that’s just how the regulators thought it should be. Essentially, the feds argued that he gets paid the big bucks to make those decisions.
The emails also reveal something else very important: Bank of America may have been in just as bad shape as Merrill Lynch. The threat to invoke the MAC clause on the Merrill deal may well have been a cover for BoA and its dwindling capital base. The emails make for riveting reading: Bank of America appears bungling, unable to produce basic data on the Merrill deal to the Federal Reserve even though it had been conducting due diligence for months. The feds are clearly shocked at how inept the BoA team appears.
The feds also seem to feel the Merrill write-downs in the fourth quarter weren’t that big a deal: Investors would be more intersted in 2009 pro forma results. They also painted a picture of Lewis as an executive a little too interested in preserving his job, as a man who asks for a CYA letter from regulators on a decision to go through with the Merrill deal. He feared shareholder lawsuits. No one seemed concerned about whether hiding the information was the right thing to do. Did shareholders and taxpayers need protection from the truth, the clear implications of all the emails and discussions between the key parties?
Technically speaking, the Federal Reserve, Treasury, and Office of the Comptroller of the Currency didn’t instruct Lewis on how to do his job. No one ordered him to buy Merrill or to remain silent about accelerating losses. But did Don Corleone ever really have to tell anyone what the right thing to do was?
In the passive voice of a team player, Lewis explained that he held off announcing the Merrill losses until BoA released its fourth quarter earnings in January 2009. Why? He wanted to accede to “the desire by the Federal Reserve and the Treasury to have an objective to have an announcement at one time so it wouldn’t spook the capital markets.” The feds clearly feared the short bursts of bad news, the rat-a-tat of Merrill’s deepening losses and then of BoA’s precarious capital position — independent of Merrill.
The denouement: In January BoA got another $20 billion in TARP funds (in addtion to the $15 billion he said he didn’t need in October 2008) and $118 billion in guarantees for troubled assets. And six months later, on the day of Lewis’s testimony, Morgan Stanley raised its outlook on Bank of America, largely on the strength of profits from its controversial investments in Merrill Lynch and Countrywide Mortgage.
So the deal may work out for BoA but in the process investors and taxpayers have been trampled. The last quarter of 2008 was one of the darkest in memory: It felt as if the financial system was on the verge of collapse. Much of that anxiety was the result of the way the leadership in this country handled the crisis — backing to and fro; hiding information from the public; changing direction. If the downturn in the economy that began in 2007 is now known as the Great Recession, the last few months in 2008 may well deserve its own moniker — the Quarter of Darkness. Let’s hope that the key players make a real commitment to greater transparency going forward. By now, they should have learned that darkness doesn’t lift fear it only spreads it further.
Image by Getty Images via Daylife