There are two storylines that Bank of America has been pushing about its decision to go through with the Merrill Lynch acquisition, even after it became clear that Merrill was facing billions in losses. The first paints Bank of America as a martyr that decided to bite the bullet and go through with the deal in order to save the broader economy from collapse. The second is that BofA was forced into a shotgun wedding by federal regulators. But recently released emails from Federal Reserve officials raise questions about both of these stories.
As for the notion that BofA returned to the taxpayer trough for a second serving of bailout funds in order to save Merrill and prevent a larger financial catastrophe... According to the Washington Post, the Fed's internal emails show that "the government did not just move to rescue the Merrill Lynch acquisition -- officials also needed to rescue Bank of America," whose "own health still was in a downward spiral. Regulators calculated more than half the decline in Bank of America's capital reserves was the result of internal problems..."
Far from being Merrill's heroic savior, these events raise the question: Did BofA use Merrill as a crutch to garner public sympathy for another taxpayer handout? Or perhaps something even more cynical. The Washington Post reports that when BofA CEO Ken Lewis testified before a Congressional committee on June 11th, "Democrats pressed Lewis to acknowledge he had threatened to leave a major investment bank to a grim fate as a gambit to get public money" (more on that below).
Which brings us back to that second storyline -- the shotgun wedding.
Lewis told New York Attorney General Andrew Cuomo that he had approached regulators about invoking a material adverse change (MAC) clause in order to walk away from the Merrill deal after learning of Merrill's losses in the fourth quarter, but that that the feds had instructed him not to disclose the information to the public and that if he exercised the clause, that the government would replace the bank's management and its board of directors. So the government supposedly tied Lewis's hands, gagged his mouth, and forced him to walk the plank (of course they gave him a $120 billion bailout package as a life jacket to help BofA stay afloat, but that's neither here nor there).
But according to the New York Times, regulators did not think Lewis was actually serious with his threat to walk away from the merger. In an internal memo, one Fed official pointed to the "reputational consequences" of BofA pulling out of the deal, since management's judgment and ability to manage risk would be called into question. Internal emails show that some Fed officials believed that Lewis should have known about Merrill's problems even before the shareholder vote to seal the deal, but that he pushed forth with the transaction anyway. Furthermore, Washington Post columnist Steven Pearlstein points out that if BofA had pulled out of the deal and Merrill had collapsed and a financial meltdown ensued, BofA "would have been the first and biggest casualty in such a meltdown" because of its own deteriorating health.
But the Fed played ball anyway, and at the end of the day, BofA, a bank whose health was in a "downward spiral" and that had "mounting losses and [a] thinly capitalized balance sheet," walked away with a bailout package worth nearly $120 billion. Lewis even pressed for a get out of jail free card that said the government had ordered him to close the deal with Merrill in case he got hit with shareholder lawsuits, but regulators refused.
Do these facts paint the story of an unwilling BofA being dragged to the altar by regulators? At the Congressional hearing on the 11th, some lawmakers thought otherwise. Congressman Edolphus Towns (D-NY) said, "The question is, who was holding the shotgun?"
Did the Fed force BofA into a shotgun wedding, or is it possible that BofA put a shotgun to the head of the broader economy in order to get political and economic cover for a bailout that it needed anyway?
