The BofA sideshow

June 11, 2009

Pay no attention to the folks in front of the TV cameras. That’s the way you should view today’s Congressional hearing into whether federal regulators pressured Bank of America CEO Ken Lewis to follow through on the bank’s acquisition of Merrill Lynch.

Frankly, it really doesn’t matter whether Fed Reserve Chairman Ben Bernanke and former Treasury Secretary Hank Paulson threatened Lewis to carry through on his commitment to buy Merrill on the eve of Lehman Brothers bankruptcy. Based on the pieces of leaked emails to a select group of reporters, there is evidence that Bernanke and Paulson did do a lot of arm-twisting. 

But it’s not clear whether Bernanke and Paulson gave Lewis any kind of ultimatum.  Still, does it really matter?

I’m all for more transparency–both from the government and Wall Street banks–and it’s probably good if we get a fuller accounting of what transpired in those hectic the-house-is-on-fire months. But this is the thing: there’s still no evidence that anyone from the federal government was holding a gun to Lewis’ head when he and John Thain shook hands on the merger just as Lehman was spinning towards bankruptcy.  

Lewis bears full responsibilty for that deal–along with his newly annointed chief risk officer Greg Curl. It didn’t take a rocket scientist or a mathematician to know that Lehman’s uncontrolled bankruptcy filing would have grave consequences for the financial system. Yet that didn’t stop Lewis and Curl from agreeing to buy Merrill. And at a price that was then a substantial premium to Merrill’s then share price.

If Congressional investigators want to do more than simple grandstanding they should begin by asking Lewis what kind of due diligence his team did in September when he inked the deal. They can start by asking whether he did any due diligence or was it just wishful thinking that everything would out.

Next our elected officials can get Lewis to spell out in excruciating detail why Merrill’s losses in December were such a surprise. BofA has had no problem telling us the losses were greater than expected. But the bank has never spelled out which losses didn’t they seem coming and why.

After Lewis does all that, then Congress can start asking whether he felt pressured to follow through on the transaction.


The Deal Professor a/k/a Steven Davidoff does a great job taking apart Lewis’ so-called MAC defense and why it’s really nothing more than a red herring. (MAC, of course, stands for Material Adverse Change clause). Lewis has claimed BofA could have gotten out of the Merrill deal by invoking the MAC clause after Merrill said it’s December loss was much bigger than expected. But Davidoff says that’s a bunch of nonsense and Lewis’ position never would have prevailed in court.

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