Thursday, April 23, 2009

Ken Lewis confirms my suspicions

As readers of this feature likely know, I worked for Bank of America for 3 years earlier in the decade. It was the most go-go time of the housing boom/bubble and things were going great guns for the Bank, including our line of business. B of A has always been aggressive in expanding its reach, but it struck me as passing strange that it would agree to acquire Merrill Lynch last fall as the financial crisis first became clear, especially since Merrill was hemorrhaging money at the time. The acquisition has just about killed B of A and the effects have cost many people their jobs, including many of my old friends with the Bank.

CEO Ken Lewis is an aggressive businessman, but he's never been a fool. So why did B of A go through with what was clearly a bad deal? The Wall Street Journal has now provided the reason (via Hot Air):

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. — a deal that later triggered a government bailout of BofA — according to testimony by Kenneth Lewis, the bank’s chief executive.

Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.



Emphasis mine. Awfully nice of Paulson and Bernanke to expect Lewis and my friends who have now lost their jobs to fall on their swords, huh?

Official Washington is all aflutter about torture memos and similar minuets this week and the various portside windbags on Capitol Hill are primping and putting on their makeup to have hearings about it. Forget all that. You want to have a Truth Commission? Let's get to the truth of this matter. If what Lewis is saying is true, and based on my experience as an old B of A hand I have no reason to believe it isn't, this is one of the worst things that has ever happened in Washington. And yes, it happened on George W. Bush's watch.

3 comments:

my name is Amanda said...

Bernanke and Paulson ought to be waterboarded for this!

I love the "bully in the schoolyard story" though. It wasn't "up to" him? Take on Merrill - or they'll do what?! Does the CEO not have a responsibility to disclose this info to the shareholders as well?

"...told prosecutors that he believed..." he was being instructed - that is some purposeful language there.

I would hope that if this were true, then it was a motivated by a genuine desire to help sustain the economy.

Anyway, I admit that economics and the financial crisis is not something in which I am an expert. I find the whole thing complicated and confusing. But I do know exactly how to take a "they made me deceive" story when I read it.

Mark Heuring said...

I understand your skepticism, Amanda. There is more to the story and I'll have another post up about it later tonight. Put it this way – Ken Lewis was given a choice of two bayonets. He had to march into one of them.

Gino said...

besides, if you dont play ball with govt regulators, they can bury you in BS inquiries, false accusations, innumerable audits and trumped up charges.

it is the way of washington.

amanda is right. she doesnt understand that business. neither do i. niether do 99% of the public.
thats why something like waterbaording gets coverage, and the govt men get away with the true criminal acts.