Fed strong-armed BofA into taking Merrill Lynch

posted at 10:55 am on June 11, 2009 by Ed Morrissey

Bank of America CEO Ken Lewis has taken a lot of criticism for his agreement to absorb Merrill Lynch last year as the dominoes started to fall on the financial markets, but CNN Money reports today that the criticism may have been misdirected.  Lewis didn’t choose to take the heavy losses of ML; e-mails obtained by CNN-M show that Ben Bernanke and the Fed threatened to remove Lewis and the BofA execs if they didn’t agree to the federal cramdown:

According to emails released Wednesday that pull back the curtain on heated negotiations, Federal Reserve Chairman Ben Bernanke had suggested to another Fed official that “management is gone,” if BofA managers tried to flee the deal and later on needed further government assistance.

The revelations come thanks to Congressional subpoenas demanding that the Fed disclose emails related to Bank of America’s purchase of Merrill. CNNMoney.com acquired copies of some of the emails circulated among House Republicans late Wednesday. …

Lewis told investigators in the New York Attorney General’s office earlier this year that he felt his job was on the line if he didn’t go through with the deal. Once Lewis learned last December of Merrill Lynch’s deterioration, he told then Treasury Secretary Henry Paulson that BofA was considering backing out of the deal, according to his testimony to investigators.

Paulson said that Lewis and the BofA board would be replaced if they sought to end the merger, which Paulson viewed as integral to the health of the U.S. financial system. Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke.

As part of its newfound role as management critics on Wall Street, Congress had demanded answers as to why Lewis would have agreed to buy ML when its fourth-quarter losses were so bad.  Now we know the reason why he did it.  The government (and we should point out that this was the Bush administration) interfered in what should have been a private transaction and forced one company to buy another.  It used extortion and intimidation to do it, making the Fed and the Treasury look more like a bumbling version of a syndicate — the Corleone Family as run by Fredo.

BofA’s spokesman tried to put the best possible spin on it to CNN, saying that a lot of heated words got traded in the exigent crisis of the moment, but that’s no excuse.  Government cannot act to pick its own winners and losers.  They have to act according to the law, especially in the business world.  As the memos show, they had a backup plan to keep ML afloat if BofA refused to buy it, and in the end spent as much money bolstering the weakened BofA as they may have had to use to support ML.

The entire financial crisis shows the foolishness of government intervention (as opposed to common-sense regulation) in the markets, from the CRA all the way to the bailouts.  Unfortunately, we still have the Fredos running the Family.


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Count to 10 on June 11, 2009 at 2:17 PM

Basically, we are buying lots of tangible assets (oil, computers, whatever) and we are sending them paper with ink on it (which may soon be worthless).

I guess we’ve been getting a great deal!

BPD on June 11, 2009 at 2:46 PM

why didn’t lewis tell all this before? or why didn’t he just quit & tell this when it happened?

i’m just getting here, so pardon if someone already asked these questions.

kelley in virginia on June 11, 2009 at 2:49 PM

Count to 10 on June 11, 2009 at 2:17 PM

Um, I understand quite well the difference between trade deficits (or balance of trade, and balance of payments, which are also different), and budget deficits, thanks for thinking I’m a retard.

The US system is actualy a CLOSED system… enclosed by its own laws and banking system. It interacts with other systems, but is a system unto itself (which is why we can measure GDP and such).

The American system must MAKE more wealth, than it consumes, exports, and wastes, or it goes under. The amount of DEBT (US Gov, Corporate, and Private) we owe to other economic systems shows that this balance is NOT being maitained.

Keep with your unreal platitudes all you wish, while the American economy is still strong, it is now going further and further into debt to other countries to continue in its unrealistic and unsustainable “plan”.

10% of GMC is being sold to Canada. Chrysler was sold/given to Fiat. How many other “American” companies are now foreign owned? How much American real estate is now foreign owned? All of these point to the FACT that we are not producing as much as we are using (as a Macro Economy)… and are now having to sell off ASSETS.

Romeo13 on June 11, 2009 at 2:54 PM

Basically, we are buying lots of tangible assets (oil, computers, whatever) and we are sending them paper with ink on it (which may soon be worthless).

I guess we’ve been getting a great deal!

BPD on June 11, 2009 at 2:46 PM

Granted, that paper still means something, and things could get a bit … chaotic … if the Dems insist on grinding our economy into the dust, but, yes.

Count to 10 on June 11, 2009 at 2:54 PM

Basically, we are buying lots of tangible assets (oil, computers, whatever) and we are sending them paper with ink on it (which may soon be worthless).

I guess we’ve been getting a great deal!

BPD on June 11, 2009 at 2:46 PM

Exactly…. problem is that this is an unsustainable model. We can’t do that forever.

Romeo13 on June 11, 2009 at 2:55 PM

Romeo13 on June 11, 2009 at 2:54 PM

It is a bit simple minded to interpret the trade deficit as meaning that we consume more than we produce: it only exists because people in other countries want in on our prospects of future production. If the US were not such a powerhouse of future economic growth, we would not have the constant influx of investment, and the exchange rate would quickly bring our trade deficit to zero.
Now, P.BO’s barrow-and-spend spree is going to be sticking a monkey wrench in that, crushing both our current productivity and out prospects for future productivity. You will know that the important people in the rest of the world have caught on to that when/if our trade deficit shrinks, or worse, goes into surplus. It will be painful, but still just the natural consequences of socialist policy, the better to teach us of our folly for hiring Democrats.

Count to 10 on June 11, 2009 at 3:03 PM

Exactly…. problem is that this is an unsustainable model. We can’t do that forever.

Romeo13 on June 11, 2009 at 2:55 PM

It’s actually not any more unstable than anything else in economics. As long as the world uses US Dollars the way it used to use gold, and the world economy expands, it will continue. If that ends at any point, there will be consequences, but there is nothing inherently bad about it in and of itself.

Count to 10 on June 11, 2009 at 3:06 PM

Circling back to this:

Federal Reserve Chairman Ben Bernanke had suggested to another Fed official that “management is gone,”

Isn’t there something called the RICO Act that responds to this sort of intimidation by a group?

Paulson said that Lewis and the BofA board would be replaced if they sought to end the merger, which Paulson viewed as integral to the health of the U.S. financial system. Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke.

No matter who did it, it is wrong…

right2bright on June 11, 2009 at 3:18 PM

It’s actually not any more unstable than anything else in economics. As long as the world uses US Dollars the way it used to use gold, and the world economy expands, it will continue. If that ends at any point, there will be consequences, but there is nothing inherently bad about it in and of itself.

Count to 10 on June 11, 2009 at 3:06 PM

Key part is “and the world economy expands”… which it is not.. Recesion? Thats what makes it unsustainable. Its based on the assumption that things will always go well… but in real life it does not.

Romeo13 on June 11, 2009 at 3:26 PM

Thinking further on this…

Is our economy based on nothing more than a blatant pyramid scheme perpetuated by the Banking system?

If you look at fractional lending practices, and the amount the banks are leveraged, any hit to the system of even 3% or 4% would cause collapse… as we are seeing now.

Is this all just an effort by the banking system insiders to keep the Pyramid scheme afloat?

Romeo13 on June 11, 2009 at 3:37 PM

it only exists because people in other countries want in on our prospects of future production.

Count to 10 on June 11, 2009 at 3:03 PM

Yes, but that’s an illusion. The scam is that the dollars we send to other countries constitute an IOU on future production. Other countries believed that those IOUs would actually be repaid eventually. Unfortunately for them we have been selling the cows and chickens to buy milk and eggs, and have no productive capacity to make good on those IOUs. As Romeo said above, it’s just a giant Ponzi scheme, and as we know, those always fail when investors lose trust. The bond market collapse of late shows that the Ponzi economy that the US government and Federal Reserve have helped facilitate is coming to an end.

Ahh a Lion on June 11, 2009 at 3:59 PM

Ahh a Lion on June 11, 2009 at 3:59 PM

Well, it wasn’t a Ponzi scheme until now, and even that is pushing it. Continuous global economic growth is pretty much a given, except when socialists and other control freaks come in and dam it up.
So long as the US currency was kept stable, none of this was a problem, but we now have people in control with dangerously incorrect economic theories which they will push at the expense of the robustness of our currency. Yes, things are going to get bad, but the trade deficit is not the cause true cause of that pain, only one of the many instruments by which the consequences of socialist policy will drive home our errors.

Count to 10 on June 11, 2009 at 4:10 PM

Count to 10 on June 11, 2009 at 4:10 PM

Do you understand how the basis of the modern banking system, fractional lending works?

Its a classic pyramid scheme, which will only work if there is no hit to the system larger than your cash reserves.

When you are leveraged up to 25 times, as was normal before the latest little downturn, any 3-5% downturn, like in a recesion, will destroy the banking system…. which is EXACTLY what happened (housing bubble), and is why they have had to prop up the system with so much Taxpayer IOUs and manufactured cash.

That downturn could be due to bad Gov decisions (which we have), called in debt, natural disaster, War, or a bubble in some comodity.

If the system cannot survive a 3-5% economic downturn without Government intervention, then the system is flawed, because history shows those downturns are almost inevitable.

Romeo13 on June 11, 2009 at 4:53 PM

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