Fed strong-armed BofA into taking Merrill Lynch

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.