Another Theory For Merrill’s Disastrous December


Bank of America’s propaganda machine wants everyone to believe that Ken Lewis and BAC were as shocked as everyone else when Merrill suddenly revealed a $15.5 billion Q4 loss. Bank of America has thus far refused to provide details about this loss, however, sparking questions about how, when, and why it happened.

Bank of America has said that the loss mostly happened in December–presumably between the shareholder meeting on December 5th, when it assured shareholders that everything was a-OK, and December 17th, when Ken Lewis flew to Washington to threaten to invoke a material adverse change clause unless Paulson and Bernanke bailed him out again.

The early story was that Merrill sustained violent trading losses in December.  No one can figure out, however, why this would have happpened in December, when the markets were calm, instead of in November, when they crashed.  Ex Merrill CEO John Thain, meanwhile, said publicly that the losses did not come from trading but from legacy Merrill assets, triggering further questions.  Again, BOFA has offered no clarification.

In the absence of facts, we can only speculate, so here’s one possible explanation for what happened:

  • Merrill sustained big losses in November
  • Bank of America went ahead with the shareholder meeting and got approval for the deal
  • Ken Lewis learned about the November losses, knew he would be savaged for arranging the deal, and flew to Washington to threaten to walk unless Paulson and Bernanke gave him a sweetheart bailout.
  • Lewis got a secret agreement from Paulson and Bernanke that the taxpayer would cover him.
  • Knowing it had a deal in hand, Bank of America then ordered Merrill to take severe writedowns on existing assets to minimize the likelihood that it would have to take these writedowns later. These writedowns came at the end of December, thus producing the December “losses.”  (And thus conforming with Thain’s story that the losses came from existing assets).
  • Bank of America claimed to be shocked by the extent of the losses.

What would all this accomplish?  It would allow Ken Lewis and Bank of America to deflect criticism that they had spent $50 billion on an asset that was actually worth nothing (Merrill).  It would support the story that the losses were all Thain and Merrill’s fault.  It would allow Lewis to say that Paulson and Bernanke wanted him to go forward with the deal for the good of the country.

It would also explain why the losses came in “December,” as well as why Bank of America has yet to explain them.

Any other theories?  (Or, better yet, knowledge?)  Please share!

See Also: Did The Government Really Force Bank of America To Buy Merrill?