Ben Bernanke’s performance on Capitol Hill doesn’t make him look so great. At issue is whether he overstepped his bounds by pushing Bank of America (BAC) to stick with its Merrill Lynch acquisition, while (possibly) threatening Ken Lewis with termination if he invoked a (legally dubious) MAC clause.
Bernanke says he never threatened Lewis, but obviously Lewis felt such a threat was coming from somewhere, and there is that email about sacking the board and management if Lewis invoked the MAC and it ended up failing in court and Bank of America came back to the Fed asking for assistance to close the deal.
Sorry, but this is totally reasonable.
The thing is, there’s no other threat to be made. They can’t credibly claim they’re going to deny BofA an 11th hour, Sunday-evening bailout, if they need one, since Bank of America is too big to fail. The only credible threat is that they’ll sack management, and they hope that management has enough skin in the game such that they care.
Or to put it another way, to let Ken Lewis threaten a MAC without any repercussions is to give Lewis a free roll. Heads: Bank of America gets to extricate itself from Merrill. Tails: The get a bailout to help it acquire Merrill.
What the heck is that?
The problem comes back to banks being of such a size that they’re too big to fail. When they get that large, there’s just no way to credibly deny them a bailout.
So, until there’s some way to address this issue, the only realistic lever the Fed can have over big banks is over management, and Bernanke recognised that. Why this is so outrageous to people, particularly Congress, is hard to imagine.