We’ve very publicly called for the ouster of Bank of America head Ken Lewis. Under his leadership, Band Of America march right up to the edge of the abyss and then jumped right off. If not for a huge government safety net, Bank of America would be gone. The acquisitions of toxic waste dumps like Merrill Lynch and Countrywide Financial were particuarly boneheaded.
Could we be wrong in holding Lewis responsibile for this disaster? We’ve previously said that we based our call for Lewis to be fired based on the idea that there wasn’t some secret backroom Treasury deal where Hank Paulson forced him to take one for the team. But what if there was?
Fortune says that when Lewis figured out how bad things were at Merrill, he tried to back out of the deal. But the Committee To Save The World told him it was too late for that. He had to buy Merrill.
When Lewis saw Merrill’s write-downs mounting, he wanted to get out of the deal. BofA also faced a disastrous fourth quarter as losses on consumer loans, from credit cards to home equity, kept cascading. Lewis feared that BofA no longer had enough capital to absorb a damaged Merrill. On Wednesday, Dec. 17, he flew to Washington to discuss his options. At 6 p.m., he sat down with Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson in the cathedral-like Federal Reserve building, renowned for its echoing vastness. Lewis told Bernanke and Paulson that because Merrill’s losses were so much worse than expected, BofA was in a position to invoke a “material adverse effect” clause from the merger contract to cancel the deal.
Bernanke and Paulson weren’t swayed. They told Lewis that the Fed’s legal staff had read the contract, and that under the law, BofA absolutely had to close the deal. They also said that a failure to buy Merrill would put the entire banking system at risk. They made it clear that renegotiating the price – a natural move in normal times – was not an option. The reason: It would take two months to issue new proxy statements and hold shareholder votes at both companies, while the fate of Merrill stayed in limbo. Bernanke and Paulson said they would provide a rescue package for BofA to ensure that it had adequate capital to complete the deal.
Technically the government did not have the authority to force Lewis to buy Merrill. But it hardly matters: In the current crisis bankers have little alternative but to do what Washington tells them. “The Fed and Treasury made it crystal clear,” says one person familiar with the talks. “Our position is your position.”
While this version of events doesn’t totally absolve Lewis–he didn’t have to agree to the acquisition in a rushed weekend without diligence in the first place–it does change the story. And it makes it far more depressing because it shows the banking regulators were doing far more than recapitalizing banks. They were attempting to impose central planning on the structure of the banking industry, with disasterous results.
Keep in mind, however, that this version of events clearly comes from Lewis himself or a deputy authorised to leak the story to the press. It is being told to Fortune’s reporters in an attempt to rescue Lewis’s reputation. It may be some time before we get a final accounting of all the backroom bankersterism that went on at the end of 2008.