Is it plausible that Ken Lewis believed in October of 2008 that John Thain might try to wiggle out of Bank of America’s acquisition of Merrill Lynch?
With hindsight, this seems far-fetched. We now know that Merrill Lynch would report epic losses that would have bankrupted the firm if it had remained independent. As it was, the Merrill losses put such a huge hole in Bank of America’s balance sheet that Lewis had to ask the government for tens of billions of additional TARP aid. In fact, it was Lewis who seems to have attempted to get out of the deal—or at least been willing to bluff an exit attempt to secure more government support.
But in David Wessel’s reading of Paulson’s book we learn that Lewis was indeed telling the Treasury Secretary that he was worried Thain might try to reneg.
In October 2008, after the government had pumped money into BofA, Merrill and other big banks, Lewis confided to Paulson that he was worried Merrill CEO John Thain would try to wiggle out of the deal; he wanted Paulson to insist that Thain go through with it. Paulson says he never mentioned the call to Thain. Less than three months later, of course, Lewis would talk about backing out of the deal, completing the purchase under pressure from Paulson and Bernanke.
Derek Thompson at the Atlantic is surprised by this.
I’ve covered this topic for a few months now and I spoke with a source close to Thain at the time of the deal, but I’ve never heard that story. There are at least two reasons to question either Lewis’ statement or Paulson’s recounting. First, Merrill was days away from bankruptcy when Bank of America agreed to buy the company for a rather generous $50 billion, 86 per cent of BofA’s stock price. Merrill’s precariousness was no secret, especially to Thain who had been brought in to save the company from its increasingly likely demise.
We’re less sceptical. In October of 2008, many on Wall Street believed they were in the midst of a temporary dislocation, a liquidity crisis that would be resolved once the alleged panic was over and the alleged short-selling attacks were stopped. Lewis might very well have worried that Thain would try to reclaim Merrill’s independence once things had settled down.
What’s more, those epic losses had not yet occurred. Indeed, there are indications that the trades that triggered those losses were not yet in place. Merrill was at the time positioning itself for a recovery in the values of various assets linked to real estate—a recovery that eventually did occur, if several months too late to save Merrill. This seems to indicate that Merrill also viewed the crisis as a temporary panic.
Inside of Merrill, the prospect of being acquired by Bank of America was dramatically unpopular. Many long time Merrill veterans dreaded the vanishing of the MER symbol from the stock ticker and worried about what would happen to their firm when it was swallowed by the monster of Charlotte. No doubt there were voices whispering to Thain that he should look for a way out of the deal if it were possible.
So we’re not sure Lewis or Paulson are remembering things wrong. Or that they would have been all that far off-base in suspecting that Thain was scheming to nix the deal.