Jon Stewart lambastes Bank of America (BOA) in a recent video called Make It Rain. It seems that BOA is screwing their credit card customers in anticipation of new rules that will make it harder for them to screw those customers in the future. Very late in the 10:33 minute segment, there is one allusion to Merrill Lynch's losses, which BOA is still trying to cover after they "acquired" Merrill late in 2008, a deal that was closed on January 1, 2009.
Who was responsible for this $50 Billion Deal From Hell? (Wall Street Journal, January 22, 2009)
Mergers often prove troublesome, but few have set the land-speed record for disaster as fast as Bank of America’s $50 billion acquisition of Merrill Lynch.
It is official. In Bank of America’s acquisition of Merrill Lynch is a candidate for the title of “A Deal from Hell.” You might remember that this is inspired by a book from Robert Bruner, dean of the Darden School of Business at the University of Virginia, “Deals From Hell: M&A Lessons That Rise Above the Ashes.” Bruner’s requirements for consideration included destruction of market value; financial instability; impaired strategic position; organizational weakness; damaged reputation; or violation of ethical norms and laws.
Check, check, check, check, check and mate.
Bank of America and Merrill Lynch arranged the deal in less than 48 hours, and the hasty work shows. Thain’s departure Thursday is the clincher, particularly on the matter of the culture clash to come between Bank of America and Merrill Lynch. Dealbreaker has the internal memo here.
When BOA CEO Ken Lewis became aware of the impressive size of Merrill's losses, he wanted to back out of the deal. But that wasn't going to happen—this was a shot-gun wedding.
What happened last winter?
The House panel's questions about the BofA-Merrill deal stem from separate probes by the New York Attorney General's Office and the Special Inspector General for the Troubled Asset Relief Program, the $700 billion bailout program enacted last October.
In December, Bank of America CEO Kenneth Lewis approached regulators, including Paulson and Fed Chairman Ben Bernanke, and threatened to scuttle the acquisition after discovering the scope of Merrill's losses, according to records released by New York Attorney General Andrew Cuomo.
In his prepared testimony, Paulson said he believed that the economy, the financial markets and firms were "fragile" at that point. He was worried that there wasn't enough money in the federal bailout program to "respond to the financial chaos" to result from the collapse of the BofA-Merrill deal. He also wrote that he and other regulators believed that if the deal failed, the markets would question the health of BofA and put the bank's shareholders and the nation's financial system at risk.
After behind-the-scenes wrangling, BofA received $20 billion in aid in January on top of $25 billion it received last fall as part of TARP. The bank also got loss guarantees on $118 billion in assets to help the company absorb its purchase.
Paulson defended the extra bailout funding, saying he had made it clear since October that the government would act to prevent failure of systemically important firms.
"It was clear that if the merger proceeded, and the combined Bank of America-Merrill Lynch entity needed financial support, the government would work to provide such appropriate and necessary support," Paulson said in his prepared remarks. Last month, when testifying before the House panel, Bernanke denied accusations that he threatened to replace Bank of America managers if they didn't go through with the purchase of Merrill.
Lewis told lawmakers that he felt pressure to go through with the acquisition.
Ken Lewis felt pressure? If he wanted to keep his job, that is. From Mish's Let The Criminal Indictments Begin: Paulson, Bernanke, Lewis—
New York State Attorney General Andrew Cuomo's letter to the SEC and Senate Banking Committee on the Bank of America, Merrill Lynch Merger provides strong evidence of coercion to commit securities fraud by former Treasury Secretary Paulson and Fed Chairman Ben Bernanke, and actual securities fraud by Bank of America CEO Kenneth D. Lewis...
It's crystal clear from the letter that a strong case can be made that Paulson and Bernanke coerced Lewis to carry out a merger agreement that was not in Bank of America's shareholders best interest. Lewis arguably did so only to save his own job and the board.
The quid pro quo is clear enough. If Lewis does the deal, he gets the bailout money. If Kenny resists, he and his board gets fired by the government. Life is not nearly as complicated as it is often portrayed. Of course, Kenny should still refuse the deal because it is his fiduciary responsibility to maintain the financial integrity of the bank, but here he put himself above that sacred obligation. And Paulson, and perhaps Bernanke, should be under investigation by a Grand Jury which, if the American Justice System were operating correctly, would likely produce criminal indictments for illegal coercion.
So it's easy enough for Jon Stewart to skewer BOA for screwing its customers, but the Comedy Channel's report actually misses the point by a wide margin. And the rabbit hole goes much deeper than I've described here. Why did Paulson (and now Geithner) feel so strongly that it was so important to "prevent [the] failure of systematically important firms"? The story you're told is that the economy could never "recover" until, once again, credit flowed like wine at a Roman Orgy, which meant to neutral observers like former Goldman Sachs CEO Henry Paulson or former New York Fed chief Tim Geithner that the Really Big Banks could not be allowed to fail.
Plainly, since each new dollar of GDP has required more and more private debt to support it, this rationale "makes sense" in so far as it upholds business as usual. Not mentioned is that business as usual is insane. And just coincidentally, business as usual ensures that a huge amount of money flows towards banks that are Too-Big-To-Fail. Another flaw in this otherwise stellar reasoning was the failure to foresee that a shitload of small- or medium-sized banks would be crushed under the weight of their bad investments, especially in commercial real-estate. Nobody saved them. (Fannie and Freddie are absorbing most of the housing losses now.) The predictable result is that lending has been falling at an epic pace—
U.S. banks posted last year their sharpest decline in lending since 1942, suggesting that the industry's continued slide is making it harder for the economy to recover.
While top-tier banks are recovering at a faster clip, the rest of the industry is still suffering, according to a quarterly report from the Federal Deposit Insurance Corp. Banks fighting for survival, especially those plagued by losses on commercial real estate, are less willing to extend loans, siphoning credit from businesses and consumers.
Besides registering their biggest full-year decline in total loans outstanding in 67 years, U.S. banks set a number of grim milestones. According to the FDIC, the number of U.S. banks at risk of failing hit a 16-year high at 702. More than 5% of all loans were at least three months past due, the highest level recorded in the 26 years the data have been collected. And the problems are expected to last through 2010...
So when you see heartbreaking videos like the one below, I hope you will remember what the Real Story is. It is the sordid tale of an Empire In Decline, a place where fairness no longer exists and corruption taints all things.