Smoke Clears on Shotgun Merger
Friday, June 12, 2009
House Democrats and Republicans yesterday picked through the details of Bank of America's shotgun merger with Merrill Lynch, a crucial episode in the dueling narratives that the parties increasingly are telling about the government's role in the financial crisis.
A House oversight committee had called Bank of America's chief executive, Kenneth E. Lewis, to testify about his interaction with the government after he threatened to walk away from the purchase of Merrill Lynch. The deal, which initially involved no federal assistance, closed only after Bank of America secured $20 billion in federal aid and a government guarantee to limit losses on $118 billion in toxic assets.
Over the course of three hours, Republicans on the Committee on Oversight and Government Reform sought agreement from Lewis that the government had forced him to complete a deal that no longer made sense, while Democrats pressed Lewis to acknowledge he had threatened to leave a major investment bank to a grim fate as a gambit to get public money.
In the words of committee chairman Edolphus Towns (D-N.Y.), "The question is, who was holding the shotgun?"
The different answers offered by the two parties reflect their judgments about what new laws should be written as Congress embarks on overhauling the financial regulatory system.
"One of the lessons from this case is that we need much more transparency and accountability in the financial regulatory and oversight process," Towns said. "The American taxpayers and corporate shareholders deserve no less. They need to know what's going on."
Rep. Jim Jordan (R-Ohio) drew a different moral: That the government had gone too far.
"The rule of law restricts the government's ability to do whatever it wants," Jordan said. "We must understand the full story of what happened in the process of the government taking over much of the banking industry so that when the next crisis occurs we can understand the proper limits of government action in a free and civil society."
The hearing focused mostly on a few frantic weeks in December after Bank of America informed the Federal Reserve, its primary regulator, that it might abandon the deal. Regulators launched an intensive effort to dissuade the company from what Fed Chairman Ben S. Bernanke called "a foolish move" in an e-mail to subordinates. The Fed was concerned that both Merrill Lynch and Bank of America could lose the confidence of investors and collapse, threatening the broader financial system.
A trove of internal e-mails the committee subpoenaed from the Fed offer a rare look at the deliberations of the secretive agency.
After Bank of America told Fed regulators it was backing away from the deal because Merrill Lynch's losses had climbed to unexpected heights, senior Fed officials repeatedly asked why Lewis had been caught by surprise, writing that this reflected poorly on his leadership. "Lewis should have been aware of the problems at ML earlier (perhaps as early as mid-November) and not caught by surprise," the Fed's general counsel, Scott Alvarez, wrote Dec. 23.