Smoke Clears on Shotgun Merger
From the Details of BofA-Merrill Deal, Lawmakers Draw Arguments for Reform

By Binyamin Appelbaum
Washington Post Staff Writer
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.

But the e-mails also make clear that the government did not just move to rescue the Merrill Lynch acquisition -- officials also needed to rescue Bank of America. The company already had received $15 billion in federal aid, plus another $10 billion to buy Merrill Lynch, but its own health still was in a downward spiral.

Regulators calculated that more than half the decline in Bank of America's capital reserves was the result of internal problems, according to an e-mail sent Dec. 18. The conclusion was at odds with Bank of America's public explanation at the time that its need for additional government help was primarily the result of a merger that would help the broader economy. One regulator wrote that the finding was a "smoking gun."

Asked yesterday about the apparent contradiction, Bank of America spokesman Lawrence Di Rita said, "We've have not had the opportunity to review any of these documents, and it's not appropriate for us to comment."

Neither the e-mails nor the hearing, however, clarified the crucial question of who held the shotgun. Fed officials wrote repeatedly that they had not forced Bank of America to close the deal. Indeed, the e-mails show that the Fed refused to provide legal cover for the company if it were sued by shareholders for completing the acquisition. The Fed decided not to provide Bank of America with a letter stating that officials had determined that the bank would be harmed if the deal fell through.

"I don't think it's necessary or appropriate for us to give Lewis a letter along the lines he asked," Alvarez wrote in an e-mail to Bernanke. "First, we didn't order him to go forward -- we simply explained our views on what the market reaction would be and left the decision to him. Second, making hard decisions is what he gets paid for."

Lewis in testimony yesterday agreed that the bank had made its own choice, although he denied asking regulators for such a letter.

But members of both parties suggested that Lewis was concealing the truth: that the Fed had forced the company to complete the deal by threatening to fire Lewis and other executives, and that he was refusing to say so because he did not want to anger regulators.

The parties disagreed, however, about the implications of the government's role.

Rep. Darrell Issa (R-Calif.) said that regulators acting as "financial vigilantes" were jeopardizing the confidence necessary for private markets to function.

"If this administration continues to vilify private investors who choose to exercise their legal rights . . . I am concerned about the preservation of our free market principles," Issa said in a prepared statement.

Some Democrats, by contrast, saw the episode as evidence that regulators were working behind closed doors to advance the interest of banks at the expense of the public.

And several representatives seized the opportunity to press Lewis on other aspects of the company's business.

Rep. Gerald E. Connolly (D-Va.) questioned Lewis's choice of Gregory Curl, the architect of the Merrill Lynch deal, as his new chief risk officer.

"Is it wise to appoint a man who missed $12 billion in Merrill Lynch losses?" Connolly said.

Lewis, his decisions now a subject of Congressional ridicule, paused several times.

"No one thought things would get as bad as it, as it did in the fourth quarter," he managed.

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