Kind of. There are two issues here that do not entirely make sense. But first, a timeline of events for those who just tuned in. In September 2008, when the financial world had fallen to its knees, Merrill Lynch CEO John Thain realized that losses were too grave for the company to live without major invervention. With the help of the US government, he brokered a deal to merge with Bank of America, paid for with $50 billion of stock. Written into the merger agreement was the understanding that Merrill's losses were potentially enormous and that no changes in business, economic or market conditions could change the terms of the deal.
In December, however, BofA's Lewis, sensing that the losses were too much for his company to stand, went to Washington, DC, to meet with Bernanke and Paulson to explain he wanted to back out of the deal. Lewis testified that they both threatened to fire him. Bernanke said he didn't. Paulson now says that, well, he personally did. But he was right to do so, and he acted alone.
For some, perhaps that sounds like the end of the story. But I have two questions.
1. Did Ken Lewis Violate His Fiduciary Responsibilities?
Let's say we take all three men at their word. Doesn't that still mean that Ken Lewis took a bad deal home with him for fear of losing his job, and put himself ahead of shareholders? Would that be illegal under security laws? We're might find out soon. At least five pension funds have sued Ken Lewis for withholding information from shareholders.
2. What Do We Actually Wish Had Happened?
It's unclear to me exactly what Congress wanted to happen
with the Washington, DC meeting. Certainly we didn't want Merrill Lynch to fail, which could have followed Lewis' cancellation of the merger -- after all, we saw the shock the system caused by Lehman's collapse. So are we mad at Paulson for twisting Lewis' arm or not? It seems we are.
But why? I understand the basic premise of the anger: Intimidation/Shadiness = Bad. Minimal government intervention/private company independence = Good. But how do those axioms shake down in the BofA merger? On the one hand, you have Congressmen like Dennis Kucinich who are wondering why Ken Lewis wasn't fired. "Not a single CEO of a systemically significant bank was removed from his job by government action for a misdeed or mistake," Kucinich said today. One the other hand, Rep. Jim Jordan of Ohio is upset by what he calls"a clear pattern of deception and intimidation." But to fire a bank CEO represents the ultimate act of intimidation, right? Reading between the lines, it's unclear whether Congress wanted Paulson and Bernanke to allow Lewis to back out of the deal, or fire Lewis to preserve the merger.
Let me see---- who is shaving the truth... Think it maybe the Bank... Ummm or our Gov... Nah--- they---politicians would never tell us something that is not true...wanna beat ,,,
Basically, a US official - Paulson at least - threatened the CEO of a large publicly traded bank if he did not complete a merger that would endanger both stockholders and depositors in his bank.
Bernanke, as head of the Fed, is supposed to look out for benefit of depositors. The very basis of Fed regulation is to prevent banks from endangering their depositors' money. If Bernanke went along with the forced merger, he basically did the opposite of what his duties mandate since the merger DID endanger depositors.
But Bernanke and Paulson might have both thought the merger was in the best interests of both companies' depositors in the long term (and, if you believe their testimonies, they did). It was Lewis who has testified that he felt in December that the deal was rotten. So it's Lewis that we should be pinning that blame to, right?
Absorbing the Merrill losses, with all their toxic assets, could not be good for B of A. Lewis realized that the losses were far higher than anticipated and attempted to protect his stockholders and depositors. That's his job. His job is NOT to look out for Merrill, nor is it to look out for the financial industry in general. How could it be even remotely contrived as "good" for B of A depositors? The necessity of TARP funds proves that. By the way, Merrill has no "depositors".
The ill for B of A was confirmed after the Merrill merger. Then lewis got all sorts of grief for doing what the government wanted, and possibly forced, him to do.
Also, was B of A still supposed to fork our 50 Bil in stock, diluting B of A shareholders equity, for a company that was in death throes? I have never, ever heard of a proposed merger that did NOT have a clause that would entail a major change if the acquired company showed a material negative change in assets. I'd be quite surprised if the B of A lawyers would have gone to the mat over not including it.
Surprisingly, many public mergers exclude that sort of thing from the contractual terms. Instead, they rely on shareholders voting against the merger when financial terms deteriorate.
Did either Bernanke or Paulson have the clear legal authority to fire Lewis? Statutory or contractual, from the TARP?
OK, from what I've been able to find, as a member bank of the FED, Bernanke had the ability to force changes in its governance. Apparently the FED also insisted on changes to its board to get more expertise.
The other thing to consider is the MAC agreement signed my BofA, which could have made it legally nearly impossible to back out of the merger. Explanation here:
http://business.theatlantic.com/2009/06/within_the_financial_crisis_an.php
The MAE clause in the contract probably could not have been invoked without breaching the merger agreement. That is, the decline in ML's financial fortunes did not constitute a MAE as drafted in the merger agreement. Thus, Lewis could not legally have directly caused B of A from backing out of the merger. However, that's not what (knowledgable) critics are claiming.
Instead, the critics are charging Lewis did not share all of his information with his shareholders in the days leading up to the shareholder vote to approve the merger. In December 2008, Lewis had information that ML was in much worse shape than expected. That information was highly relevant to the shareholder's decision to approve or not approve the merger. Lewis did not publicly disclose that information because of the threat to his job.
According to the critics and the shareholder lawsuits, Lewis chose job security over disclosing the information to the shareholders. Had he disclosed the information, the merger almost certainly would not have been consumated on the original terms. Either the parties would renegotiate the deal (at a lower price) or the shareholders would have voted against the deal.
Derek - I wouldn't think the MAC agreement itself would allow Bernanke the specific recourse to remove Lewis though. I could be wrong though, I'm not a lawyer.