Towards the end of last year, Bank of America, apparently seeing a depressed valuation for Merrill Lynch and lusting after their considerable retail distribution network, agreed to purchase the firm. According to BofA’s CEO Ken Lewis, though, there was more to the story, as he now tells the NY Attorney General that he was pressured into the deal by then Treasury Secretary Paulson and current Fed Chair Bernanke.
This may seem completely plausible – remember that the Federales got the big banks together at a low point in the current crisis and told them they were all going to hang together instead of separately – and take various amounts of TARP money. However, CEO Lewis’ defense sounds peculiarly like someone trying to find an excuse for a bad transaction and an attempt to keep his job.
We do firmly believe that the current lack of independence between the Fed and the Treasury is troubling and should (probably will) be addressed by Congress at a later date. However, blaming them at this stage for a seriously poor investment decision is much like comedian Flip Wilson’s lament as the irrepressible Geraldine, “The devil made me do it.”
The ‘story behind the story’ on this could very well go back to the soon to be unveiled and, probably misnamed, stress tests of major US banks. Undoubtedly CEO Lewis knows how the venerable BofA will look and he realizes that the upshot may be that he will have to fall on his sword, as well as see any legacy trashed, in order to avoid complete loss of shareholder value.
Perhaps Mr. Lewis could take heart in another of Mr. Wilson’s sayings, “You can’t expect to hit the jackpot if you don’t put a few nickels in the machine.” Alas, Mr. Lewis played more than BofA could reasonably afford to lose.