Ken Lewis: Paulson Made Me Do It!

The accusations released by Cuomo are certainly explosive:  Ken Lewis claims that Paulson basically forced him to buy Merrill without disclosing its problems to shareholders.  If it hasn't, Paulson would have sacked him and his board.  Paulson confirms this, but claims that this was because Fed analysis showed that Bank of America had no grounds to back out of the deal.  The Fed is, thus far, silent.


  • I'm sure that Paulson and Bernanke made this threat.  I also think they thought they were acting in the best interest of everyone, possibly even including Bank of America shareholders.  Further, I think they may have been right.  Lehmann's demise was catastrophic enough; a second investment bank failure immediately on its heels might have made the disaster ten times worse. 
  • But of course, there's no way to run the counterfactual.  This is deeply troubling, both because of the lack of transparency, and because a CEO was forced to screw his own shareholders.  But I'm not sure what would make it better.  If you have regulators, they have the ability to threaten their regulated companies outside of the public limelight.  Many of the things they make CEOs do will be against the interests of shareholders--witness the games the regulator has been playing with Fannie Mae and Freddie Mac's accounting.
  • The political fallout will be limited unless Geithner is somehow involved in this mess.  But since Geithner was then the president of the New York Fed, that's not entirely out of the question.
  • Bernanke can probably count on not having a second term.  That's no criticism of Bernanke--what has been done, what may well have had to be done, has been unpopular.  I don't see Obama displaying that kind of loyalty to someone he didn't appoint.