Former Treasury Secretary Hank Paulson testified today about his controversial role in the mammoth Bank of America-Merrill Lynch merger, and he took quite a licking from Congress. Amid the web of barbs and accusations, three things became clear: 1) That Paulson basically threatened to replace BofA CEO Ken Lewis if he backed of the deal; 2) That Paulson did not necessarily act on behalf of Federal Reserve Chairman Ben Bernanke; and 3) That Congress is mad, mad, mad about the whole thing. Does this all add up?
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.