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.
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.