More Gossip from the Bank of America-Merrill Lynch Merger

In Hank Paulson's new book On the Brink, the former Treasury secretary reveals more information about the bizarre union of Bank of America and Merrill Lynch. I knew Bank of America CEO Ken Lewis was nervous about the deal and tried to back out of it in December. Here's what I didn't know.

From a first read by WSJ editor David Wessel:

In October 2008, after the government had pumped money into BofA, Merrill and other big banks, Lewis confided to Paulson that he was worried Merrill CEO John Thain would try to wiggle out of the deal; he wanted Paulson to insist that Thain go through with it. Paulson says he never mentioned the call to Thain. Less than three months later, of course, Lewis would talk about backing out of the deal, completing the purchase under pressure from Paulson and Bernanke.

John Thain was about to back out of the merger in October? I've covered this topic for a few months now and I spoke with a source close to Thain at the time of the deal, but I've never heard that story. There are at least two reasons to question either Lewis' statement or Paulson's recounting. First, Merrill was days away from bankruptcy when Bank of America agreed to buy the company for a rather generous $50 billion, 86 percent of BofA's stock price. Merrill's precariousness was no secret, especially to Thain who had been brought in to save the company from its increasingly likely demise.

More importantly, two months after this conversation, Lewis went to DC precisely to "wiggle out of the deal." To be sure, by December Merrill's fourth quarter writedowns had quadrupled, from $3 billion to $12 billion (and they would finish the quarter at negative-$15 billion). But Thain knew the losses would be excruciating, my Merrill source told me. That's why he had no recourse but to merge with a commercial bank and why lawyers wrote an airtight MAC (material adverse change) clause to keep Bank of America from using deteriorating losses as an excuse to back out of the deal. It's puzzling to imagine Thain would be looking for the escape hatch in October, as well.