Fascinating front page WSJ article on the tactics used by Fed Chair Ben Bernanke, Treasury Secy Hank Paulson to “persuade” Bank of America CEO Ken Lewis who the new sheriff in town was:

“Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street.

The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill’s losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse.

Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say.

“I need you to know how bad the picture looks,” Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank’s earlier cooperation — but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.

Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital.

The entire piece makes for entertaining reading.


In Merrill Deal, U.S. Played Hardball


See also:
Bank of America’s Lewis Has to Pay for Blunders
David Reilly
Bloomberg, Jan. 16 2008


Category: Bailouts, Corporate Management, Derivatives, M&A

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7 Responses to “Ken Lewis Learns There’s a New Sheriff in Town”

  1. matt says:

    At least stuttering Hank didn’t have Fat Tony threaten to break his knees with a ball bat.

  2. dead hobo says:

    Good start, not a lot of follow through. If Uncle Stupid was as effective as this story makes him appear, then credit would be flowing a lot better. The impression I walk away with is good execution on short term objectives, no thought given for what happens next.

  3. And BAC hit a new 52-week low this morning. A share of BAC stock ($4.41) will now buy a quarter-pounder meal at McD’s in most locales, but you’ll have to pony up the tax.

  4. JohnnyVee says:

    Welcome to AmeriKa Comrad.

  5. Wasn’t it just like 4-5 months ago when Lewis was being toasted as the Folksy, Down Home No’th Ca’lina boy done good? When he had bought Countrywide (AKA subprime patient zero) more than a year before?

    This is not going to be a slowly-gathering storm.. Folks are going to be battening down their hatches unless/until they lose their jobs and businesses, then they’re going to SNAP.

  6. bobc7i says:

    If BAC walked away, the move could undercut confidence in BAC in the markets???

    Forcing MER down BAC’s throat and BAC into nationalization is undercutting confidence much more than letting BAC walk away.

  7. oblom says:

    Mess with the bull, get the horns.