BofA / Merrill Scandal Gets Interesting, Again

Some juicy details are emerging about the Government’s meddling in Bank of America’s (BAC) takeover of Merrill Lynch. This issue hasn’t gone away quietly, as many skeptics thought it would (myself included).

Potentially Huge Break – Fed E-mails About the Deal Leaked

These emails, assuming they’re real, provide a peek into internal Fed discussions about the deal. More importantly, they reveal that Fed employees clearly knew how toxic Merrill was. Mac Alfried, Senior VP at the Richmond Fed, had this crude assessment of ML, “Merrill is really scary and ugly”.

It seems clear that the Fed knew, at least suspected, how bad the Merrill situation was. Yet they pushed ahead, even threatening Ken Lewis’ job if he didn’t seal the deal. Bank of America was buying a hot toxic mess in Merrill Lynch, and apparently everybody knew it. So why did the deal go through?

Under the contract, Bank of America seems to have had an out. Scuttling the deal under the Material Adverse Change clause was an option (once they found out how horrific Merrill’s books were). But they were strong-armed into not evoking the MAC clause. Why? The official line was likely, “to prevent a collapse of confidence in banks.” The end result may be the exact opposite.

This excerpt is another shocker:

Just had a long talk with Ben [Bernanke, presumably]. Says they think the MAC threat is irrelevant because its not credible. Also intends to make it even more clear that if they play that card and then need assistance, management is gone. (Forgot to tell him KL [Ken Lewis] is near retirement.) Hopes a Citi-like deal can be done w/o us taking 3rd loss, but if we get away w/ the gov just backstopping $74 that would be cheap given the size of the companies. He’d be surprised if that’s all it takes though.

I’m still digesting all of this, and suggest everyone read the whole thing. Documents like this need as many eyes on them as possible. So scan for nuggets if you’re so inclined.

On a more light-hearted note, Jesse’s Cafe posted their entertaining take on how things went down:

Shotgun Wedding (click to enlarge)

Moving on… Zero Hedge also posted another juicy tidbit yesterday:

Tim Geithner, Treasury Secretary, supposedly emailed telling BofA that they couldn’t back out of acquiring Merrill Lynch, according to CNBC.

An email by Geithner telling BofA to close the deal would be a proverbial smoking gun, since BofA honcho Ken Lewis has said he was forced into buying the bank and not publicly revealing the poor financial shape that Merill Lynch was in, in the wake of pressure from the government.

If accurate, I don’t see how Geithner can last much longer at Treasury. How could the administration justify an action like this by their pick for Treasury Secretary (who was President of the NY Fed at the time)? I wouldn’t worry too much about Mr. Geithner’s prospects, though. It seems inevitable that a bank/hedge-fund would take pity on him (and offer a fat multiple of his old paycheck).

If T3 (Turbo-Tax Timmy, as ZH refers to him) does get canned, it seems likely that he’ll go down as the villain in this mess, or at least the buffoon. A scapegoat is sorely-needed to take the heat for the Bank of America debacle. While he seemingly does deserve part of the blame, the problem surely goes much higher up the food chain than a bureaucrat like Tim.

This is not to say that Ken Lewis is innocent in the matter (of poor judgement, at least). He chose to buy two of the most toxic books on the planet, Countrywide and Merrill Lynch. His eagerness to expand into lucrative markets blinded him to risk. It does appear that he was eventually pressured to follow through with the Merrill deal, after problems became evident. But Lewis was lusting after ML’s wealth-management biz for a while.

Paulson to testify Before Congress

Yesterday brought yet another key development in this case, when it was announced that Henry Paulson will testify before Congress next month. He’ll be grilled on record (and presumably under oath) about about BAC’s acquisition of Merrill. Warning: Don’t get your hopes up. Paulson has a thick Teflon coating to protect him from political heat. Goldman Sachs (GS) is too entrenched and politically connected for anything serious to happen to one of their own like Henry. (Bloomberg piece)

Comments

[nobby73:]

This is further evidence of what so many people have suspected. If I were a long term shareholder of BoA, I'd be on the phone to my lawyer.

We should also not forget the massive bonuses accelerated and paid to the senior execs at ML, when it must have been screamingly obvious how bad the books were.

Jun 25 07:04 AM

[ScottEX:]

I just can't believe that Americans are watching this happen. The trillions of dollars out of their own pockets to prop up these companies, and they are all jacking up their employee payouts! How does this work? These people are essentially government employees, I don't think there are many making less than the president. Are Americans blind or just misinformed?


On Jun 25 07:04 AM nobby73 wrote:

> This is further evidence of what so many people have suspected.
> If I were a long term shareholder of BoA, I'd be on the phone to
> my lawyer.
>
> We should also not forget the massive bonuses accelerated and paid
> to the senior execs at ML, when it must have been screamingly obvious
> how bad the books were.

Jun 25 09:14 AM

[ScottEX:]

By the way, I was a derivatives accountant at ML. Books? What books?


On Jun 25 07:04 AM nobby73 wrote:

> This is further evidence of what so many people have suspected.
> If I were a long term shareholder of BoA, I'd be on the phone to
> my lawyer.
>
> We should also not forget the massive bonuses accelerated and paid
> to the senior execs at ML, when it must have been screamingly obvious
> how bad the books were.

Jun 25 09:16 AM

[The Opinion:]

The Mawwiage between BOA and ML was a big surprise to many. Mostly because BOA seemingly overpaid for ML by about 1.5 times MLs' real value. (So I have heard from a pretty good source that has many friends on Wall Street.) Politics over the good of shareholders and the taxpayers seems to be status quo no matter who is in the White House. Must be nice to have friends in high places. Keeps the brand and reputation in tact even when its really falling a part behind the scenes.

Jun 25 09:44 AM

[Marli:]

You guys have it all wrong. Don Bernanke sent his trusted consigliere, Hank 'the tank' Paulson, to make Ken Lewis an offer he couldn't refuse. Mr. Lewis refused, only to wake up the next day with the bloody head of his favorite racehorse underneath his blanket. It's very simple really. As for Hank Paulson testifying before the Commission, he's got nothing to worry about. He's a made guy, they won't touch him.

Jun 25 09:44 AM

[Jimbo:]

As long as Wall Street Bankster Gangsters can buy the folks in Washington, this game will go on. At taxpayers' expense, of course.

Jun 25 10:30 AM

[ScottEX:]

" 1.5 times MLs' real value. "

Really, wow, I'd like to know what air they pulled that number out of. A black hat maybe. Look, there is no way an army of derivatives accountants could put a number on that company, even were they given the true books and records. This company has well over 2000 corporate entities, officially. The tactics they pull with their trading books and records to get around trading regulations, what few there are, is shocking, the ease with which they can manipulate the system. It adds up one giant meaningless lie on my books. Those occasional rogue traders you read about, in my view, those guys are nobodys compared to what management gets away with!

What I'd like to know is how obscure the books and records could get if people had the ability to web the maze of official books and records with offshore anonymous holding companies and so forth. Well, web of lies. Who cares. It's good for hysteria, good for greed, good for American capitalism. So who cares. I imagine the need to keep these secrets is why no changes will come to the US financial sector. It's hard to accept after what we lived through this past year. Now it seems to be going in the opposite direction. Morgan and Goldman are now bank holding companies with a back door to the fed, and no change to their ability to take unlimited risks, completely covered by the American taxpayer. But I guess since they own the fed it probably makes sense somehow. Anyways, my rant for the day. The world is controlled by liars and thieves. Not even 911 got an official investigation. Try reading David Ray Griffin on that subject just to see how little citizens in the US care about the truth. Why would we expect any truth to come out of this mess. Reaganomics, gotta love it.


On Jun 25 09:44 AM The Opinion wrote:

> The Mawwiage between BOA and ML was a big surprise to many. Mostly
> because BOA seemingly overpaid for ML by about 1.5 times MLs' real
> value. (So I have heard from a pretty good source that has many friends
> on Wall Street.) Politics over the good of shareholders and the taxpayers
> seems to be status quo no matter who is in the White House. Must
> be nice to have friends in high places. Keeps the brand and reputation
> in tact even when its really falling a part behind the scenes.

Jun 25 10:53 AM

[Steve Soden:]

Stop The Drama!
These people are all Guilty but will be allowed to retire making lots of Money from Corporations once they do so.
We need to pull the Plug on this abuse and put'em in Jail!
Being a Government worker was once a low paying job with Good Benefits.
Now these people gamble on a Big Pay-Off once they leave Government and The Gamble has paid off for many years.
It's time to change things back to the way they once were.
This is the only way we'll get good people back in Washington again working for the People!

Jun 25 12:08 PM

[Adam Sharp:]

ZH just posted some more Fed emails:

zerohedge.blogspot.com...

Jun 25 09:19 PM