The BofA / Merrill Mess - A Misguided Mob Goes After the Wrong Guy

Before I begin this post, I would like to introduce "Mr. G". This is actually not his name, but an anonymous moniker that I use to protect his wishes for privacy. He is a very successful business man who worked with one of Wall Street’s white shoe firms. Since this period, Mr. G has moved on to bigger and better things and is even more connected and much wealthier than he was from his investment banking days. He is a dear friend and mentor of mine with whom I periodically communicate via phone or email.

Today, I bring you his comments via email excerpts, with the inclusion of my own two cents' worth, on the investigation of Ben Bernanke’s role in Bank of America’s (BAC) decision to purchase Merrill Lynch.

Excerpt of my email to Mr. G:

"Hey Mr. G,

It’s been a while.

As you are an informed citizen, I wanted to elicit your take on this whole Fed cover-up issue. (By the way, I’m being sincere with my inquiry as I respect your opinions in lieu of our political divergences.)

Do you think Hammering Hank & Uncle Ben actually cornered Ken Lewis, put him in a headlock, and threatened to give him a swirly if he reneged on the Merrill deal?

Desperate times often call for desperate measures and I generally don’t put much stock in the integrity of men, especially those from government. Anything is possible.

What’s really bizarre about all this is that we have a Republican, Issa, making these allegations against Bernanke while Warren Buffett, a supporter of and advisor to the Obama Administration gives the Fed Chairman a solid endorsement. In the midst of all this are some elements of the right wing media calling this a conspiracy by the Obama team to get rid of Ben.

Who’s right and who’s wrong is beyond me. I could fathom involvement from both sides of the aisle although I fail to see the motivation. Republicans dislike Bernanke because he works with the Obama Administration and some Democrats snub him because he was selected by the Bush Administration.

Anyway, part of the conspiracy theorist in me sees inciting a lynch mob as a ruse for distraction or misdirection in an effort to divert attention from other issues of vital importance.

Whatever the case, it is this type of pusillanimous political bickering that I absolutely deplore about America. If something is amiss, then let’s investigate it without trashing or discrediting Bernanke and distracting his focus from a far-from-over crisis at hand. While the Fed doctor is in the operating room performing reconstructive surgery, allow him to complete his task or be officially relieved before charging him with malpractice.

The American people and its media have a dysfunctional penchant for public lynchings and due process often takes a back seat to their amygdalean impulses.

May God forgive and help us all…"

Mr. G’s excerpted response to my email:

Of course they did!

Think about the set up:

1) Bear Stearns and Lehman Brothers stuck investment banking into the new and exciting world of bankruptcy, and with it … investment banking flavored illiquidity

2) Not wanting to be left out, AIG mentions that investment banking illiquidity might have a not so great effect on the world of off balance sheet finance … derivative flavored illiquidity

3) Indy Mac (IDMCQ.PK) leads a cast of local "oopsy daisy" lenders and actually hosts a "run on the bank", bringing us … local banking flavored illiquidity

4) Wachovia and Citi (C) don’t want to be left out, so they belly up to the bar … money center flavored illiquidity

5) While they're not officially banks, industrial lenders like GE Capital decide that they might not be quite as AAA as they thought … non-bank bank flavored illiquidity

6) And finally, just to prove that illiquidity actually matters, GM (GMGMQ.PK) and Chrysler raise their hands and say, "oh by the way, if we don’t get some more of those dead presidents, we might have the unfortunate task of ushering in a million more people to the ever growing soup line …

Where’s that Reagan cheese when you need it?"

So, when B of A thought it was getting a great deal buying Merrill at what was a bargain basement price, right before they discovered two more levels of basement, I’m guessing Ken Lewis said "get me that M&A agreement, I want to get out of this thing before they take us (me) down to the seventh level of that Dante book."

It’s at this point that the Hank and Ben show kicks into high gear and they say, "wow, people really are going to remember us once we’re gone, we’re they guys who presided over the death of the greatest wealth-creating nation of the last two millennium. Maybe we ought to forget about the law for a few minutes and just stop this thing before it’s too late. Because before you know it, the people will become disenchanted with capitalism and they will start believing the historic lies of socialism. Then, we will end up with the government deciding that it has the power to fire CEOs and dictate the salaries for bankers."

So yea, I think they gave him a dirty look and said, "If you back away from this deal you’re going to be the first CEO in history to get an atomic wedgie from a bureaucrat!"

Of course, I could be wrong…"

Well gentle readers, now you have a couple more opinions on this whole mess. I really feel sorry for my Uncle Ben who I believe is inclined towards honesty.

However, in times of war, e.g. the current one against an economic meltdown, difficult decisions and sacrifices are demanded. Typically, the brunt of the sacrifice is borne by common infantry and in this instance the Fed and Treasury’s infantry are the American taxpayers (which includes all of us).

Is it morally right or politically correct? I think not, but making erroneous judgements in the heat of battle is not a war crime either. At the same time, every effort must be made to reduce unnecessary casualties, i.e. wasteful spending of taxpayer dollars to resolve this crisis and stimulate the economy.

If the American people and media really want to villify or lynch someone, they should consider going after the players from the public and private sectors who facilitated and perpetrated these events instead of the people who are attempting to clean up this "POS" for which they are not responsible.

Disclosure: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[GregT:]

Worthless rambling without any real insight.

Jun 28 05:10 AM

[apppro:]

And of course you found more of the WRONG people to blame. I am still waiting for someone to blame the handful of people that broght down: Ambac then MBIA then Beare then Fannie & Freddie then WAMU and then finally what brought it all down LEHMANS. AIG followed, but the damage had been done.
One by one they were picked off by rumorboarding, naked shorting and abuse of M2M.
When do we finally place the blame of that hanful of shorts that brought it all down.

Jun 28 07:54 AM

[HBWOW:]

Mr. Lewis is responsible for the bank's dealings in high risk derivatives and he should have acted in the best interests of the BAC stockholders/depositors and passed on the Merrill Lynch "deal", first on the basis of finding out about previously undisclosed losses (M & A) and secondly finding out about the outrageous "performance bonuses" cooked up by ML management (white collar crime???).

He should be further investigated and dealt with based on the findings. These high flying insiders and their political buddies all
are to blame for the mess. It is so amazing that they deal verbally without documentation records so no one can be proven wrong/guilty, wow. WHAT EXAMPLES FOR THE FUTURE OF AMERICAN MANAGEMENT ETHICS/RESPONSIBILITIES CODES!

Jun 28 10:41 AM

[lazzybum:]

Mr. Lewis did the best under the circumstances. It is the stockholders of BACV and Mr. Lewis who are the ones got the short end of the stick. Uncle Ben also did the right thing as the general at the dire moment. The ones who escaped the blame are all those GS guys who shorted the CDS, MBS, all those derivatives and the stock market in general during the blackest time. Of course, they did nothing wrong. People from GS will sell the rope that hang them.

Jun 28 02:01 PM

[User 422955:]

A bit of morbid humor is appropriate in these circumstances. Thanks, Mr. H & Mr. G.

Jun 28 03:03 PM

[User 437862:]

"Maybe we ought to forget about the law for a few minutes and just stop this thing before it's to late. Because before you know it the people will become disenchanted with capitalism and they will start believing in the historic lies of socialism.

Two things are important here:
1. The Federal Reserve, FDIC, SEC and Treasury were not doing their jobs in overseeing the financial markets.
2. When the crisis started the Federal Reserve, Treasury, and FDIC thought that they were above the law. This country was founded upon having a rule of law and no one should be above the law.

Ben Bernanke, Hammering Hank, and Shelia should be held accountable for the financial injuries they caused by breaking the laws and for being slothful in their duties to prevent this meltdown.

Jun 28 04:56 PM

[lazzybum:]

All three officials mentioned by have had little time in their offices. The problem started back during the Clinton times. You can't blame them for not doing their duties. Paul and Ben did break the law to save the economy. I give credit to Ben but not to Paul. Paul tried to hard to save his GS budies. He should tell those Greedy Bunch to stop undermine the whole economic system.


On Jun 28 04:56 PM User 437862 wrote:

> "Maybe we ought to forget about the law for a few minutes and just
> stop this thing before it's to late. Because before you know it the
> people will become disenchanted with capitalism and they will start
> believing in the historic lies of socialism.
>
> Two things are important here:
> 1. The Federal Reserve, FDIC, SEC and Treasury were not doing their
> jobs in overseeing the financial markets.
> 2. When the crisis started the Federal Reserve, Treasury, and FDIC
> thought that they were above the law. This country was founded upon
> having a rule of law and no one should be above the law.
>
> Ben Bernanke, Hammering Hank, and Shelia should be held accountable
> for the financial injuries they caused by breaking the laws and for
> being slothful in their duties to prevent this meltdown.

Jun 28 05:44 PM

[Free Market...:]

What this all boils down to is, do you feel that the G, or quasi G (in this case the Fed and Bernanke) has any right in telling a company president what he should or should not do when the matter at hand falls outside of any regualtions that they are in office to uphold or support.

Jun 28 08:30 PM

[captainccs:]

Don't ever forget that Ken Lewis has "empire building" blood in his veins. I can imagine him salivating at getting his hands on Merrill Lynch. Of course, the lack of transparency tripped him up like it tripped up the whole financial community.

I just wish they would let all these lousy banks fail. Why should the taxpayer bail them out? Nobody bails me out when I mess up.

Jun 28 08:57 PM

[Fitz919:]

Lets get right to the point, Lewis was forced to take TARP in exactly the same way he was forced to take Merrill. Bernanke lied, and so will Hank...end of story.

Jun 28 09:58 PM

[Ouch$:]

The article was interesting and informative. It is hard to believe that Uncle Ben and Hammering Hank can pull off attempted assassination of Lewis by themselves.

They would need the help of a lot of democrats and some republicans. Look at the Chairman of the Financial Committee.

Jun 28 11:34 PM

[pitboss33704:]

Ken Lewis is a coward in every sense of that word ... Period ...

Jun 29 09:53 AM

[rlpsatx:]

Mr. Hill makes a great analogy. Senior commanders seldom court martial anyone for bad decisions in the heat of battle. They usually won't do it even if incompetent leadership results in the slaughter of an entire unit. However, Bad leaders get sacked and are placed(eventually). I agree that you don't want to replace surgeons in the midst of an operatio(another good analogy). And, we do wait until after the surgery to judge results. Botched surgeries result in lawsuits. They don't result criminal prosecutions or lynchings(except in cases of deliberate criminal conduct). Personally, I'm not sure whether all parties involved in this mess are incompetent, stupid, or criminal. I am sure that both political parties are involved in this mess. I remember both Jack Kemp and Henry Cisneros crowing on CNBC(on Squawk Box I think) that anyone who wanted a home could have one. I thought at the time(early 1990's) that this idea sounded really stupid. We do not have enough information right now to detrmine who is a criminal and who is just incompetent. So, who do we sack and who do we sack and who do we jail? I say we sack both parties. Vote for any independent that wants to make white collar crimes a capital offense( yes execution for thieves). None of this will end until all thieves are dead!

Jun 29 10:42 AM

[rlpsatx:]

Mr. Hill makes a great analogy. Senior commanders seldom court martial anyone for bad decisions in the heat of battle. They usually won't do it even if incompetent leadership results in the slaughter of an entire unit. However, Bad leaders get sacked and are placed(eventually). I agree that you don't want to replace surgeons in the midst of an operatio(another good analogy). And, we do wait until after the surgery to judge results. Botched surgeries result in lawsuits. They don't result criminal prosecutions or lynchings(except in cases of deliberate criminal conduct). Personally, I'm not sure whether all parties involved in this mess are incompetent, stupid, or criminal. I am sure that both political parties are involved in this mess. I remember both Jack Kemp and Henry Cisneros crowing on CNBC(on Squawk Box I think) that anyone who wanted a home could have one. I thought at the time(early 1990's) that this idea sounded really stupid. We do not have enough information right now to detrmine who is a criminal and who is just incompetent. So, who do we sack and who do we sack and who do we jail? I say we sack both parties. Vote for any independent that wants to make white collar crimes a capital offense( yes execution for thieves). None of this will end until all thieves are dead!

Jun 29 10:42 AM

[FloridaBoy2:]

If the American people and media really want to villify or lynch someone, they should consider going after the players from the public and private sectors who facilitated and perpetrated these events instead of the people who are attempting to clean up this "POS" for which they are not responsible.

Thanks for the article. I agree. You can't blame the janitor for making the mess. In the macro picture Merrill had to be hung somewhere and it ended up in B of A's closet.

Goldman played hard in the game too they were just smarter and saw the end of the game coming. As CEO Lloyd said, they managed the risk a little better. O.K a lot better.

Jun 29 11:30 AM

[Peter Iwano...:]

Even though it has been said...desperate times for desperate measures

Jun 29 03:11 PM

[optionsgirl:]

Dear Clinton:
I think Mr. G's got that backwards-
Americans are tired of socialism, not capitalism. That's what we've got, isn't it? We've been heading toward socialism for the past 40+ years.

Jun 29 03:33 PM