BofA and the Merger with Merrill Lynch: Heroics Not Weakness

The Atlantic Monthly has an article about the pressure put on BofA and its CEO, Ken Lewis, to close the deal to purchase Merrill Lynch.  See The Final Days of Merrill Lynch.  Treasury Secretary Henry Paulson apparently threatened Lewis with removal if he tried to use the material adverse condition clause to get out of the merger.  To the extent that the story is accurate (the three main principals, Paulson, Lewis and Bernanke declined to be interviewed for the article), it suggests that Paulson was overbearing and Lewis weak.  As the article states:

• On one level, the merger between Bank of America and Merrill Lynch is a simple story of executive hubris and cowardice. Leaving aside the question of whether Lewis’s failure to publicly disclose new information—about Merrill’s losses, about his deal with Paulson and Bernanke—was legal, his passivity throughout the process was, in the eyes of some financial-industry insiders, contemptible.

On this Blog, we are often critical of managerial practices, particularly when involving executive compensation.  But we feel compelled to note that there is an entirely different way of looking at the same facts.

As the economy seems to be crawling out of the recession, it is perhaps easy to forget the desperation that prevailed in the financial markets during the September - December time period.  With the collapse of Lehman, lending markets froze.  The inter-bank market was paralyzed.  It has taken $700 billion in TARP funds (although not all of it has been invested) and over $1 trillion in stimulus to unfreeze the markets.  The failure of Merrill, which almost certainly would have occurred if BofA had walked away from the deal, would have jolted the financial markets and exacerbated the desperate economic conditions.  The recession would likely have lasted longer, greatly increasing the costs.  

Paulson was right to want the deal to go through and Lewis did the right thing.  The acquisition may not have been the best thing for shareholders although they will recover some of the loss in the law suits that have been filed.  But for the United States and the economy, it was very much the right thing.

Lewis in particular wasn't weak.  Quite the reverse.  In the long run, his actions ought to be viewed as heroic.  In many ways, the easy path would have been to walk away from the merger.  Nor did it mean Lewis would actually lose his job.  As one commentator noted in the article: “There is no question what I would have done if I were in his shoes,” he told me. “I would have told [Bernanke and Paulson] I was calling the MAC, was releasing the decision publicly, and dared them to fire me and the board—and that never would have happened, trust me.”

It is frankly a good thing for the United States that Lewis chose the more difficult path and avoided the potential shock to the financial system.  With housing sales improving and the stock market up, Lewis deserves some of the credit.

Comments

[TPaine]

Lewis can only be hailed as a hero if the "extend and pretend" strategy works. Odds are it won't. In which case, the only thing that the BofA/Merrill merger accomplished was to keep the fiction that Paulson's bailout (and the Fed's massive mismanagement of the economy to prop up Dubya) was working and that it wasn't just about protecting a small financial elite from the consequences of its grotesque greed and incompetence.

Cohan's article curiously gives Ed Herlihy (Wachtell) significant credit for bringing the parties together and then never returns to explain his critical role.

All the more curious since Lewis and BofA is now hiding behind Wachtell's skirts.

A strategy that wouldn't ordinarily work if we had not devolved into a banana republic:

http://firedoglake.com/2009/08/26/whydoesnt-the-sec-know-about-the-doctrine-of-implied-waiver/

[Nash]

Those who are considering the public avenue must contact someone who has enough knowledge on the legalities that come along the filing at SEC for the plan on going public.