Almost forgotten this week was testimony from Bank of America CEO Ken Lewis regarding BofA's purchase of Merrill Lynch. The key question remains: was Lewis unlawfully forced by the government to complete the acquisition? Republican Congressman Darrell Issa offered his take Thursday on Bloomberg.
There are three take-aways from this interview:
1) Issa and others believe former Treasury Secretary Henry Paulson and Fed Head Benjamin B-52 Bernanke 'inappropriately' exerted undue influence on Lewis to complete the merger.
2) The Hammer and B-52 have agreed to testify (without subpoenas) before the committee. This is great news and should make for salacious TV when it happens. A caveat, Issa doesn't clarify whether they will be asked to testify together or separately. Obviously, it's almost useless if they aren't on the same stage. Together is our request.
3) Though the hearings are backward-looking and BAC is currently happy with the Merrill deal, the purpose of the hearings is to demonstrate to the markets that future undue government influence in private business will not be tolerated. An attempt to assuage certain market fears.
Here's my take. It's rarely a good idea for the government to show its heavy hand with private. This is one exception. Henry and Benjamin were in crisis prevention mode from September onward, and the financial markets could have easily re-initiated their death spiral had the deal been scuttled, thus undermining 3 harrowing months of panic deterrence.
If BAC scraps the merger, Merrill is left scrambling for support. Highly unlikely anyone (any non-government entity) would have emerged to save them. Barclays was the only suitor for Lehman and in the end they balked without Fed help. So who would be there to take Merrill--likely no one. Then Hank and the Helicopter and (Lloyd Blankfein of Goldman Sachs) would have been forced to contemplate government help (depending upon Goldman's exposure to Merrill) for the trash pile of assets known as Merrill. Here's the problem: Since Merrill would have been perceived as worthless, the market might figure out that every one of them was worthless (insolvent).
Don't kid yourselves, they WERE all insolvent, and guess what, everyone of them still is insolvent. Lehman, Merrill, Goldman, Morgan Stanley and Citigroup would each be wiped out if forced to value their entire asset base fairly. It's been ages since we've heard discussion of Level 2 and Level 3 assets (The change to fasb 157 and fair-value accounting took care of those trillion dollar problems, apparently) and anybody remember the trillions of junk sitting off-balance sheet? Yet despite the silence, these pesky issues remain. We've simply done the Zen thing and chosen not to recognize them.
Instructions:
1) Dig hole.
2) Place head in hole.
3) Add sand.
4) Whistle 'Yankee Doodle'.
We're still waiting for the asset de-leveraging to begin...the only question: who will be the buyers?