As summer ticked over to autumn and then to winter, Bank of America removed the
veil from its betrothed then basically regurgitated its foie gras upon what it
saw.
Lewis says he learned on December 14 last year from Merrill that its
mortgage-related losses were now projected to be at least $7 billion more than
what Merrill informed the Bank of America board prior to the board voting to
approve the merger.
Lewis says he was astounded by what he called the "staggering amount of
losses"; but with the experience of dealing with all of Countrywide's nasty
surprises already behind him, could he really be surprised that the state of
the mortgage market at this time
could cause this much pain?
Also coming into painfully clear focus was the culture clash between Bank of
America's moderately paid community-based, salt-of-the-earth types, and Merrill
Lynch's Masters of the Universe trading superstars and trading egos. Somehow,
executives at Merrill were able to reach back into Bank of America's vaults and
award themselves $3.6 billion in corporate performance bonuses - even more
remarkable due to the fact that the "corporate performance" being rewarded with
bonuses was, in essence, bankruptcy.
Rumors abounded at the time that Lewis was close to utilizing the Material
Adversity Clause (MAC) clause in the merger agreement to get out of the deal.
Other rumors have Paulson threatening Lewis with torments commencing with
disembowelment and then increasing in severity from there if he moved backwards
instead of forwards on the deal.
The general public got a taste of the arrogance of the trading gods when it
learned of the $1.2 million in company funds Thain spent to redecorate his
office and bathroom, including $87,000 spent on rugs and $35,000 spent on an
antique four-footed commode.
Well, when you gotta go, you gotta go, and Thain had to go. Lewis fired him on
January 22. Lewis then held out as president until Bank of America's board
fired him in late April. He currently hangs on to the CEO post by his
fingernails.
With the US Treasury, the Securities and Exchange Commission, the US Department
of Justice and the Federal Bureau of Investigation, along with the House of
Representative's Oversight and Government Reform Committee, and New York State
Attorney General Andrew Cuomo all now investigating both the hidden losses and
the surprise bonuses for evidence of possible criminal activity, one might
conclude that Lewis' foray into the fire of Lehman weekend had been a
spectacularly glorious and bloody failure, like the British offenses in the
Passchendaele in 1917.
Since the Lehman weekend, it has not been a particularly propitious time to own
stocks, especially financial stocks, and that has proved particularly true
regarding Bank of America - it's stock has underperformed the S&P 500, the
BIX banking index, and the KBW banking index - in the case of the KBW, the
underperformance has been on the order of 60%. The stock has performed better
since the general market lows in March, but, as I noted early this month (see
Moron capitalism, Asia Times Online, September 2, 2009), that is
probably more resultant from market players seeing this and other large
financials now operating under a fairly explicit US government "too big to
fail" guarantee rather than the fulfillment of Lewis' grand dream of the
corporate synergies that would accrue to Bank of America once its customers
went across the lobby to buy stocks at Merrill after cashing their checks at
the Bank.
On the first anniversary of Lehman's fall, at a financial conference in San
Diego, billionaire investor Warren Buffett raised more than a few eyebrows by
calling Lewis the "ironic hero" of the Lehman collapse.
Buffett's logic in his elevation of Lewis to sainthood reveals some of the
inner thinking of a master trader who truly knows how the flows of world
capital move through the underground pipes of the financial system.
One thing we now know for certain about the Lehman weekend was that there was
never any way that Lehman was going to survive it - the views of the US
government and private bankers were just too far apart on the issue.
Lehman would have been, and in the final result was, at least the fourth
example of a remarkably perfidious wealth-destruction engine that has come to
the fore during the financial crisis.
It now starts with cheap purchases of credit default swaps on the target
institution's bonds. Then, maybe, a few well-chosen stock shorts. A bad buzz
starts on the stock, and the big depositors, the ones with overnight deposits
many times the Federal Deposit Insurance Corporation limits, get scared and
pull their deposits out. The avalanche has now started. It goes though a few
more cycles of the above, and soon a bank thought to be healthy is bankrupt and
gone. Just last year this was the fate of Bear Stearns, Fannie Mae and Freddie
Mac - then Lehman.
Then who? The thinking on Lehman weekend was that the next target was indeed
going to be Merrill Lynch. Then, who? JP Morgan? Chase? Goldman? The beast
would have some success in taking down Citigroup in stages over the rest of the
autumn - if they had been able to take down Merrill, would these nefarious
engines of speculative attack been so powerful as to be able to leave nothing
standing in their wake?
Credit default swaps are traded on US government debt, and you can always short
the US dollar or stockmarket. If Merrill fell, would a full-fledged speculative
attack on the United States have followed soon afterward?
But if you're a Bank of America shareholder, your focus would be on more
pedestrian concerns, such as why Lewis agreed to pay $50 billion (when the deal
closed on January 1, the actual amount was, due to Merrill's then lower stock
price, $19 billion) when, if Merrill had undergone a speculative attack, it
would, after the corporate rapists and pillagers had had their way with the
stock, have been available for far, far less?
As Buffett put it, "Why pay X for Merrill on Sunday when you could have had it
for pennies on Monday? When Lehman failed, Merrill would have gone about five
seconds later."
The stockholders and regulators now after Lewis' scalp say this was the sum of
his folly and his hubris. Maybe, in reality, it was here that Lewis showed his
true courage.
Things don't get a whole lot better when you run the tape forward from the
Lehman weekend. In the first 48 hours following Lehman's downfall stocks crash,
debt markets froze, AIG got a bailout-by the middle of the week, and Paulson
knew that the government had to get back into the game. Out came what became
known in infamy as the TARP, the Troubled Asset Relief Program, a three-page
request for Congress to appropriate about $800 billion to buy the mortgage and
mortgage backed securities then rotting away in banks' balance sheets.
TARP failed on its first attempt at passage through the Congress; it didn't
clear the legislature until October 3. The next week, in a stunning volte face
by Paulson, he announced that he was postponing ( in November, that would turn
into canceling) the troubled asset emphasis of TARP in favor of near-emergency
direct injections of capital onto the bank's balance sheets. During the autumn,
this would provide big banks such as Citigroup and Wells Fargo emergency
federal assistance in the neighborhood of $25 billion to $50 billion - a
neighborhood that Bank of America's first announced $50 billion purchase price
of Merrill fits into well.
Seen in this light, Lewis' expensive purchase of Merrill on Lehman weekend,
when he could have had it much cheaper in the days to come, was not Lewis'
folly; it was, in essence, a private sector pre-TARP, a capital injection
intended to at least try to hold the financial markets together with enough
spit and chewing gum until Paulson got his act together sufficiently to get the
first TARP checks out the following month.
In the modern theory of the corporation, there's a name for CEOs who put the
state's or society's interests above those of their own stockholders - ex-CEOS.
Therefore, it's not surprising that Lewis was forced to fall on his sword. In
Lewis' defense, he says he bought Merrill high because he did not want the
stock to fall and create what he called a "damaged brand". Lots of stockbrokers
are probably filing that one away to use with enraged clients who want an
explanation of why the stock the broker so confidently pitched just dropped
80%.
In Ryan's Daughter, Doryan finds all too brief solace and peace in the
arms of the local publican, Ryan's daughter, hence the title of the film. If
Ken Lewis seeks similar comfort for his wounded soul, and if he finds it only
with MSNBC morning show host Mika Brzezinski, the daughter of the National
Security Advisor under Jimmy Carter, does that make this whole saga Zbigniew's
Daughter?
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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