Sympathy for Ken Lewis, Part 2

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My colleague Stephen Gandel did the hard work of watching the Ken Lewis hearing today on TV, and e-mails this report:

The most important thing we learned from the Ken Lewis hearing today is that the Bank of America CEO has no idea what the definition of the word “threaten” is.

Lewis testified that he was considering backing out of his firm’s now-completed acquisition of brokerage firm Merrill Lynch in mid-December. He said he was told by Ben Bernanke and others that if BofA didn’t go through with the Merrill deal the government would do its best to remove him and the rest of BofA’s board from their jobs. Lewis said he even went to his own lawyers to find out if the Federal Reserve had the power to get him canned. (Lewis said he was told the Fed does, but not the Treasury.) So was he threatened by the government? Lewis was asked this again and again. His answer: Not really.

The more you watched the hearing the more you got the feeling that the House committee had summoned the wrong guy. Most of the questions were really meant to get at the missteps of Bernanke and not Lewis. In fact, the statements Lewis made that should have been pushed on he was given a pass on. Lewis said Bank of America was financially strong. Really? Wasn’t BofA just told by the government in the stress tests that they had to raise nearly $34 billion, far more than any of its rivals, to be considered financially stable? He said the Merrill Lynch deal has turned out to be great for his shareholders. Really? Hasn’t BofA’s stock plunged 60% since announcing the Merrill deal?

But the fact that the Merrill deal was a fundamentally bad one gets to the heart of the mistake Bernanke made. By pressuring BofA to complete its acquisition, he took a troubled brokerage firm and turned it into one of the nation’s most troubled banks. And it’s a problem, unlike Lehman, that is still hanging around.

BofA may still have to be taken over by the federal government or broken up at some point if the economy worsens rather than rebounds. A failure of Merrill Lynch would have been bad for the financial market, certainly back in the fall of last year. But a failure of BofA, when you take into account how many Americans that would touch, would be catastrophic, even now. Whether Bernanke pressured BofA to do the deal seems beside the point. Why he failed to see that the BofA-Merrill deal was a lousy one, is what I would be asking.

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