I am watching a hearing of the House Oversight and Government Reform Committee investigating the merger of Bank of America and Merrill Lynch. Ken Lewis, CEO of Bank of America, is the lone witness called to testify and he doesn't look particularly happy.
There is something very odd about seeing both Democrats and Republicans get into high dudgeon about the supposed "threats" and strong-arming of Bank of America by Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke.
For starters, there is the unseemly spectacle of Republicans attacking other Republicans for unwonted government pressure on private businesses. The Republicans on the committee, led by ranking member Darrell Issa, are upset that Paulson and Bernanke purportedly leaned on Ken Lewis in a (successful) effort to prevent him from backing out of the merger. You get the sense that they may actually be less concerned with what happened last year than they are in bolstering their own rhetorical case for attacking the current administration's interventions.
But so far, at least, there also seems to be a lack of context. If Merrill Lynch had not been absorbed by Bank of America then it would have required its own AIG-size bailout, or it would, most likely, have been forced to declare bankruptcy like Lehman Brothers.
The merger between Merrill Lynch and Bank of America occurred on the same weekend that Lehman collapsed. Given the damage caused to the U.S. economy by Lehman's collapse, one can only tremble at the prospect of what would have happened if two of the nation's biggest investment banks had gone under at the same time.
That is what Paulson and Bernanke were contemplating. Was it within their constitutionally determined powers to threaten Ken Lewis with dismissal if he backed out of the merger -- while sucking down billions of dollars of TARP capital? Maybe not. But they were operating in uncharted territory. Which is why it is absurd to read analysis like that of Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc., as reported by Bloomberg.
"The Fed and the Treasury, jointly acting as a committee, decided the interests of shareholders were going to be subverted to what they perceived were bigger threats. ... In this case, those threats were undefined."
Undefined? The threat was the possibility of a second Great Depression. Nothing less would explain why a Republican administration would so desperately attempt to intervene in the normal business of Wall Street.
As Ken Lewis just said: "Even just six month later, it is easy to forget just how close to the brink we came."