Bernanke and Paulson look foolish
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NEW YORK (MarketWatch) -- If Ken Lewis is telling the truth -- and he'd be foolish to lie to New York State Attorney General Andrew Cuomo -- then Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson were more than concerned about the financial crisis. They were panicking.
Why else would the two most important administration officials presiding over the financial crisis play hardball backroom politics with Lewis, the chief executive of Bank of America Corp. (
, who had taken significant risk by acquiring Merrill Lynch & Co. last September?
Lewis testified that Paulson used threatening language to push through the deal, according to a letter released by Cuomo's office Thursday.
"'I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help'," Lewis claims Paulson told him, according to testimony released Thursday.
Lewis said he considered invoking a material adverse change, or MAC, clause to pull out of the Merrill deal in December, reasoning that Merrill's financial picture deteriorated severely in just three months' time. But he adds he was warned by Paulson to stick with Merrill.
"I can't recall if he [Paulson] said, 'We would remove the board and management if you called [a MAC],' or if he said, 'We would do it if you intended to'," Lewis testified.
Lewis backed down in the December showdown and was left to take the blame when Merrill reported a stunning $15 billion loss for the fourth quarter, after the deal closed at year's end.
If his testimony is correct, the story seems to vindicate Lewis, in part, for his decision to go through with the deal. One could argue Lewis should have called Paulson's bluff, but when you're facing two regulators threatening your job and your bank, well, one can't blame Lewis for taking the escape route offered to him.
As for Paulson, his legacy is further tarnished by the heavy-handed tactics charged by Lewis. Paulson's alleged wishes that the backroom agreement would not be a "disclosable event," or that he would remove the board of a public company, suggest power run amok.
Bernanke's reputation is tarnished worse. He stepped aside and let Paulson play bad cop even though he clearly had doubts about how the Bank of America situation was being handled. Bernanke still leads the Fed.
But his influence and judgment have suffered self-inflicted wounds.
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