Of course the Fed threatened BofA – be glad they did
Ben Bernanke, being second-guessed yesterday by Congress. Image by Getty Images via Daylife
Give credit to Rupert Murdoch for having some restraint. Even though he now owns The Wall Street Journal, today’s big story isn’t the death of any ‘icon,’ but the grilling of Federal Reserve Chairman Ben Bernanke by the House yesterday. Did he or didn’t threaten Bank of America CEO Ken Lewis when Lewis indicated he may want to back out of a deal to buy Merrill Lynch? Bernanke says no, he didn’t.
But of course he did.
Not in so many words. You buy Merrill or I’ll break your legs. Not even with a threatening implication. It’d be a shame if this bat fell on your executive wet bar.
No, but make no mistake Ken Lewis knew the consequences if he backed out. And Bernanke didn’t need to spell it out for him. History shows the Fed squirrels away memory of actions it deems not in the best interests of the broad economy, uncovering them years later to dole out some measure of justice.
As I explained here in April (before any of the details about the back and forth came out):
When hedge fund Long Term Capital Management brought the world to the brink of financial collapse in 1998…. the heads of the big investment banks of the time – Merrill, Goldman Sachs, JP Morgan, Salomon Smith Barney, Morgan Stanley, Bear Stearns – were all called together by the Federal Reserve and told they needed to save LTCM to avert a worldwide financial crisis. They all stepped up to do so, except Jimmy Cayne and Bear Stearns. We now know, thanks to last year’s financial collapse, what would have happened if LTCM went belly up.
We also know what happened to Bear Stearns when their chips were down. Do you think the humiliating $2 a share takeover offer the Fed arranged last year wasn’t intentionally low to punish Jimmy Cayne for not being a team player in 1998?
So Ken Lewis may not have had much of a choice when the Fed pressured B of A to take on Merrill Lynch last autumn, and then not tell shareholders about how bad of a condition Stan O’Neal and John Thain left Merrill.
Basically Lewis had to know that if he didn’t play ball, the consequences would be very bad for him and Bank of America if the day came when they may have needed extraordinary government measures to save them. He didn’t even need to look back to the spring and Bear Stearns, he just had to look a couple of months earlier, at Lehman Brothers’ collapse. Do you think Lehman would have been so easily let die if officials had a better view of the combative Dick Fuld?
I’m not arguing that this type of regulation is ideal – it’s personality and ego-driven and prone to failure. But it worked in this case. Make no mistake, the size and scope of the derivatives problem was (and still is) so huge that if the Fed and rest of the government hadn’t taken the extreme measures it did we’d be hoping right now we could plant enough food in our yards to get us through winter. Merrill failing would have been a huge step in a worldwide financial melt down.
So it makes good politics for Congressman Dan Issa and the other conservatives to grill Bernanke and warn of the specter of big government rearing up. But the idea of hands-off government regulation is a big part of what got us into this mess. Be glad someone decided to be hands on – and not worry about getting his hands dirty.
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Yes, you make a good argument and I agree with your conclusions however one would think that this type of rescue should be a once in a century event but Bernake has so far done nothing to keep the financial barn door closed.
Was that issue addressed? Simply having a bigger Fed to regulate bigger can’t fail banks seems, well, overly optimistic, short sighted, no blind to recent events.
A Fed chairman is after all, a political appointment and a laissez-faire administration could throw all the good intentions of regulation down the toilet with a lax appointment. After all Greenspan doesn’t seem like such an oracle these days.
I agree – laissez-faire was a big issue in what went wrong here. I almost sort of think of the Fed as the macro regulator and the SEC as the micro regulator. When the SEC made no push to try and cover derivatives (and Chmn Christopher Cox actually turned down an offer from Congress at a hearing to be given more resources for regulation) I think it opened the door to a lot of abuse. And let’s not kid ourselves, this was abuse and everyone on the Street knew it or should have (think of Citi’s Charles Prince comment ‘as long as the music is playing you have to keep dancing’).
In response to another comment. See in context »Has the Fed closed the door? I think the new financial oversight could do that, we’ll have to see how it makes it through Congress. Looking at what happened practically the past year, I think the Fed did a great job with what it had to bring to bear.