22 Jan 2009

Patriotism, the Last Refuge of an Unprofitable Banker

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Here is the story to which Glenn Beck was alluding on his awesome (radio) show the other night:

Hours after the bank received a new government bailout to cover heavy losses at its Merrill Lynch subsidiary, [Bank of America CEO] Mr. Lewis came under fire Friday from investors wanting to know why the bank did not notify them of Merrill’s losses in December, when the bank told the government it would need additional support to ensure the merger would survive.

Merrill Lynch reported a devastating $15.3 billion loss in the fourth quarter, its last quarter before the merger closed. Those losses came atop Bank of America’s own $1.79 billion loss last quarter…The shares closed at $7.18, down 13.7 percent. In a conference call with analysts, Mr. Lewis found himself fending off a barrage of questions about what he knew of Merrill Lynch’s losses, and when he knew it.

Mr. Lewis told analysts that he was surprised to learn in December, three months after the bank snapped up Merrill Lynch in a shotgun deal, that the magnitude of losses at the brokerage was far greater than expected. He said he had considered walking away from the deal at that point, but was persuaded not to, partly by regulators who feared that a failure to seal the deal could set off a new round of panic in the markets.

The decision to stick with Merrill despite its problems, he said, was patriotic. “I do think we were doing the right thing for the country,” Mr. Lewis said.

But that may not be the right thing for the bank’s shareholders, who were already upset that Mr. Lewis appeared to have overpaid to achieve his dream of dominating the brokerage business.

In the months after the merger, however, financial markets deteriorated more brutally. The bank’s shareholders voted on the merger on Dec. 5. And while the full extent of Merrill’s fourth-quarter losses might not have been fully known then, had shareholders had an idea of the extent of the losses, they may have agitated for the deal price to be renegotiated.

Mr. Lewis said he had considered trying to renegotiate the price once he learned the extent of Merrill’s losses. But he feared that the length of time required for a new shareholder vote would put Merrill and the markets at risk. More important, he said, the government did not want to risk new turbulence in financial markets if the deal were to be delayed.

“In recognition of the position that Bank of America was in, both the Treasury and the Federal Reserve gave us assurance that we should close the deal and that we would receive protection,” Mr. Lewis said.

And now you know why I think the economy is in the toilet for years. If you think capital markets serve a purpose, then you will have to agree with me that we are screwed.

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