Stop Hammering Hank
Ex-Treasury Secretary Henry Paulson testifies today about forcing Ken Lewis and BofA to take over Merrill Lynch. Charlie Gasparino argues the shotgun marriage may have saved the market.
Former Treasury Secretary Hank Paulson will be on the congressional hot seat today, but he shouldn’t be—at least not for what the House Committee on Oversight and Government Reform is investigating.
Paulson’s alleged misdeed is that he somehow “threatened” Bank of America CEO Ken Lewis back during the dark days of the financial crisis in December 2008 to either to follow through with his planned purchase of Merrill Lynch, which was about to announce a $15 billion loss, or face losing his job.
Paulson will tell his inquisitors that he did in fact threaten Lewis with his job, because according a copy of his testimony, “such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system.
I’ve known Hank Paulson for many years, primarily when he was CEO of Goldman Sachs. He can be aggressive, even nasty, in carrying out his objectives, which during his Goldman years was to attain and then maintain his power at a firm that gives the term “snake pit” new meaning.
In fact, “the snake” was the name former New York Stock Exchange Chairman Richard Grasso gave Paulson when the Goldman CEO seemed to support Grasso one minute, and then led the charge for his ouster the next, after details of Grasso’s enormous pay package emerged. New Jersey Governor Jon Corzine, whom Paulson disposed of as Goldman CEO to take the top job in 1999, has even worse things to say about his former colleague.
With all of that, it’s still difficult to see why Paulson should be wasting even a second with this knucklehead of a committee over such a bogus issue. During today’s hearing, Paulson will tell his inquisitors that he did in fact threaten Lewis with his job, because according a copy of his testimony, “such an action would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system.”
That should be the end of the hearings, with maybe Paulson giving some details on how the government gave BofA billions of dollars in additional capital and back-stopped the bad debt on its balance sheet, but it won’t end there. The committee will explore the following:
—In September 2008, after years of lusting for Merrill Lynch—and its global banking franchise, not to mention its 16,000 brokers that dealt with millions of small investors across the country—Lewis got his wish. Bank of America purchased Merrill in a deal then valued at $38 billion.
—Lewis did this after less than two days of due diligence. In fact, according to emails reviewed by The Daily Beast, his team of bankers believed they had actually underpaid for the firm. How did they know this? Well after less than 48 hours of looking at Merrill’s books, these emails say that BofA officials felt comfortable with Merrill’s assets, including the levels of toxic waste it was holding on its books.
—On December 5, Bank of America’s board approved the deal as the financial crisis continued to roll. The government had just bailed out Citigroup, fearing that if the big bank went the way of Lehman, the entire financial system would collapse. The last thing they were thinking about was the collapse of Merrill Lynch, now supposedly in the safety of BofA’s embrace.
—November and December were dismal months for Wall Street. Nearly every firm was taking losses. But Lewis’ people thought Merrill’s loss was contained, something manageable, like $5 billion to $6 billion. Then came the news from Lewis’ internal team of auditors in mid-December: Merrill wasn’t in such hot shape after all—it was about to record a $15 billion loss for the fourth quarter.
—Lewis’s next move is to threaten to evoke something called a Material Adverse Change clause, known as a MAC clause, to scuttle the deal. Every merger has one of these. It’s supposed to cover fraud or unforeseen events—a natural disaster that wipes out a company’s headquarters and destroys its assets. What it doesn’t cover is stupidity.
That’s essentially what Lewis found out when he told Paulson, along with Fed Chairman Ben Bernanke, that he was thinking about killing the deal by using the MAC clause. And Paulson told him what any normal human being with an ounce of insight into finance and the state of the markets would tell him: You do that and you’re toast.
First, MAC agreements are rarely enforceable particularly on this train wreck of a deal. But more importantly, Lewis’ threat would create even more uncertainty in the markets by forcing the government to either watch Merrill fall into bankruptcy—which would unleash the mother of all panic given the massive size of its balance sheet—or undertake a complete government takeover of the battered firm.
So Paulson will be grilled today by our representatives about his threats and whether they were approved by the legendary tough guy Ben Bernanke. All this while unemployment grows to 10 percent, the economy still sputters, and the banking system struggles to recover. We live in a wonderful country, don’t we?
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.