Today’s two biggest financial stories are a probable Chrysler bankruptcy in the next week or two and revelations from Ken Lewis’s testimony.
The Wall Street Journal is subscription only, but its Ken Lewis story has been spread widely. This is from a US News blog:
Lewis Silenced, Threatened Over Merrill By Bernanke And Paulson
Bank of America’s Ken Lewis’ testimony sheds some light on the gory details of last year’s crisis management. From the WSJ (sub. req.):
Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.
The cost of refusing to keep shareholders in the dark might have been his job:
The Wall Street Journal previously reported, in a page-one story on Feb. 5, that Mr. Lewis agreed to proceed with the Merrill merger only after Messrs. Paulson and Bernanke said that he and his board would lose their jobs if Bank of America backed out of the deal. Mr. Lewis’s testimony with the New York attorney general’s office corroborates that account.
Bernanke’s denial that he threatened Lewis is not literally inconsistent with one version of the story discussed on CNBC: that Paulson made the threat at Bernanke’s request.
If true, this story is a stark reminder that the heavy-handed government takeover of the financial industry started last fall, before the Obama Adminstration took charge.
Perhaps Professor Bainbridge would know whether, if Lewis’s account is accurate, Lewis would be liable for failing to disclose material information and whether Bernanke or Paulson would be liable for inducing them to do so.
I confess that I find Mr. Lewis’s testimony somewhat ambiguous (from the WSJ):
Mr. Lewis testifies about his discussions with Mr. Paulson about the possibility of Bank of America walking away from the Merrill deal, citing the “material adverse effect” clause, or MAC, in its merger agreement:
Mr. Lewis: I remember, for some reason, we wanted to follow up and see if any progress — as I recall, we actually, had not agreed to call a MAC after the conversation that we had, and so I tried to get in touch with Hank, . . . and he — this is vague; I won’t get the words exactly right — and he said, “I’m going to be very blunt, we’re very supportive of Bank of America and we want to be of help, but” — I recall him saying “the government,” but that may or may not be the case — “does not feel it’s in your best interest for you to call a MAC, and that we feel strongly,” — I can’t recall if he said “we would remove the board and management if you called it” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.” And the board’s reaction was one of “That threat, okay, do it. That would be systemic risk.”
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