The issue I'm having a bit of trouble accepting is how does the gov't force BofA to accept a loan and force BofA to purchase a company [or not disclose deleterious information to members of the board as Tilted described].
What kinds of pressure can the gov't impose on a global entity such as BofA? Why can't BofA say FU?
I would just like to know what the possible outcomes might have been if BofA were to have said "no thanks" to both the loan and the purchase.
In addition, I don't hear anyone saying BofA was forced to buy Country Wide....
As far as the Country Wide deal goes, I don't have a lot of knowledge of how that developed, but I don't believe there was any government pressure to do that deal - at least I don't remember hearing such allegations. It happened before most of the rest of this stuff and before the government got heavily involved in the banks through TARP. But, I don't think that deal was anywhere near as important to BoA's condition as the Merrill deal was. For one thing, it was a much smaller deal, and for another, it essentially created a separate mortgage servicing entity, whereby any solvency problems it had wouldn't affect BoA at large.
As for the banks taking the loans, these banks are subject to federal regulators that they have to deal with on a regular basis. They understand what kinds of problems those regulators can cause, should they choose to. There is no dispute that, the 9 banks were told that, if they didn't voluntarily take the capital injections (TARP), their regulators would require them to take capital injections. These CEOs knew that they had no choice - they had to take the government loans and give the government interest in their companies. Furthermore, if any of them had refused, then they would have been screwed the next day when the Treasury announced the program. It was made clear that all of the other banks would have been getting a Treasury endorsement as
'healthy institutions', while they would not. That would have meant a huge exodus of funds from their bank in favor of the other ones - basically, a good old fashioned run on their bank, and then an incredible liquidity crunch. These are smart people - they know how things work - and they knew that refusing the loans was not a viable option, unless they were willing to watch their companies be destroyed.
These words might seem fairly innocuous to you and I:
We don't believe it is tenable to opt out because doing so would leave you vulnerable and exposed.
If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.
But, the CEO's of the nation's largest banks knew full well what those words meant, especially coming from the Treasury Secretary of the U.S. I'm sure they felt like grade school kids being called before the principal and being told how things were gonna go.
As for BoA going ahead with the Merrill deal, BoA was told that the board of BoA would be removed if they exercised the Material Adverse Change option (and withdrew from the deal). They were also told that doing so would damage their relationship with their regulators. Could the former have happened? Probably, the Federal Reserve does have some supervisory authority over the banks, and the U.S. government now owned some interest in the banks. Regardless, given what had happened and what was going on, it was certainly reasonable for the BoA board to believe that it was possible. Should they have capitulated? No, they probably shouldn't have. I would have liked them to tell Paulson and Bernanke to stick it where the sun don't shine, as they had a fiduciary responsibility to their shareholders - even in light of the inappropriate threats of the government. That said, they were in a difficult position, and it would have been very tough for them to do the 'right' thing.
As for the disclosure issue, I believe Paulson's position is that he never specifically told Ken Lewis not to disclose certain things to the shareholders. Who knows what exactly was said, but I tend to give Ken Lewis the benefit of the doubt with regard to that being the essence of the message from Bernanke and/or Paulson (and there are emails that might make one believe that the Fed and/or Treasury were telling him not to disclose information). He had tried to take the high road all along and not pass blame off from himself to the Treasury department. In interview after interview he had refused to go into what threats were made by the government with regard to the whole mess, and kept saying, essentially, that the buck stopped with him - it was BoA's decision in the end. It was only when he was questioned under oath, pursuant to subpoena, that he disclosed the true extent of the government's pressure - most of what he described having been later confirmed by Paulson himself. Again, Paulson doesn't generally deny the pressure he exerted, he just asserts that it was necessary.
Ken Lewis is now facing legal consequences for his actions - and that is probably as it should be. How culpable is he? That's a tough question to answer, and I'm certainly not qualified to answer it. It will be interesting to see how things unfold. More than likely, a lot of specifics will come out, and Paulson and Bernanke may well end up on the stand in a court of law - that could be quite intriguing.
