Feds Forced BofA To Buy Merrill Lynch & Lose $30 Billion

Ken Lewis, CEO of Bank of America, will testify today before a House Committee on Oversight and Government Reform that Bank of America, engaged in a private purchase of Merrill Lynch assets, was in fact forced in no uncertain terms to complete the transaction even though Merrill Lynch was rapidly becoming a liability rather than an asset.

Lewis believes that his job was in jeopardy if he did not complete the purchase of Merrill Lynch and relies on verbal statements made at the time by Ben Bernanke, Federal Reserve Chairman, that if the deal was not completed then BofA management would be removed.

Merrill Lynch was valued at $50 billion at the time the deal commenced and rapidly lost over $30 billion in value when the stock-market crashed. BofA sought to terminate the negotiations but the Federal Reserve thought otherwise and, Lewis contends, forced BofA to complete the deal.

Not that BofA actually suffered financially since the US Government provided BofA with $20 billion in bailout money plus another $118 billion in loan guarantee funds. In addition, and as a result of the purchase, BofA had the exclusive use of the Merrill Lynch client base and the remaining assets on which to rebuild the Merrill Lynch brand.

What is somewhat surprising is the huge loss Merrill Lynch sustained given that it has always been Merrill Lynch's corporate policy to bet against their customers. Like any competent casino management, the house limits its liability by betting the market will act contrary to their clients bets, thus profiting as their clients lose money.

When Merrill Lynch urges customers to purchase $10 million of stock on the theory that the value will increase, Merrill's undisclosed corporate strategy is to bet the stock will lose value.

Regardless of market conditions, Merrill Lynch is still pitching to its customers that this is just a temporary downturn and the time to buy stocks is now. Consumers only buy stocks on the basis that the value is about to increase and so the sales pitch never varies even in the worst of times.

While the sale of corporate stocks may be vital in any economy, it seems akin to a criminal act to tell consumers today that their investment in the stock market is safe and will grow in value. Then again, anyone who believes that may not be in a sound state of mind.

Ken Lewis will do his best to demonstrate how he feared for his job, but obviously not enough to be concerned about the damage this deal would cause to BofA stockholders. Ken Lewis is not a captain that intends to go down with the ship. Sphere: Related Content