By putting Bank of America CEO Ken Lewis in the hot seat Thursday, congressional lawmakers achieved one thing: They removed any doubt that navigating the financial crisis has been a messy affair for both corporate chieftains and federal officials alike.
Too messy to be cleared up in a single hearing. It will probably require more public grillings – including of Federal Reserve Chairman Ben Bernanke – to resolve questions about the propriety of actions leading up to Bank of America's acquisition of the investment firm Merrill Lynch.
Those questions include:
•Did federal officials, in an effort to contain a financial panic, put undue pressure on Mr. Lewis to go forward with the deal?
•Should Lewis have disclosed to the bank's shareholders, before they voted on whether to support the merger, that losses were piling up faster than expected at Merrill?
•Should Lewis have tried to back out of the merger, or renegotiate the terms, by arguing that those losses at Merrill represented what lawyers call a "material adverse change" (MAC) for the deal?
Lawmakers probed those issues again and again Thursday.
At times, Lewis emphasized the pressure he felt from federal officials. But he also said he and his team decided, on their own, that acquiring Merrill was a good move for the bank and its shareholders.
He said he thought Mr. Bernanke and other federal officials were acting with good intentions.
And he sought cover on the question of whether he violated a duty by not disclosing more details on Merrill's performance ahead of the shareholder vote.
"I'm not a securities lawyer," Lewis said. "When our lawyers tell us we have a disclosable event, we disclose it."
Members of the House oversight committee, comparing his answers with reports an earlier legal deposition by Lewis and with e-mails obtained from the Federal Reserve about the Merrill deal, repeatedly were unsatisfied with his answers. The said so in the bluntest terms.
Mr. Kucinich also questioned who was pressuring whom. Some questions at the hearing focused on reports that federal officials threatened Lewis's job if he didn't go through with the Merrill deal. (The government has leverage both as a regulator of Bank of America and – since last fall – as an emergency investor in the firm). Other panel members, including Kucinich, tried to probe whether Lewis had sought to influence government officials. Bank of America got an additional infusion of financial support from the government not long after shareholders approved the Merrill buyout.
Citing internal Federal Reserve e-mails, lawmakers also questioned whether Lewis was threatening to invoke a "material adverse change," with the goal of getting a better price when the Merrill purchase was finalized.
In one e-mail, also quoted in the Wall Street Journal, Bernanke referred to Bank of America using such a threat as "a bargaining chip, and we do not see it as a very likely scenario at all. Nevertheless, we need some analyses of that scenario so that we can explain to [Bank of America] with some confidence why we think it would be a foolish move and why regulators would not condone it."
In another e-mail, a Fed legal adviser warned Bernanke against giving Lewis a document opposing a MAC argument by Bank of America. "We shouldn't take him off the hook by appearing to take the decision out of his hands," the e-mail said.
Welcome to the messy world of bailouts and what one lawmaker called a "shotgun" corporate marriage.
The committee says it now plans to call Bernanke and former Treasury Secretary Henry Paulson for questioning.
The Merrill merger is one of the central events of the financial crisis, because the two firms involved are so prominent and because they agreed to the deal last September, at a time of maximum stress in financial markets. Merrill rival Lehman Brothers was in the process of going bust. CEOs of other financial firms were scrambling to ensure their survival. Federal officials were trying to save the economy from a devastating collapse of confidence. The Merrill deal was forged as all these parties held weekend meetings at the New York Fed building, in discussions that centered on Lehman's impending collapse.
The stock market was pointing to Merrill as the next investment bank at risk of failure, but Mr. Lewis saw a company with long-term strategic value.
– Guest blogger Mark Trumbull is a Monitor staff writer.