This is the story of a bank. It wasn’t one of those irresponsible banks that rode the subprime boom until the bottom fell out. It was a bank that hedged its risks, a bank that made sure its balance sheets added up.
That bank was called Bank of America. And certain government officials are now talking about nationalizing it. What happened? Bank of America got in bed with the government.
Starting in January 2008, Bank of America, which had zero subprime exposure, decided to step in and buy Countrywide, a company quickly spiraling out of control due to its heavy emphasis on risky mortgage lending. Bank of America saw an opportunity to write off Countrywide’s losses and use its resources for the coming refinancing boom. According to Bank of America CEO Ken Lewis, the government made no backdoor deals with B of A to buy up Countrywide. But the enthusiastic response of government officials ranging from Rep. Barney Frank, D-Mass., to Sen. Chuck Schumer, D-N.Y., suggests the significant possibility of a covert guarantee by the government to pick up the slack in case Countrywide’s loans went bad.
Whether or not the government was involved in the Countrywide purchase, it was certainly involved in Bank of America’s next big deal: the acquisition of Merrill Lynch. Like Countrywide, Merrill Lynch had significant exposure to the subprime market. And like Countrywide, it was on the verge of bankruptcy. In September 2008, government officials began talking up the idea of government interventionism -- creating a Troubled Assets Relief Program designed to buy up bad mortgages. Encouraged by such talk, Lewis fell in love with the idea of buying up Merrill Lynch. On Sept. 15, he made the initial offer to buy Merrill Lynch in a whopping $50 billion all-stock deal.
There was only one problem: Lewis did not anticipate that the government would renege on its TARP promises. In October 2008, President George W. Bush and Treasury Secretary Henry Paulson announced that TARP funds would be used to buy preferred stock in ailing banking institutions. Instead of taking bad assets off the books, the government would be buying into banking. In November, Paulson announced that nine of the nation’s largest banks would be taking $125 billion in government capital. Refusal was not an option.
Meanwhile, Merrill’s losses began to accrue more and more rapidly. By December, Merrill was showing a pre-tax loss of $21 billion.