In the September issue of The Atlantic, William Cohan explains how Bank of America came to purchase Merrill Lynch last year for $50 billion in stock. The story, as Cohan describes it, “raises serious questions about the sanctity of legal contracts in post-crash America, and about the fast-evolving relationship between American government and industry.”
Apparently, Bank of America executives quickly realized they’d vastly overpaid for Merrill, which was facing staggering losses that would end up on the bank’s books. This lead the management team to consider invoking a material adverse-change clause in the contract. Doing so would have exposed BoA to lawsuits from Merrill shareholders, but would have protected the bank’s shareholders from Merrill’s toxic assets.
First, though, BoA’s CEO Ken Lewis decided to check with then-Treasury Secretary Hank Paulson. “We’re very supportive of Bank of America and we want to be of help, but the government does not feel it’s in your best interest for you to call a MAC,” Lewis says Paulson told him on Dec. 21, less that two weeks before the deal would be finalized. In fact, Paulson added, “We would remove the board and management” if Lewis tried to pull the plug.
Lewis has testified that federal policymakers made it clear that, “We want this deal done on time and on these terms.” He says, “There wasn’t an ability to renegotiate.” To ensure things went smoothly, “no information about Merrill’s growing losses was provided to Bank of America’s shareholders before the vote,” Cohan notes.
The Atlantic author spoke to Mark Sunshine, president of international commercial lender First Capital. Sunshine admits he would have gone along with the government, too. But what choice would he have had?
This whole tale “also sounds an awful lot like what happens in a banana republic or in Putin’s Russia, when the captains of industry did favors for the government in exchange for economic subsidies,” Sunshine adds. “How do you stop from going down the slippery slope and becoming like Putin’s Russia?”
In the weeks ahead, liberal politicians are going to insist our government can “compete” in the health insurance market and “bring costs down” while “improving service.” But the government doesn’t compete. It compels.
If we’re foolish enough to allow socialized health care, the system we’re left with will be barely “good enough for government work.”
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