Shares of Bank of America (NYSE: BAC) are now down almost 75% in the past three months, making this former bank bully's market cap substantially smaller than that of Wells Fargo (NYSE: WFC) and just half the size of former competitor No.1 JPMorgan Chase (NYSE: JPM).
Most of the plunge came in the last week, as B of A's deal to purchase Merrill Lynch prompted a second helping of bailout funds to help cover massive Merrill losses. Shareholders are infuriated -- as they should be -- and have filed a class action lawsuit against CEO Ken Lewis and former Merrill CEO John Thain in protest. The outrage ultimately led to Thain's resignation earlier today.
Two key questions that investors want to know the answers to are when those seemingly "unexpected" Merrill losses came to light, and why the deal was still consummated after they were discovered.
Here's what we do know
One popular argument is that the Fed "forced" the deal down Lewis's throat. Is it true? Well, it certainly didn't start that way. When the deal was first struck in September, the The Wall Street Journal reported that "[CEO] Ken Lewis said … that he felt 'no pressure' from federal government regulators to sign the deal."
As the report describes, things began to unravel in mid-December, when the depth of Merrill's losses took Lewis by surprise. That prompted a visit to Fed chairman Ben Bernanke and Treasury Secretary Hank Paulson on Dec. 17, where Lewis confessed that buying Merrill was too much for B of A to swallow. Lewis felt that Merrill had faltered enough to claim a material-adverse-change clause, which might allow him to walk away.
According, again, to The Wall Street Journal, Bernanke and Paulson worried that a failed deal would ravage financial markets, and warned B of A that pulling out "would reflect poorly on [B of A] and suggest it hadn't done its due diligence and wasn't following through on its commitments."
Nothing suggests that the Fed "forced" a deal against Lewis's will. On the contrary, it seems more appropriate to say that Lewis forced Bernanke and Paulson -- who have a responsibility to protect the financial system -- to bail out his blunderous miscalculation. As Lewis himself put it, "We went to regulators and told them we would not, that we could not close the deal without their assistance."
Maybe it's just me, but "would not close it without their assistance" seems like a far cry from "I tried to back out, but they held a gun to my head."
Moving on
To me, the argument that the Feds forced this deal to happen (a) seems to be untrue, and (b) ignores what's really important: that Lewis swung for the fences without understanding the risks, and shareholders are now paying dearly for his mistakes.
Someone remind me again: why hasn't Lewis followed Thain out the door yet?
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