Conspiracy theorists must have been doing a joyous jig today as news broke that Bank of America (NYSE: BAC) CEO Ken Lewis was supposedly strong-armed by the government to keep mum on the losses at Merrill Lynch.
This builds on previous speculation that B of A was forced to buy Merrill as Merrill's situation began to look Lehman-esque, and opens a whole new Pandora's box on a situation that is already one big snafu.
But the story's importance spreads beyond the shock-and-awe factor. As investors, we need to be wary of the wide-ranging consequences of this bombshell.
In Ken we ... trust?
Lewis has been in a battle for his job at B of A, and rightly so. The company has been one of the hardest hit in the financial crisis and, unlike fellow folly Citigroup (NYSE: C), the same folks that helped land it in the current pickle remain at the top.
Certainly there can and will be arguments made in support of Lewis. The Merrill acquisition came on the heels of the bankruptcy at Lehman, at a time when the entire world economy seemed to be at risk of falling into an abyss.
Even after the acquisition was completed, the financial system was still very touch and go, so talk of Merrill's troubles could have rattled things further -- which of course would have come full circle to batter B of A.
But if only that were the whole story. In fact, Lewis not only agreed to snatch up Merrill, he did it with relish. Bank of America announced the transaction at a 70% premium to what Merrill's shares were trading at a day earlier, and it didn't secure any government backstops on excessive losses from the broker.
This was in stark contrast to the smoking hot deal that JPMorgan Chase (NYSE: JPM) got when it scraped Bear Stearns off the pavement. And that's not to mention the fact that Lewis has talked up the acquisition on quite a few occasions since the original announcement.
The whole ordeal leaves shareholders between a rock and a hard place when it comes to the company's leadership. If you believe one side of the story -- that the government's mob-like tactics kept Lewis quiet -- then B of A is headed up by someone not willing to truly advocate for the company's shareholders. If you take the other side, then you undoubtedly come to the conclusion that Lewis is full of baloney -- and probably some other non-lunchmeat substances -- and not fit to run a major bank.
All roads seem to lead to the end of the road for Lewis.
But wait! There's more!
You didn't think I'd let the government off scot-free, did you? In terms of blame, the story isn't quite as lose-lose for Ben Bernanke and Hank Paulson on this one, since there is the possibility that Lewis is embellishing the story in an attempt to cling to his job -- a possibility that I don't think is out of the question.
In terms of impact though, it'll likely be pretty troublesome for not only Bernanke and Paulson, but the markets as a whole. The government has been pulling out all the stops to stabilize the financial system, and a big part of that is inspiring confidence in market participants.
Should the current debacle at B of A lead to further inquiries and investigations -- which I think is likely -- trust in the government and its ability to clean up this mess will likely be eroded.
Unfortunately, it probably doesn't even matter in the near term whether the Fed or Treasury really tried to put a gag on B of A. The incident is more than enough to inject uncertainty into the market -- and the market hates uncertainty. This may bring wary eyes to many of the other recipients of huge amounts of aid, such as AIG (NYSE: AIG) and Wells Fargo (NYSE: WFC).
More still?
The best-case scenario here is that Lewis really is just a big-shot CEO with a lot of pride who is throwing in the kitchen sink in an effort to keep his job. That would mean that we could attribute this whole shenanigan largely to Bank of America and move on.
But what if it's not just Lewis? What if financial company CEOs at places like PNC Financial, Morgan Stanley (NYSE: MS), or US Bancorp (NYSE: USB) have been telling only half the story? Maybe they received a call from the government or maybe they took it upon themselves to withhold information for "the good of the economy."
But maybe the biggest question this raises is what's right and wrong in a situation like this. Warren Buffett has described the current circumstances as fighting an economic war. Could these be justifiable tactics to win the war? Let us know what you think by taking our Motley Poll. And feel free to fire away in the comments section below.
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Would the government have been right to tell Bank of America to keep quiet about the problems at Merrill Lynch?
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