Lewis on Merrill: The Government Made Me Do It!

A Journal scoop this morning goes a ways toward filling in the details of just what Bank of America’s Ken Lewis was thinking during the last weeks of his disastrous merger with Merrill Lynch, when he didn’t disclose the disastrous losses he’d found.

Lewis says Paulson and Bernanke forced him to conceal the key information.

Lewis testified that the regulators made him not only complete the deal with Merrill but also not disclose its sordid condition to his investors, who would have surely voted down the deal had they known.

From the regulators’ responses to Journal requests for comment, it’s hard to tell if Lewis is telling the truth—at least about Paulson.

Bernanke denies it:

A person in government familiar with Mr. Bernanke’s conversations with Mr. Lewis said Wednesday that the Fed chairman didn’t offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel.

But Paulson does not here:

Mr. Paulson repeatedly told Mr. Lewis that “the U.S. government was committed to ensuring that no systemically important financial institution would fail,” according to his spokeswoman.

But the Journal reports further down that Paulson testified to Cuomo that Lewis may have misunderstood him.

Whatever the case, now we’ve got two dud companies instead of one—and one is the biggest bank in the country. Bank of America shareholders have one heckuva lawsuit to push.

Still, the Journal reports that the government gun to the head may not get Lewis off the hook:

By keeping mum, the CEO of one of the biggest U.S. banks appeared to set aside a basic tenet of American-style finance — that, above all, companies must disclose material information to shareholders and potential investors.

“Regulators are supposed to tell you to obey the law, not to disobey the law,” said Jonathan R. Macey, deputy dean of Yale Law School. “If you’re the CEO, your first obligation is not to your regulator, it’s to your institution and shareholders.”


And bravo to the Journal for this broadening graph:

Mr. Lewis’s statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn’t adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc.

This sure offers a glimpse at the thinking behind the secretiveness on the TARP and the Fed’s collateral and the like. I like that the Journal remembers its duty to push for transparency in the government and the markets.

So why this story now?

The New York AG’s office leaks like a sieve, especially to the Journal. Seems like it has at least since the days of Spitzer. But this is probably why Andrew Cuomo wanted a big hit for this story:

Mr. Cuomo’s office says it has been unable to gather a full picture of the Fed’s role in the December discussions because the Fed has invoked a regulatory privilege, allowing it to keep some documents confidential.

The paper reports he’ll release the testimony to regulators and overseers today.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.