The Journal has an excellent tick-tock on the deal between Merrill and Bank of America, showing how the government stared down BofA when it was considering backing out of its agreement.

Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say…

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank’s earlier cooperation — but warning that abandoning the deal would be a death sentence for Merrill…

Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

But why Lewis went through with this dog of a deal is still a mystery to me. BofA was supposedly “healthy”, right? It said it didn’t need that multi-billion dollar capital infusion in October but took it for the team.

The story is apparently the first in a series called “USA Inc.: The State of Capitalism” looking at how:

Six months into the great bailout of U.S. finance, Washington’s rescue attempt has helped shore up the system. But that emergency effort, planned on the fly, has taken the government on a risky journey deep into the heart of American capitalism.

Bureaucrats are calling the shots behind the scenes at some of the nation’s largest enterprises. Critics of the bailout program say its rules are opaque and its execution ad hoc, leading to a lingering lack of confidence in the financial system. Some lawmakers are scrambling to steer funds to favored lenders.

This is something the press needs to devote serious resources to, and it’s excellent that the Journal gives this crucial story the full page-one “leder” treatment with the promise of more to come. And the paper continues to crush the BofA/Merrill story.

Would we be better off now if the government hadn’t hardballed BofA into taking on billions in capital-sucking losses, instead nationalizing Merrill like it did AIG? Seems likely to me.

Another piece of big news here is how much BofA knew about Merrill’s problems before it submitted the deal to a shareholder vote without telling shareholders about the $13 billion in losses at Merrill it already knew about (that number would rise to $21.5 billion):

On Dec. 5, the deal was approved at separate shareholder meetings in Charlotte and New York. Nothing was said about Merrill’s problems. “It puts us in a completely different league,” Mr. Lewis said about the deal’s completion.

It sure did. You got bumped down from the majors to single A, Kenny. Those shareholder lawsuits are going to be very difficult to fight.

Great work by the Journal

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.