Bank of America … First to Go?

For a variety of reasons I cannot let this pass. Today’s Wall Street Journal has an interesting story about the tension between the Federal Reserve Board and Bank of America. Unfortunately the story is hidden behind their subscription service wall so I won’t pass on the link to you. A summary of the story is this: apparently BoA was so disturbed by what they found when they had a good look a Merrill Lynch’s books that they baulked at completing the deal. Recall that the Fed had helped usher Merrill into BoA’s arms. This change of mind did not sit well with Ben Bernanke who called Lewis, the BoA CEO and basically threatened him with dismissal. The conversation was not at all pleasant. Lewis was told he had no choice but to absorb Merrill even if the losses were way above what BoA had expected. In return the Fed would be willing to agree further guarantees and capital injections. But the really interesting part of the discussion was when Bernanke threatened to fire the entire executive team and board of directors of the bank if they refused to go along.

Take a minute to read that again.

Yes: Bernanke threatened to fire the management of BoA. Now is it just me, or perhaps I’m missing something? Since when did Bernanke get the power to fire Lewis and his crew? Does the Fed own BoA? Well, of course, the Fed has always had the power to force incompetent management out because it is the regulator of the largest banks. But this threat seems to be much akin to a straightforward shareholder revolt than a bureaucratic reaction to poor management. This was a world class hissy fit. And the recipient was one of our most highly paid CEO’s. If this story is true, and I imagine it is, then Bernanke has been much more actively involved in running our big banks than he’s let on thus far. This ‘discussion’ was about internal policy of a ‘private’ institution. It was not in reaction to a regulatory audit report. BoA had cold feet when they saw the depth of the problems at Merrill. They had been sold a bill of goods by Thain and his cohorts. You remember Thain: he’s the one who spent $1.6 million redecorating his office even while his company was in its death throes, and he subsequently paid out billions in bonuses before year end ‘for a job well done’.

Now I am not an apologist for Lewis. He comes across as a typical egocentric overpaid CEO. But this must have hurt. First he has to watch as Merrill melts away just after he bought it. Then he looks on as Thain accelerates the bonuses and pays them out of empty coffers – in effect with BoA’s cash. And, to cap it all off, when he tries to ‘do the right thing’ for his shareholders and save them from the impending debacle he gets slapped by Bernanke. Ouch! These are not good times in the executive suites of our big banks.

So.

Do we own BoA? Has it been ‘nationalized’ in all but name? How come Bernanke can dictate internal policy? Has he taken over the day to day operations? If that isn’t nationalization what is?

Today’s report sent BoA’s stock price spinning towards zero. It is currently below $4 a share. Word on the street is that this weakness is due to ‘nationalization’ fears. The street may be too late. And the collapse in BoA’s market worth means that virtually any injection of capital from hereon out will effectively nationalize the bank whether we call it that or not. Perhaps Bernanke is merely recognizing a fait accompli? Or, to use that over worn phrase. The facts on the ground suggest BoA was the first big bank the taxpayers bought.

Interesting, no?