In the fall of 2008, it became apparent that the housing bubble had finally burst and financial investment giant, Lehman Brothers was poised to go under after heavily investing in bad mortgages. Then Federal Reserve Bank Chairman, Ben Bernanke and U.S. Treasury Secretary, Henry (Hank) Paulson gathered the CEO's of the nation's largest and most powerful banks one fateful weekend in September to attempt to stop other investment firms from toppling behind Lehman like dominos.
One of the strategies to emerge was for Ken Lewis, CEO of Bank of America (BOA) to buy out Merrill Lynch for 50 billion dollars. (Why do I get an image of Dr. Evil, pinky in mouth, as I write that?) Lewis would later claim that he was strong-armed into the purchase under threat of dismissal from his post at BOA. The following Monday morning, Lehman fell and BOA began proceedings to acquire Merrill Lynch. However, the hope that this merger would stop other institutions from falling was soon dashed once the news broke of Lehman's failure and Merrill's needed rescue. The markets began to plunge, credit markets froze, and banks stopped lending, effectively putting the economy at a standstill.
Henry Paulson then presented to Congress that if the government didn't bail out failing banks and investment houses, the economy would plunge to the level of The Great Depression. And, T.A.R.P. was born. In October, 2008, President Bush passed the T.A.R.P. bill, despite taxpayer protests (big surprise). This bill would grant $700 billion in bailout money in exchange for ownership stake in the banks. Some banks protested, but Ken Lewis wanted to accept the proposal, as he was poised to get a double influx of funds for both BOA and Merrill Lynch. According to Breaking the Bank, the US nationalized the banks that day and Henry Paulson was now the puppet master.
Meanwhile, the marriage of BOA and Merrill Lynch was an unhappy one from the start and the mega-bonuses that Merrill Lynch employees expected quickly became an issue with Ken Lewis. Taxpayer-funded bailout money that was used to supply these bonuses drew loud and fierce opposition from the taxpayers, who were facing their own financial crisis due to the downturn. "Where's my bailout?," became a mantra of the common man.
In December 2008, Merrill Lynch's 4th quarter losses were devastating. Merrill held too many toxic assets. However, Ken Lewis did not tell the stockholders of these losses until the merger of BOA and Merrill was approved. Lewis would also later claim that he was unaware of the massive losses until it was too late to stop the merger, and even tried to invoke M.A.C. (material adverse change clause) to halt the process. This move by Lewis has been called the Lewis Ostrich Defense. When Lewis balked after learning of Merrill's heavy losses, Ben Bernanke and Henry Paulson claimed that cessation of the merger would surely collapse the banking system, and, according to Lewis, forced him to move forward.
Paulson offered Lewis an additional $20 billion to cover the losses (And we don't have money for education or to rebuild New Orleans because........?), but they both kept that offer secret for weeks. (And most Americans don't trust government or big business because.......?) When the news broke in January 2009 of Merrill Lynch's $15 billion dollar losses, the already wounded stock market began to tank. Ken Lewis placed the blame squarely on the shoulders of John Thain, then CEO of Merrill Lynch, citing mega-bonuses and irresponsible spending. Lewis was desperate to deflect the heat away from himself and threw Thain right under the speeding bus of the economy's downfall. (Insert image of political cartoon here.) Thain was fired, but Lewis' troubles were just beginning.
The new boss, President Barack Obama, was displeased with the former regime's handling of the banking crisis (there's a surprise) and not only demanded a change in way banks do business, but called for an accounting of how the bailout money was allotted.
On February 2, 2009, Lewis and other bank CEO's were grilled before Congress and held accountable for the billions of dollars handed to them. Ken Lewis was defiant throughout the proceedings, but eventually was stripped of his chairmanship by BOA and has since claimed that he regretted ever taking T.A.R.P. funds.
The long saga draws on, foreclosures are still high, and taxpayers, who suffered the greatest in this debacle are still crying out, "Dude, where's my bailout?"
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