Monday, June 22, 2009

Shotgun Economics: The Merrill Lynch Deal

The Frontline story on Bank of America's acquisition of Merrill Lynch was indeed a fascinating look behind the scenes at one of the more controversial government interventions into the banking system. You can view the program in its entirety below.

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1 comment:

JP Farrell & Associates, Inc. said...

I thought the reporting was quite good and was especially impressed with the director's use of music, imagery and pacing to dramatize the story. The report was also quite true to the timeline, which you can find at .

The facts themselves are quite disturbing. There seems to be some dispute as to whether Bank of America freely entered into the deal, with Ken Lewis alleging that he was given an ultimatum by regulators that he must either complete the deal or find himself and the Board replaced. Bernanke responded to those charges today (see News). If Lewis truly completed the deal against his own best judgment and contrary to the interests of his shareholders, he should be replaced. We'll leave it to Congress to decide if Mr. Lewis did in fact throw the Bank under the bus to save his position or whether his whinging Congressional testimony was merely posturing.

In any event, the charge shows how seriously off track banking and securities regulation had wandered by 2008. Lack of effective oversight of these privileged industries had allowed investment banks like Merrill Lynch, Bear Stearns, Lehman Brothers and others to take highly leveraged positions in mortgage-backed securities, covering their bets with credit default swaps through AIG. Recognizing that the fall of AIG could take down the entire investment banking system (including his former company, Goldman Sachs), Secretary Paulson sprang into action, just in time to forestall a total economic collapse, but too late to prevent a Democratic landslide in the 2008 elections and 10% unemployment a few months hence.

Surely this isn't what Milton Friedman had in mind when he urged the government not to use monetary policy to interfere in the marketplace. By failing to adequately regulate during the Clinton and Bush Administrations, Bush's Treasury Secretary was forced to violate every principle of free trade. The Treasury and Federal Reserve set prices and terms of sale for private companies, among them Merrill Lynch and Bear Stearns.

We're reminded that markets work and markets fail, which is precisely why the U.S. and every other economy regulates its banking sector. Regulation is not the antithesis of capitalism; rather it is the mechanism by which a society attempts to wring as much good from free markets as capitalism permits.