Things could be much worse, either that or the US government would explicitly own Merrill by now.

From Free Exchange:

"What sank Bank of America?

Posted by:

Economist.com | NEW YORK

Categories:

Financial markets

WHAT sealed the fate of Bank of America? I was surprised by something Thomas Friedman said yesterday.

And many other banks — the ones that took on the most leverage like Citigroup and Bank of America — are in trouble because of all the loans on their books that can't now be repaid, such as auto loans, commercial real estate loans, credit card loans, corporate loans.

In the run up to the crisis, there was reckless behaviour on the part of Citibank, Lehman and Bear—but is it fair to put BofA in that category? By acquiring Merrill and Countrywide, BofA has lots of nasty things on its books and it has taken lots of government money. But a big reason why things are so dire is because it bought a bank in really bad shape, not because it engaged in irresponsible lending and took on too much leverage.

Not to say things would be so rosy if it had not bought Merrill. While BofA may not have been as exposed as other firms, according to William Patterson, executive director of CTW Investment Group (which claims its affiliated funds own 116m BofA shares), by March 2008 BofA had lost 30% of its market capitalisation from the previous year. That was largely the result of liquidity support agreements from the CDOs it issued.

Also, even tougher times may lie ahead. The original BofA is heavily exposed to the American consumer. That may be a problem if unemployment goes above 10%. BofA has lots of home-equity loans and credit-card default could turn out to be a big problem. But, its behaviour, prior to acquiring Merrill, would not have left it on the brink of explicit nationalisation. It seems by taking on Merrill, it also took on its poor image. That made things even worse by sinking confidence further.

So even if Bank of America did not behave as recklessly as Merrill, was the decision to acquire it equally irresponsible? A letter circulating today from Mr Patterson to Temple Sloan, the bank’s lead outside director, calls for the removal of Ken Lewis for making that decision.

The board, however, subsequently allowed Mr. Lewis to take outsized, reckless risks by acquiring Merrill Lynch in the midst of severe financial uncertainty. After hastily arranging the ill-considered acquisition, management then failed to disclose Merrill’s staggering fourth quarter losses prior to the shareholder vote on the merger. In addition, BAC’s senior management was reportedly aware of Merrill Lynch’s intent to distribute nearly $4 billion in bonuses at a time when Merrill Lynch was suffering heavy losses. It also appears that Mr. Lewis had the ability to prevent the payments under a previously undisclosed agreement.

Mr Lewis claims he had no idea how bad 4th quarter earnings were until the board voted. Though, a friend of mine who works at Merrill put the merger rather succinctly: “It’s like buying a house during Hurricane Katrina and then acting surprised later the house is uninhabitable because of flood damage."

Nonetheless, after Mr Lewis realised how bad things were at Merrill, he claims he tried to back out of the deal. But Hank Paulson pressured him to stay the course (with the understanding of $20 billion of new capital from the government).

It’s ironic that now BofA is being cast in the same light as the worst behaving banks. The decision to buy Merrill may have been bad for BofA. But can you imagine where we would be now if that same fateful weekend Merrill went down with Lehman, or if Mr Lewis did back out of the deal to buy the troubled bank? Things could be much worse, either that or the US government would explicitly own Merrill by now. Who knows? If BofA survives this, it may someday be glad it bought Merrill (assuming that house does not need to be condemned)."

Me:
Don the libertarian Democrat wrote:

March 6, 2009 1:48

"Nonetheless, after Mr Lewis realised how bad things were at Merrill, he claims he tried to back out of the deal. But Hank Paulson pressured him to stay the course (with the understanding of $20 billion of new capital from the government).

It’s ironic that now BofA is being cast in the same light as the worst behaving banks. The decision to buy Merrill may have been bad for BofA. But can you imagine where we would be now if that same fateful weekend Merrill went down with Lehman, or if Mr Lewis did back out of the deal to buy the troubled bank? Things could be much worse, either that or the US government would explicitly own Merrill by now. Who knows?"

You make a good point, but let's follow through with some conclusions from this.

First, there was serious fear on the Sunday before Lehman went bust that, if they did, Merrill would follow. The actions of the following week to get the B of A to buy Merrill seem to argue that the fear was justified. Why then take the chance of letting Lehman go bust? Why not have given more aid to the B of A to buy Lehman?

Secondly, given the tax provisions of the original TARP that helped Wells acquire Wachovia, and all of the other actions, it's obvious that the plan to take care of these large businesses was to make them bigger. But what if the size was the problem?

Thirdly, since Bernanke and Bair have said that neither the FDIC or any other government agency can seize these large banks, what was the contingency plan if that occurred? Surely somebody must have asked what would happen if a large bank became insolvent. As best as we can tell, the plan was to turn the large banks over to other large banks with government help. That is the definition of a government guarantee. If the agency that seizes insolvent banks can't seize an insolvent large bank, and we don't let banks go bust in the US, that means that the government is financially committed to saving that bank. Period.

Finally, since you make the point that the B of A was pressured to and helped in the saving of Merrill, how can we help but conclude that the government now feels honor bound to save them?

he worries that solving the financial crisis might come to dominate Barack Obama's first term

From Clusterstock:

"Thomas Friedman Thinks The Crisis Might Be Kind Of A Big Deal

Joe Weisenthal|Mar. 4, 2009, 1:30 PM|3

Tags: Economy, Stimulus, Financial Crisis, Barack Obama

We were perplexed upon reading Thomas Friedman's colum this morning in which he worries that solving the financial crisis might come to dominate Barack Obama's first term.

I’m worried. We’ve just elected a talented young president with many good instincts about how to propel our country forward, extend health care to more people, make our tax code fairer and launch a green industrial revolution. But do you know what I fear? I fear that his whole first term could be eaten by Citigroup, A.I.G., Bank of America, Merrill Lynch, and the whole housing/subprime credit bubble we inflated these past 20 years.

We weren't sure what to say, so fortunately Robert Teitelman at The Deal captured our thoughts exactly:

This may be mean spirited, but what planet has Thomas Friedman been visiting?.

Last weeks' column got a similar reaction, after venture capitalists slammed his idea for dumping more money into their coffers. Friedman seems intent on shredding his reputation to bits by sounding ridiculous."

Me:

Don the libertarian Democrat (URL) said:

Mar. 04, 1:50 PM

Maybe you should do a Tom Friedman Watch like Felix Salmon's Ben Stein Watch.

Show weakness about what is yours, and you are a baby-step away from Bosnia. Which is, of course, what Serbians thought, and how "Bosnia" began.

Bernard Avishai:

"Apocalypse Now?

How is it that Israelis, as Ethan Bronner reports, are almost universally in favor of the Gaza operation, including the way it's been prosecuted, while government leaders and educated people around the globe, even those disgusted by Hamas missile attacks, condemn the operation, and especially the way it's been prosecuted? What's so strange, as veteran Haaretz columnist Gideon Levy rails, is that ordinary Israelis know as well as anybody that hundreds of Palestinian civilians, including perhaps 300 children, have been killed or maimed, and yet this horror has not become a significant part of public debate. For a small minority of peace activists( OF WHICH I WOULD BE A PART ), even a few people in the south, the price in blood has seemed much too high for ending random missile attacks. But most will argue, not entirely convincingly, for humanitarian relief—and then spur on the IDF. Israelis, I hasten to add, are as sickened and frightened by military violence as the rest of the world is, even by their own. They may feel a superficial pleasure in retaliation for the missiles, or a satisfied relief in seeing the IDF perform in a coordinated, disciplined way, but they are not immune to doubts. There were two blockbuster films over the last couple of years, both anti-war films lamenting actions in Lebanon, "Beaufort" and the throat-clenching "Waltz With Bashir." My Palestinian friends will cringe when I say this, but most Israelis think of Israeli soldiers as children, too. Ron Ben-Yishai, the veteran war correspondent whose revulsion over Sabra and Shatila was featured in “Waltz With Bashir,” now supports keeping up "the pressure." One young soldier, interviewed this week on the radio, spoke with obvious sadness and compunction—but also with grim determination—about blowing up houses on the edge of Gaza city. He said, haltingly, that he feels he has had to harden his heart: "If it is their house or my house, I suppose I have to destroy their house," he said. HOW COULD THE vast majority of Israelis feel it morally defensible to take actions bound to result in the deaths of so many kids; how for the sake of gains everybody assumes will be, in the grand scheme of things, tactical and temporary? There is a big clue in that soldier's apocalyptic language. Israelis speak about this operation entirely in terms of Hamas' capabilities. Israelis are asking: Do you not see that any pain they have the capability to inflict on us they will inflict, sooner or later, so we have to go after those capabilities, if not once and for all, then now, while we can? Have you not looked at their covenant? Can you not see how their Iranian patron is arming them? Israelis are intrigued by levels of Hamas' motivation, but never by Palestinian motives more generally. The latter are not ever mentioned because they are assumed to be irrelevant to the confrontation in Gaza. It is their house or our house. Think about this. Occupation, preventive detentions, 300,000 settlers, the annexation and walling off of East Jerusalem, checkpoints, house demolitions, economic collapse, Gaza becoming Somalia—all the things that all Palestinians care about all the time, all the things that people abroad cannot get out of their minds—all irrelevant. Forget for a moment what Hamas is. The point is, for most Israelis nothing Hamas says—i.e., lift the siege, negotiate a “hundred year cease-fire,” subject any deal to a referendum—can be responded to by diplomatic or other means. Their sad choice, most Israelis think, is to attack Hamas, even at the expense of mauling Gaza’s citizens. Their vague goal—as Tom Friedman surmises, a little too much like King David counting up enemy foreskins—is that although the attack will redouble hatred for Israel , it will significantly raise levels of resentment for Hamas. Hell, hatred for Israel is absolute anyway( IT ACCOUNTS FOR THE COVERAGE AND INTEREST, AT LEAST TO SOME DEGREE-DON ). WHY APOCALYPSE, of all times, now, when Israel’s military power seems so incomparable? Why extend the vendetta culture in which Hamas thrives( TRUE )? What needs to be understood—and Israelis themselves don’t see this easily—is that Hamas’ professed commitment to Israel’s destruction torments a kind of collective unconscious. Any Palestinian threat seems an “existential” one. I am not referring here to some “holocaust complex” outsiders like to go on about (though, God knows, filtered memories of the European genocide are in the emotional background). Nor do Israelis fear that they could never make restitution to Palestinians for dispossession, for the Naqba, though this fear brings us closer to the truth. I am referring to something more actual, a kind of projection from everyday knowledge of Israel’s political and legal structure, which Israelis feel protective (if not vaguely guilty) about—a structure they rightly suppose no self-respecting Palestinian could ever accept. Israelis, you see, ask another question, which is not at all about Gaza: How can we have a Jewish state if this cannot really accommodate non-Jewish citizens? Is it not obvious that, in the end of ends, they just don’t want us here? One can challenge Israelis on what Palestianians mean by "want" and "here." The great problem is that Israelis themselves don't really know what they mean by "us." This makes public debate increasingly defensive, frustrated, strident. It makes politics dangerous. IT IS NO accident that—just last week, as the Gaza attack raged—Israeli Arabs took to the streets, while a majority of Knesset parties, including Kadima, voted to strip the Arab parties of the right to participate in the upcoming elections (a right, most agree, the High Court will restore). For the growing discomfort of Israeli Jews with the country's Arab citizens, and vice versa, is very much reflected in Israel's fierce response in Gaza. The prosecution of this attack suggests, not just a fear of some next crisis, but of the chronic crisis; the presumed challenge to Israel always waiting around the bend, causing Israelis to prove—so they think—that they have overwhelming staying power. What is the crime these Arab parties have committed? They insist on Israel being "a state of its citizens( HOW AWFUL )," not a "Jewish and democratic state." To foreign ears, this sounds like a distinction without a difference. Why not a democratic state, patently Jewish insofar as it is Hebrew-speaking, much like France is “French.” But since 1948, Israelis have allowed "Jewish state” to evolve in curious ways: most land is reserved for “Jewish settlement,” the state gives the orthodox( AS A CONSERVATIVE AND REFORM CONVERT, THIS IRKS ME ) rabbinate control over marriage and aspects of citizenship, the whole of Jerusalem is decreed a Jewish patrimony, and so forth. (I take this all up in The Hebrew Republic.) While the Arab minority, 20% of the population, has been marginalized, Israel has spawned a kind of Judean settler state around Jerusalem and the West Bank, which Israelis are reluctant to confront for the sake of Palestinians. For most, the word democracy has come to mean, more than anything else, maintaining “a Jewish majority.” And this Jewish state, Israelis know in a day-to-day kind of way, is something that they would reject if they were in the shoes of Israeli Arabs. Lurking behind this knowledge is the not unreasonable fear that any peace they make with the Palestinians will unravel as the rejection of Israel by its own Arab citizens unspools. Sadly, you see, Israelis see their Jewish state as a bone in the throat of Palestinians, not just historically, but still. They feel themselves, increasingly, in a desperate “existential” fight where no holds are barred now, because no holds will be barred later. Show weakness about what is yours, and you are a baby-step away from Bosnia. Which is, of course, what Serbians thought, and how "Bosnia" began.

Posted by Bernard Avishai at 10:18 AM "

This is sad, and untrue. Israelis and Palestinians could live together. See, they've been doing it in Israel for sixty years. Somehow, that fact is forgotten.

"President Elect Barack Obama, who went to the mat for Lieberman"

From Joe Gandelman on The Moderate Voice:

"Joe Lieberman may have been a Democrat, he may now be an independent, and some progressive Democrats may think he is a closet Republican. But what is indisputable is that he is a survivor: he has come out of a meeting with Senate Democrats upset over his role in supporting losing GOP Presidential candidate Sen. John McCain with little more than a slap on the wrist.

He did so with a little help from a (perhaps former) friend: President Elect Barack Obama, who went to the mat for Lieberman, making it clear behind the scenes that he didn’t want to start off his White House term with Democrats stripping Lieberman of his committee chairmanship or making Lieberman so upset that he’d bolt to caucus with the Republicans.

Progressive Democrats will be and are livid. But Sen. Majority Leader Harry Reid argues that Lieberman is there when it counted on Democratic issues, and Lieberman vows its “the beginning of a new chapter.”

Here's my comment:

I thought that it was a wise political decision, and have been hoping for this. Good work.

Here was an earlier post:

"Wednesday, November 12, 2008

"Several top Democratic senators have launched a behind-the-scenes effort to save Sen. Joe Lieberman’s chairmanship"

I don't talk about these kind of issues much because so many other people do. But here goes:

"Several top Democratic senators have launched a behind-the-scenes effort to save Sen. Joe Lieberman’s chairmanship, despite calls from a Democratic base seeking retribution for Lieberman’s vocal support of John McCain’s presidential campaign.

Sens. Chris Dodd (D-Conn.), Ken Salazar (D-Colo.), Tom Carper (D-Del.) and Bill Nelson (D-Fla.) are all involved in the effort, according to top Senate Democratic aides. These four senators — along with other Lieberman allies — are reaching out to the rest of the Democratic Senate caucus to try to ensure Lieberman survives a secret ballot vote on whether to strip him of his chairmanship of the Homeland Security and Governmental Affairs Committee.

This effort, along with kind words from Majority Whip Richard J. Durbin (D-Ill.) last night about Lieberman, is giving the Connecticut senator some serious momentum heading into next week’s secret vote. Dodd’s involvement in saving his home-state senator is an extraordinary turn because Dodd backed Democratic candidate Ned Lamont in 2006 against Lieberman, who won the Connecticut Senate race as an independent. Dodd, however, had backed Lieberman in the Democratic primary and only switched support to Lamont when he became the Democratic nominee.

Also driving the effort to save Lieberman — an outcast with the progressive left — is the spirit behind Barack Obama’s victory.

“He’s got momentum, and we need to keep him in the caucus, and this fits into Barack Obama’s message of change and moving forward,” said one Senate Democratic aide familiar with discussions. “The message here is that we don’t want to start off a new era with retribution.”

I agree. Keep him where he is. It reminds me of Burke's treatment by the Whigs, which, well, really pissed me off. Lieberman is a Democrat. He was for the war. How many times have we heard the phrase "No litmus test", only to find out there's a folder of them that we have to pass before being a member of a party.

People like Lieberman, Friedman, and Hitchens, strike me as Democrats or leftists. Putting a hex on them because they supported the Iraq war seems wrong. It was a frightful mistake, but we might well make one ourselves someday out of the best of intentions.

"Several top Democratic senators have launched a behind-the-scenes effort to save Sen. Joe Lieberman’s chairmanship"

I don't talk about these kind of issues much because so many other people do. But here goes:

"Several top Democratic senators have launched a behind-the-scenes effort to save Sen. Joe Lieberman’s chairmanship, despite calls from a Democratic base seeking retribution for Lieberman’s vocal support of John McCain’s presidential campaign.

Sens. Chris Dodd (D-Conn.), Ken Salazar (D-Colo.), Tom Carper (D-Del.) and Bill Nelson (D-Fla.) are all involved in the effort, according to top Senate Democratic aides. These four senators — along with other Lieberman allies — are reaching out to the rest of the Democratic Senate caucus to try to ensure Lieberman survives a secret ballot vote on whether to strip him of his chairmanship of the Homeland Security and Governmental Affairs Committee.

This effort, along with kind words from Majority Whip Richard J. Durbin (D-Ill.) last night about Lieberman, is giving the Connecticut senator some serious momentum heading into next week’s secret vote. Dodd’s involvement in saving his home-state senator is an extraordinary turn because Dodd backed Democratic candidate Ned Lamont in 2006 against Lieberman, who won the Connecticut Senate race as an independent. Dodd, however, had backed Lieberman in the Democratic primary and only switched support to Lamont when he became the Democratic nominee.

Also driving the effort to save Lieberman — an outcast with the progressive left — is the spirit behind Barack Obama’s victory.

“He’s got momentum, and we need to keep him in the caucus, and this fits into Barack Obama’s message of change and moving forward,” said one Senate Democratic aide familiar with discussions. “The message here is that we don’t want to start off a new era with retribution.”

I agree. Keep him where he is. It reminds me of Burke's treatment by the Whigs, which, well, really pissed me off. Lieberman is a Democrat. He was for the war. How many times have we heard the phrase "No litmus test", only to find out there's a folder of them that we have to pass before being a member of a party.

People like Lieberman, Friedman, and Hitchens, strike me as Democrats or leftists. Putting a hex on them because they supported the Iraq war seems wrong. It was a frightful mistake, but we might well make one ourselves someday out of the best of intentions.