And so the saga continues. After the Fed denied the allegations that it forced Bank of America to push through with its purchase of Merrill Lynch, some emails surfaced showing that there was in fact threats coming from the Fed that BofA’s management are at risk if they decided to cancel the deal. There was also criticism of the plan calling the material adverse clause invoked by Ken Lewis a “bargaining chip”. Some excerpts from email sent to and by Fed regulators:
“Ken Lewis’ claim that they were surprised by the rapid growth of the losses seems somewhat suspect,” Tim Clark, senior adviser at the Fed’s division of banking supervision and regulation, said in a Dec. 19 email to Fed officials. “It calls into question the adequacy of the due diligence process [Bank of America] has been doing.”
“I think the threat to use the MAC is a bargaining chip, and we do not see it as a very likely scenario at all. Nevertheless, we need some analyses of that scenario so that we can explain to BAC with some confidence why we think it would be a foolish move and why regulators would not condone it.”
–Dec. 21 email from Chairman Bernanke to some Fed officials
“Just had a long talk with Ben. Says they think the MAC threat is not credible. Also intends to make it even more clear that if they play that card and then need assistance, management is gone.”
–Dec. 21 email from Federal Reserve Bank of Richmond President Jeffery Lacker to other Fed employees regarding a conversation he had with Bernanke.
See Wall Street Journal’s story on the issue with more excerpts on the side.
This would the Fed under intense scrutiny as more from emails sent become public. The only defense they could present here is that they were trying to prevent systemic risk from growing and spreading. But apparently, this does not rid them of a more professional manner of dealing with the matter.