Fed’s Role In BOA-Merrill Lynch Merger
Federal Reserve Chairman Ben Bernanke gave testimony before Congress on it’s role over the merger of Bank of America(BOA) and Merrill Lynch. As we have seen many BOA shareholders sharply questioned the transaction after the fact, once major losses came to light in ensuing quarters.
As you know, the period encompassing Bank of America’s decision to acquire Merrill Lynch through the consummation of the merger was one of extreme stress in financial markets. The government-sponsored enterprises, Fannie Mae and Freddie Mac, were taken into conservatorship a week before the Bank of America deal was announced. That same week, Lehman Brothers failed, and American International Group was prevented from failing only by extraordinary government action. Later that month, Wachovia faced intense liquidity pressures which threatened its viability and resulted in its acquisition by Wells Fargo. In mid-October, an aggressive international response was required to avert a global banking meltdown. In November, the possible destabilization of Citigroup was prevented by government action. In short, the period was one of extraordinary risk for the financial system and the global economy, as well as for Bank of America and Merrill Lynch.
Obviously the Fed didn’t want to see another episode of what happened in the aftermath of the Lehman collapse when financial market froze up and at the time the financial system was and is still on shaky ground. Until the financial system can gain firmer ground, one of the main goals of the Fed is preventing any additional shocks that would undo much of the massive intervention the government has already undertaken.
In hindsight maybe they wished they had done more to prevent the Lehman Brothers collapse but at the time the Fed was unwilling to take on the substantial risks that would have imposed on them. Even now, you can’t say they made the wrong decision since Lehman’s liabilities far outstripped it’s assets because they were so heavily leveraged.
In the case of Merrill Lynch at least they had a party in BOA that they could share some of the risk with. For the time being it appears that the Fed made the right decision in supporting the transaction even though some parties don’t agree with it.
