The BoA - Merrill - Fed - Treasury Debacle

The purpose of this soap opera currently eludes me and the staff at Dredd.

First, a brief recap...

In September of 2008, Bank of America and Merrill Lynch agreed to get married, subject to a "Material Adverse Change" clause. That clause basically stated that Bank of America could get out of the deal if they found that Merrill had undisclosed financial material that that could hurt Bank of America during their due diligence process. The merger was to be complete by January 1, 2009.

In December, Bank of America found out that Merrill had such bad financial material, and Ken Lewis, CEO of Bank of America, called then Treasury Secretary Hank Paulson to inform him that Bank of America intended to get out of the agreement.

In January, the merger went through.

In April, Ken Lewis was removed from his position of Chairman of the Board of Bank of America by shareholder vote, but he remains CEO and President.

According to testimony from Lewis in June, Hank Paulson, at the behest of Federal Reserve Chairman Ben Bernanke, threatened Lewis' job if he didn't go through with the merger in January.

Bernanke testified today in front of Congress to tell his side of the story. According to the Fed chief, there was no such threat against Lewis.

Phew. This one should give the afternoon soaps a run for their money.

Here's what we don't get.

Why would Lewis go out of his way to start problems with the Fed? This is not in his benefit over time unless there's something we don't know (which is likely).

Why would the Republicans be the group going after Bernanke? Bush appointed Bernanke as a successor to Greenspan. Is this just more distancing from Bush?

Why aren't the Democrats going after Bernanke? After all, they have Larry Summers in their camp, who was Treasury Secretary for a while under Clinton. Obama's out of control spending is going to require many more Treasury auctions and money printing episodes from the Fed. There's been criticism that Ben Bernanke has been printing like crazy, but in fact, the Fed has been relatively stable for the last few months, and it is behind on monetizing the debt, according to its own published plans. This is not supportive of bigger government programs. You'd think Obama and the Dems would want to see Bernanke replaced by someone even more willing to print money even faster...

Politics and economics go hand in hand. From our standpoint, politicians are the ones that are usually to blame for most every negative economic event--this one included. Thus, it is important to keep tabs on what the rats in Washington are doing.

We're not sure what's going on, but it's worth paying attention to. Bernanke is up for reappointment in January. If Obama doesn't reappoint him, we're betting Summers gets the Fed gig. But we're also willing to bet that the next leg of the decline in the economy will be upon us by January. In that case, replacing Bernanke would be disastrous as it would put any sense of confidence in US stability in question.

Don't get us wrong here. We think the Federal Reserve and fractional reserve system as a whole needs to go. But, if we're in the stock market if or when Bernanke is replaced, that's probably a huge negative event.

This is an interesting event that's going to end up being more meaningful over the next few months. At a minimum, the banker sharks are starting to turn on one another, much like the hedge funds have. The finance world has turned into a feeding frenzy with the sharks turning on their own.

This may be a bit complex for some of our core readers that are new to all of this mess. Don't be perplexed. All of these machinations will become more clear over time. We probably need a brief report on how the Fed, Treasury and banking system work so that the conflicts are more clear.