TOPICS > Economy

Paulson Defends Bank of America-Merrill Lynch Deal

July 16, 2009 at 6:25 PM EDT
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Former Treasury Secretary Hank Paulson testified Thursday in the third and final House hearing looking into the government's role in the Bank of America purchase of Merrill Lynch. Jim Lehrer discusses the hearings with Binyamin Appelbaum of the Washington Post.
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JIM LEHRER: A major bank, JPMorgan Chase, reported strong profits just months after the worst of the financial crisis. But a smaller lender, CIT, moved closer to filing for bankruptcy as the government indicated it would not bail out the company.

And Congress continued to ask questions about the role of the government last fall. NewsHour correspondent Tom Bearden begins with that part of the story.

TOM BEARDEN, NewsHour Correspondent: Former Treasury Secretary Hank Paulson testified on Capitol Hill today for the first time since leaving his post in January.

CONGRESSMAN: Do you solemnly swear to tell the truth?

TOM BEARDEN: It was the third and final House hearing looking into the government’s role in the Bank of America purchase of Merrill Lynch at the height of the financial crisis last fall.

After agreeing to the purchase, Bank of America discovered Merrill Lynch’s losses were far deeper than expected and reportedly wanted out of the deal, but the company was pressured and even threatened by the government.

Bank of America CEO Ken Lewis and Federal Reserve Chairman Ben Bernanke have testified already. Today, it was Paulson’s turn, and he quickly defended his actions.

HENRY PAULSON, Former U.S. Treasury Secretary: In the midst of a rapidly changing crisis, our responses were not perfect, but I am confident that they were substantially correct and that they saved this nation from great peril.

TOM BEARDEN: Bank of America got an additional $20 billion from the federal government to cover Merrill Lynch’s losses.

HENRY PAULSON: My view and the view of numerous government officials working on the matter, the interests of the nation and Bank of America were aligned with respect to closing of the Merrill Lynch transaction.

Paulson admits to pressuring Lewis

Henry Paulson
Former Treasury Secretary
It was also appropriate for me to remind him that, under such circumstances, the Federal Reserve could invoke its authority to remove management and the board of Bank of America.

TOM BEARDEN: Today, Paulson acknowledged he told Lewis the bank's management and board could lose their jobs if they invoked a clause to exit the deal.

HENRY PAULSON: That would show a colossal lack of judgment and would jeopardize Bank of America, Merrill Lynch, and the financial system. It was also appropriate for me to remind him that, under such circumstances, the Federal Reserve could invoke its authority to remove management and the board of Bank of America.

TOM BEARDEN: Federal Reserve Chairman Ben Bernanke has denied threatening to oust Lewis and said he didn't direct anyone else to, either. Paulson backed that up today. But after he acknowledged some of his conversations, he ran into considerable skepticism and grilling from committee members, including Republican Dan Burton of Indiana.

HENRY PAULSON: I participated in a number of meetings and calls where Chairman Bernanke participated. There were lawyers from the Fed, staff members from the Fed, people from Treasury. And I came away from those calls with that understanding. And...

REP. DAN BURTON (R), Indiana: Well, who's -- wait a minute. Wait. If you came away from that...

HENRY PAULSON: Let me just -- let me just...

REP. DAN BURTON: Well, no, listen. Just a second. If you came away from that, from those phone calls, somebody must have said, "Hey, we can't let them do this."

HENRY PAULSON: Well, I just...

REP. DAN BURTON: And I would suggest that it might have been Mr. Bernanke.

HENRY PAULSON: Well, what I would say to you, I do not know whether someone in those conversations or calls expressly said it or if my understanding came from just the tone and the forcefulness of...

REP. DAN BURTON: You know, you're a very smart man. I don't think anybody is buying what you're saying right now.

TOM BEARDEN: Many congressmen, including Chairman Edolphus Towns, also felt the government exerted too much power in the deal.

REP. EDOLPHUS TOWNS (D), New York: The American people, investors, and the Congress were kept in the dark. There was no oversight to determine whether this arrangement made sense. In my view, this is unacceptable and must be prevented from happening in the future.

TOM BEARDEN: Republican Congressman Jim Jordan of Ohio.

REP. JIM JORDAN (R), Ohio: When most people look at this, they see a clear pattern of deception and intimidation. I don't think there's anyone in this room who doesn't believe that you guys intimidated Mr. Lewis. I think the American people need to see this situation, because it sheds light on where we're headed.

TOM BEARDEN: Paulson defended the government response and said the taxpayers will get their money back with a profit. Some of the banks who took federal money at the peak of the financial crisis -- Goldman Sachs and JPMorgan -- have posted profits this week. Both have paid back the government's original investment in them.

Higher bank profits, fewer banks

Binyamin Applebaum
Washington Post
You know, it's interesting. We have a recession that began with the collapse of Wall Street. And what we now have is Wall Street going great guns and the economy around it is what's suffering.

JIM LEHRER: More on these banking and finance developments now from Binyamin Appelbaum, who covers financial and banking for the Washington Post.

Binyamin, welcome. First, on these profits from JPMorgan and whatever, how should they be read? What's going on? Is the financial crisis over?

BINYAMIN APPELBAUM, Washington Post: You know, it's interesting. We have a recession that began with the collapse of Wall Street. And what we now have is Wall Street going great guns and the economy around it is what's suffering.

So we've had a partial recovery in the banking sector. The investment banking side of the house, the business of trading in financial instruments, raising money for companies, that's doing great. Retail banking, the business of making loans to businesses and consumers, is still doing terribly. And it will be as long as unemployment keeps going up.

JIM LEHRER: But is there any particular reason that the first part of it is doing so well? Is that a result of the federal bailout money that went to these banks?

BINYAMIN APPELBAUM: It is in part. It's also a result of the fact that there are a lot fewer investment banks. Several of the largest firms collapsed. Lehman Brothers, Bear Stearns, Merrill Lynch, they're all gone. So there are fewer people at the table, and each of them gets a bigger slice of the pie.

We've also seen a modest recovery in demand from investors for financial instruments, so these companies can, you know, sell the instruments that they have at higher prices.

And one thing that's happened that's kind of interesting is that banks marked down what they held. They reduced the value of their assets in the belief that this recession was going to get really, really bad. It turned out that it's just really bad. And as a result, they have been able to claim some increase in the value of those holdings.

JIM LEHRER: How does all of this affect the ongoing concern about credit itself? Is it really -- is this a sign that credit is, in fact, loosening up a bit?

BINYAMIN APPELBAUM: Not yet. It could be the first sort of dawning of that. But at the moment, no, credit remains extremely tight. It's very hard to get a loan. There's a lot of reasons for that. None of them seem to be improving right now. If you're a business or you're a customer out there just in the marketplace looking to borrow money, that hasn't gotten any easier just yet.

Paulson issues Lewis an ultimatum

Binyamin Applebaum
Washington Post
The government forced Bank of America to complete this deal. It provided the money that Bank of America needed to complete the deal. Whatever your views are on whether or not that was a good thing, it seems pretty clear that that's what happened.

JIM LEHRER: OK, now the Paulson hearings. In the final analysis, we just heard one of the congressmen say, "I'm not buying this. I don't buy this." You know, all kinds of allegations made, not only against Paulson, but Chairman Bernanke and everybody -- Bernanke and everybody else who was involved in this. Was there a consensus result of this hearing? Or was everybody just agreed to disagree and going to go away and fight some more?

BINYAMIN APPELBAUM: You know, there's a couple different things going on at this hearing. One of them is what everyone says the hearing is about, which is the question of what the government did in the fall, and I think we've got a pretty good understanding of that now.

The government forced Bank of America to complete this deal. It provided the money that Bank of America needed to complete the deal. Whatever your views are on whether or not that was a good thing, it seems pretty clear that that's what happened.

JIM LEHRER: They forced it? They made this happen?

BINYAMIN APPELBAUM: They said to Bank of America, "If you walk away from this, we'll remove your senior management. We think this is a terrible idea to even think about walking away from this. We strongly encourage you to do this." And Bank of America, when the federal government strongly encourages you to do something, they understood what that meant, and they did the deal.

JIM LEHRER: So now the question remains, though, was this a good thing or was this a bad thing?

BINYAMIN APPELBAUM: Right. And that's going to be a question -- it may be a while before we know the answer to that. And it turns out that this narrative is actually a convenient thing for both Democrats and Republicans. They're increasingly using it to argue about what should happen next.

They look at this incident, and Republicans say, "Here's an example of the government overextending its authority, reaching into the life of a private company. The lesson here is that we need to pull back."

Democrats look at this and say, "Here's an example of a private company essentially extorting money from the government by threatening to walk away from a deal. What happened here was wrong. It happened behind closed doors. What we need is greater transparency and greater control over the regulatory agencies. And what we need is more oversight of these companies."

JIM LEHRER: And as Congressman Towns said, we've got to make sure this never happens again...

BINYAMIN APPELBAUM: Right.

JIM LEHRER: ... "it" being, what, the Bank of America and Merrill Lynch deal and how it happened.

BINYAMIN APPELBAUM: Well, "it" being government involvement.

Lender CIT nears insolvency

Binyamin Applebaum
Washington Post
For two years now, CIT really hasn't been able to get additional money from investors. It's been burning its own fat, and it's running out.

JIM LEHRER: Government involvement in that kind of deal. The third thing is CIT, finally, its troubles. What do we know about it right now? Has there been any late developments on CIT and its problems?

BINYAMIN APPELBAUM: So this is a major small-business lender that has been desperately pleading with the government for aid. The government said no yesterday. Today, the company has been pleading with its own investors to provide aid, and those negotiations are still ongoing.

The company had set a deadline of tonight for its investors, basically, to agree to provide more money on top of what they've already invested.

JIM LEHRER: Now, explain to us what CIT is and what it does. It's not a bank, but it's close.

BINYAMIN APPELBAUM: It is close. It grew up sort of to compete with banks. A lot of small businesses have trouble getting money from banks. I think we all know small businesses come and go. They're pretty risky investments. A lot of them don't work out.

And so traditionally banks have been reluctant to make those types of high-risk loans. CIT grew up to fill that void. The company borrows money on Wall Street and gives it out to small businesses, and it plays a critical role in the lives of about 1 million companies across the country.

JIM LEHRER: One million companies?

BINYAMIN APPELBAUM: A million companies have relationships.

JIM LEHRER: What kind of companies?

BINYAMIN APPELBAUM: These are everything from, you know, manufacturers of clothing in Los Angeles to pretty much every Dunkin' Donuts franchisee to the suppliers who put products in Bed, Bath & Beyond stores to people who buy Dell computers. It goes, you know, sort of all through the economy.

JIM LEHRER: And CIT supplies ongoing credit to these companies, right?

BINYAMIN APPELBAUM: It does.

JIM LEHRER: All right. Now, if CIT goes bankrupt or goes under or disappears, what happens?

BINYAMIN APPELBAUM: Well, there's two things that are going to happen. The first is that companies that are able to get money from somewhere else will shift their relationships while those that can't may be forced to go out of business or to contract or to find, you know, some other means of surviving.

But the other role that CIT plays that's pretty important is as an intermediary between retailers and their suppliers. It provides the financing that supports retailers getting goods from suppliers so they don't need to pay until the goods are actually sold.

JIM LEHRER: So if somebody has a small dry goods store, CIT gives the dry goods store the money to buy the clothes that it's going to put in there. And then what happens?

BINYAMIN APPELBAUM: They basically -- so the dry goods store accepts the consignment of goods. It pays with an IOU. The wholesaler takes that IOU to CIT, and they get money for it right upfront, and then CIT eventually collects payment from the retailer.

If that network breaks down, what you're going to have is a lot of pain in the retail business, because a lot of companies are in pretty fragile condition right now. And even a temporary disruption in their cash flow could be a very serious problem for them.

JIM LEHRER: How did CIT get into such trouble?

BINYAMIN APPELBAUM: You know, the story is pretty familiar by now. It was a company that lived on the credit markets. It basically relied on the willingness of investors to provide money that it could provide to its customers.

And about two years ago, investors stopped being willing to provide money. What started with concern about subprime mortgages spread quickly to pretty much every other kind of investment. And for two years now, CIT really hasn't been able to get additional money from investors. It's been burning its own fat, and it's running out.

JIM LEHRER: If there are a million or more companies or businesses out there depending on CIT, what's the fallback position if CIT falls? What do these folks do?

BINYAMIN APPELBAUM: There's going to be a scramble. You can think of sort of the availability of credit right now as a game of musical chairs. There's not enough chairs for everyone who wants one. If CIT pull its chairs out of the game, there's going to be a lot more companies hunting for the available seats.

JIM LEHRER: Are there big competitors to CIT already there?

BINYAMIN APPELBAUM: Sure, there are some. Many of the major banks are in this business of providing funding to small businesses. Wells Fargo, Bank of America, JPMorgan Chase, G.E. General Electric, its financing subsidiary does some of this work. American Express provides small-business loans.

There's lots of other companies that do it. But, again, the problem is that, right now, if you take a big chunk of that away, there really isn't enough money to go around.

JIM LEHRER: OK. Binyamin Appelbaum, thank you very much.

BINYAMIN APPELBAUM: My pleasure.