breaking the bank

transcript

Breaking the Bank

PRODUCED BY
Michael Kirk
Jim Gilmore
Mike Wiser

REPORTED BY
Jim Gilmore

WRITTEN AND DIRECTED BY
Michael Kirk

ANNOUNCER: Tonight on FRONTLINE-

HUGH McCOLL, Jr., Former CEO, Bank of America: You're either growing or dying. So we grew.

ANNOUNCER: They created the largest bank in America.

ANDREW ROSS SORKIN, The New York Times: He wants to give the middle finger to New York and to Wall Street.

CHARLES DUHIGG, The New York Times: Merrill Lynch is this hugely prestigious brand.

SUSANNE CRAIG, The Wall Street Journal: They had long sought this prize.

MARIA BARTIROMO, CNBC: John Thain was a hero.

DAN FITZPATRICK, The Wall Street Journal: Ken Lewis finally is on top of the financial world.

ANNOUNCER: But it was troubled from the beginning.

JOHN THAIN, CEO, Merrill Lynch, 2007-08: The market was in complete chaos.

SUSANNE CRAIG: This became a game of survival.

DAN FITZPATRICK: There are major doubts suddenly.

ANNOUNCER: The government took over.

JOE NOCERA, The New York Times: You can't leave this room until you agree to take this money.

SIMON JOHNSON, Fmr. Chief Economist, IMF: We nationalized the banks in the U.S. on that day.

ANDREW ROSS SORKIN: There is no power on Wall Street anymore.

DAN FITZPATRICK: The government holds all the cards.

ELIZABETH WARREN, Chair, Congressional Oversight Panel: That old way of putting on a party, it's over.

ANNOUNCER: Tonight on FRONTLINE, Breaking the Bank.

NEWSCASTER: We learned today home foreclosures in the last three months-

NEWSCASTER: -a record high just two years ago.

NEWSCASTER: Since then, prices have plummeted-

NARRATOR: 2008. The housing bubble had burst.

NEWSCASTER: -the elevator fell over the past week, there remains fears that it hasn't yet reached the ground floor.

NARRATOR: The markets were teetering.

NEWSCASTER: Profits in the banking industry are plunging-

NEWSCASTER: At 10:00 o'clock Eastern time, at Bear Stearns-

NARRATOR: Nobody knew how bad it was going to get. On one weekend in September, the entire American financial system would be changed. It began with a phone call.

SUSANNE CRAIG, The Wall Street Journal: About 4:00 or 5:00 o'clock, the various officials from the Federal Reserve started phoning the bank chiefs. Cell phones started going off, and they said, "You need to be down here at 6:00 o'clock. We want to talk to you."

JOHN THAIN, CEO, Merrill Lynch, 2007-08: I got a phone call about 5:00 o'clock saying be at the Fed at 6:00 o'clock that evening. I was in Merrill Lynch's midtown facilities, and I live in Westchester, so I was trying to get out of the city early because the traffic is always bad on a Friday night.

I went by myself. And for the most part, the CEOs of the large investment banks and commercial banks were all there by themselves.

SUSANNE CRAIG: So everybody converged. At that point, it was just the CEOs of the main houses and very senior advisers.

NARRATOR: That night at the New York Federal Reserve, the issue was Lehman Brothers. Wall Street's fourth largest investment bank, heavily invested in the mortgage market, was in a death spiral.

STEVE LIESMAN, CNBC: Bring everybody in the room, the interested parties, and you say, "Look, we have to solve this problem." And you lock the door until they come up with a solution.

NARRATOR: The secretary of the treasury, Henry Paulson, had convened the meeting.

STEVE LIESMAN: Paulson thought perhaps he could get everybody together, create a big old fund, and try to resolve Lehman.

NARRATOR: Tim Geithner, the president of the New York Federal Reserve, led the meeting.

CHARLES DUHIGG, The New York Times: Tim Geithner says, "Somebody needs to buy Lehman. We need to figure out how to rescue Lehman because otherwise, they're going to go bankrupt."

JON HILSENRATH, The Wall Street Journal: Inside the Fed, the picture of Lehman Brothers was a financial institution that was melting away before its eyes.

JOHN THAIN: They said to us we collectively had to find a solution for this, and this is the important part, the government was not going to provide any form of assistance.

NARRATOR: Convening a council of powerful Wall Street bankers came naturally to Hank Paulson. He used to be one of them.

STEVE LIESMAN: Paulson comes from the great breeds of Masters of the Universe that have come from Wall Street.

GRETCHEN MORGENSON, _New York Times: Henry Paulson came from Goldman Sachs. He was a very powerful Wall Street figure.

NARRATOR: Paulson made his fortune in the freewheeling '90s, when the unregulated free market was king.

JOE NOCERA, The New York Times: Paulson does not have the mentality of a regulator, he has the mentality of an investment banker, that the market rewards and the market punishes, so you don't need a lot of regulation.

NARRATOR: And at the Fed that night and throughout the weekend, Paulson would push the bankers to handle the Lehman crisis on their own.

JON HILSENRATH: It was a very high stakes game of signaling that he was playing. He wanted to show these guys, you know, all of his old buddies on Wall Street, that they were going to need to step up and do something themselves.

NARRATOR: But the bankers left the Fed that night uneasy. They knew that Lehman's books carried tens of billions of dollars in liabilities from toxic mortgages, and they didn't want to touch it. And they also knew Lehman wasn't alone.

[www.pbs.org: The roots of the crisis]

STEVE LIESMAN: It is about so much more than just Lehman. It's about Merrill. It's about Citi. It's about all the banks.

CHARLES DUHIGG: Everyone's carrying in the back of their mind a list, a hit list, of who's next to go down. And it's Merrill. They're next in size. They're next in problems. They've already admitted that they have a whole bunch of toxic assets on their balance sheet.

ANDREW ROSS SORKIN, The New York Times: You know, the CEOs talked openly with John in the room, Thain in the room, saying, "Well, you know, if we try to save Lehman Brothers, that's all great. But we're going to be back here next weekend and we're going to be talking about Merrill."

JOHN THAIN: I did not want to be the equivalent of Lehman the following weekend, sitting there.

JEFFREY LANE, Lehman Brothers, 2003-07: He was absolutely dead next. And "dead" and "next" are the two appropriate terms.

NARRATOR: 53-year-old John Thain was one of the newest CEOs in the room. A graduate of MIT and Harvard Business School, his career had been a rocket ride.

CHARLIE GASPARINO, CNBC: He's been on Wall Street for years. He was the number two guy at Goldman Sachs. He was Hank Paulson's number two, considered a very tough manager, considered a pretty smart guy.

ANDREW ROSS SORKIN: You know, he had been this golden boy at Goldman Sachs. Doesn't get the top job, though. He's passed over for the top job, and he jumps ship early, perhaps smartly, goes to the New York Stock Exchange as the CEO.

CHARLES DUHIGG: He was Mr. Fixit. He could go into any situation - and he had with the New York Stock Exchange and a number of other settings - and had taken companies that were having problems and had made them work.

NARRATOR: And Merrill Lynch had plenty of problems. Once conservative and careful, they'd abandoned caution for the quick riches of exotic mortgage-backed securities.

PAUL MUOLO, Author, Chain of Blame: They got into it very heavily. They courted a lot of non-prime lenders and they lent money to them, bought their mortgages and sold them into bonds. And they thought the gravy train would never end.

NARRATOR: When Thain took over, the housing bubble had burst and Merrill was a mess.

ANDREW ROSS SORKIN: This was an opportunity to prove that he could be the CEO of a big firm, he could get the job that he couldn't get at Goldman Sachs, and he could turn Merrill Lynch around.

NARRATOR: But Thain had little time to turn Merrill around.

JOHN THAIN: It's a little bit like you're in a very attractive boat that has a hole in it and you're trying to bail, but more water's coming in faster than you can get it out. And that's really what we were in over the course of- really, all of 2008.

NARRATOR: That September weekend, as the crisis meetings at the Fed wore on, Thain realized he would have to act.

JOHN THAIN: I really changed my thought process and just focused on, "All right, what can I do to make sure that Merrill Lynch doesn't go the way of Lehman?"

NARRATOR: Hank Paulson was also worried about his former deputy's bank. He had come to the realization that no one was prepared to buy Lehman. But if Lehman failed, Paulson had to keep the contagion from spreading to Merrill, threatening the entire economy.

CHARLES DUHIGG: Every single part of Wall Street at this point is plugged into another part of Wall Street. And if I go down, I can now drag down that guy. And if he goes down, he can drag down that guy, and he can drag down that guy. And this is a huge web that connects everyone in these completely unforeseen ways.

So if just one company goes down, in this case Lehman, it can drag down everyone else with them.

MICHELE DAVIS, Asst. Secy., Treasury, 2006-09: Hank was super-intense and super-focused and super-worried. He's a worrier. The calls he was getting were getting him really worried, and you know, not able to sleep because what are we going to do about this?

NARRATOR: Paulson decided the key to reassuring the market was finding a buyer to keep Merrill alive, and he had one in mind, a bank outside of Wall Street. It had been called a pillar of strength, the superbank, Bank of America.

CHARLES DUHIGG: Bank of America is the story of some of the most ambitious, aggressive bank builders on the face of the planet.

ANDREW ROSS SORKIN: They're sharks, but they're not Wall Street sharks. It's a different type of sea that these people are swimming around, swimming in.

NARRATOR: What had first been North Carolina National Bank had grown into a formidable Southern competitor to Wall Street, Nation's Bank. Hugh McColl ran it in the '80s and '90s.

HUGH McCOLL, Jr., Former CEO, Bank of America: After the Civil War, most of the capital in the South was wiped out. What I saw as part of my goal in life was to see that we had our own banks in the South that could finance Southern industry and Southern businesses and Southern individuals. And I set out to do that, and candidly, have been fairly successful at it.

CHARLES DUHIGG: They bought and bought and bought. And they would buy one bank and then they'd buy another bank and get bigger and bigger and bigger. Even if they got bought by someone else, they were the ones who ended up taking over the show.

NARRATOR: Even the bank's name was acquired. They bought the California-based chain Bank of America in 1998.

HUGH McCOLL: You're either growing or dying. There's no middle ground. You can't hold what you have. That doesn't work in the- in business. So we grew.

NARRATOR: When he retired, McColl chose one of his long-time mergers and acquisitions specialists, Ken Lewis, to run it all.

KENNETH LEWIS, CEO, Bank of America: Well, I'm really nobody. When you look at my background, I came from a very modest beginning. My mother raised my sister and I, so a one-parent family. And she was a nurse.

DAN FITZPATRICK, The Wall Street Journal: This is not somebody with an Ivy League- Ivy League background. This is not somebody with blue-blood parents. This is somebody sort of driven by a need to prove himself, especially to prove himself against people from Wall Street.

CHARLES DUHIGG: Someone once described Ken Lewis to me as the most competitive person in the history of the United States, including the Union Army.

DAN FITZPATRICK: He practiced smiling, which is not Ken Lewis's default expression. He started wearing glasses to soften his features. He would talk, and tape himself while talking to catch, you know, the pauses. So this was quite a makeover for Ken Lewis.

ANDREW ROSS SORKIN: He wants to give the middle finger to New York and to Wall Street and he wants to beat them at their own game. And I think he revels in it, the idea that these guys from Charlotte can be beating up the guys on Wall Street.

NARRATOR: Lewis took over at a critical moment when the rules limiting bank mergers were being dismantled. A race to become the biggest superbank was on.

DAN FITZPATRICK: He wrote out a wish list of companies he wanted to acquire or businesses he wanted to be in. And one by one, year after year, he made that happen- Fleet Boston, MBNA, Countrywide, LaSalle, U.S. Trust.

JOE NOCERA, The New York Times: Ken's eyes have always been bigger than his stomach. That's part of his problem. He's always been a deal maker. I mean, that's kind of his modus operandi. That's how, you know, Bank of America was built.

[www.pbs.org: Bank of America's rise]

NARRATOR: So during that weekend meeting at the Fed, Paulson's idea that Bank of America could be a lifeline to Merrill was gaining traction. On Saturday morning, Thain made a fateful telephone call.

JOHN THAIN: I walked outside of the Federal Reserve and called from my cell phone, standing outside on the street.

KEN LEWIS: John called and said, "I'd- I think we should talk."

JOHN THAIN: I said "Ken, I think we should talk about a strategic arrangement." He said "I'd like to do that."

NARRATOR: Lewis's corporate jet was waiting at the Charlotte airport.

KEN LEWIS: I said, "I can be there around"- I think it was 2:00 o'clock. And so, "I'll meet you at- at our apartment."

JOHN THAIN: We agreed to meet at their corporate apartment in the Time Warner Center at 2:30 in the afternoon.

CHARLES DUHIGG: This is like music to Ken Lewis's ears because Ken Lewis had wanted to buy Merrill Lynch for a while.

SUSANNE CRAIG: They had long sought this prize. And they had, you know, over the years, approached Merrill several times.

CHARLES GASPARINO: Merrill Lynch has this big, huge brokerage network. It basically deals with, you know, millions of small investors, and you know, small investors that are very rich, too, across the country through these brokerage offices that have 16,000 brokers. It probably manages through those brokers, trillions, a couple trillion dollars worth of assets. So that's what he wanted.

NARRATOR: For Ken Lewis, it was the final, crowning item on his list.

CHARLES DUHIGG: Merrill Lynch is this hugely prestigious brand. It's a little akin to Holiday Inn getting to buy the Ritz Hotel. And the Ritz is down on their luck and they turn to Holiday Inn and they say, "Will you save us?" And the Holiday Inn says, "Sure.'

NARRATOR: Ken Lewis waited alone for John Thain at the Bank of America corporate apartment in the Time Warner building.

JOHN THAIN: It's just the two of us, and so I proposed to him that we would be interested in selling a 9.9 percent stake in Merrill to Bank of America and we would want them to provide us with a large credit facility.

NARRATOR: But Ken Lewis hadn't flown to New York to take a minority position in Merrill Lynch.

KEN LEWIS: I responded to John, "That's not really what I have envisioned here. I want to buy the whole company, not invest 9 to 10 percent."

DAN FITZPATRICK: And Thain says, "Well, I didn't come here to sell Merrill Lynch." And Lewis's response is, "Well, that's what I want."

JOHN THAIN: You have to remember that, you know, I had only been the CEO of Merrill Lynch for nine months. So the last thing in the world that I want to do is sell the company. That was a hard decision.

NARRATOR: In the end, Thain realized he had no choice. He agreed to sell Merrill Lynch to Bank of America for $50 billion.

SUSANNE CRAIG: It was just this really defining moment of these two men.

DAN FITZPATRICK: It was clear who had the leverage that weekend.

NARRATOR: By late Saturday afternoon, Lewis had sent his deal team over to Merrill to look at the books. They would have to work fast. Hank Paulson was adamant the deal had to be done by Monday morning.

CHARLES DUHIGG: In 48 hours, you can't do due diligence. You can't really take a bank's books, go through them and figure out where their liabilities are, where their risks are, who's been hiding what in order to try and get a good bonus this year. It's impossible to know within 48 hours what you're actually buying.

NARRATOR: The reason Paulson was so insistent was that with no buyers and no government bail-out, Lehman Brothers was headed for bankruptcy.

SUSANNE CRAIG: They had this meeting and one of the advisers, Harvey Miller, very well known bankruptcy lawyer on Wall Street- and he warned them in this meeting, "This will be financial Armageddon." He warned them what to expect Monday morning if Lehman was put into bankruptcy.

NARRATOR: Paulson desperately needed to give the markets some good news when they opened on Monday morning.

ANDREW ROSS SORKIN: The way the government and Hank Paulson and Tim Geithner and Ben Bernanke were perceiving what was going to happen on Monday morning, Bank of America was going to save the system because even though Lehman Brothers was going to go down, the next domino, Merrill Lynch, was going to stay up. And that was very, very important.

JOHN THAIN: Hank in particular was very strongly encouraging me to make sure that I got a transaction done prior to the opening on Monday.

NARRATOR: By Sunday evening, at the offices of Bank of America's law firm, the broad outlines of a deal were set. But there was a problem.

ANDREW ROSS SORKIN: The night that they are signing this deal, the conversation is not about the strategic imperatives of doing this deal, the conversation becomes about, "How much money are we going to give to the management? What kind of side letters can we have written into this contract?" You know, they were supposed to sign the deal at 10:00 o'clock at night. It ends up going to 1:00, 2:00 in the morning because they're talking about comp, at a time when Rome is burning.

NARRATOR: Comp- compensation, bonuses. The bankers from Charlotte were now dealing with Wall Street.

LOUISE STORY, The New York Times: Someone from the Merrill team left, went out of the room and came back with a piece of paper for the top five executives at Merrill. The paper came back and it said $40 million dollars for John Thain and other high eight-digit figures for the other four on his team.

NARRATOR: In the end, Bank of America agreed to let Merrill spend up to $5.8 billion on the comp.

ANDREW ROSS SORKIN: If you're Ken Lewis and you've just ponied up this enormous amount of money for this company, and five hours later, the conversation is not, "How are we going to make a great combined company together" but is "How much money can we line John Thain's pockets with," that would sour you, too.

[www.pbs.org: Read the agreement]

KEN LEWIS: Selfish things start to crop up at the very end. And frankly, it extends things to the point that I have never really been real happy by the time that champagne pours. Usually, you're mad at each other by then and you drink it politely and then leave. And that was about how I felt with this one.

ANDREW ROSS SORKIN: If you spend time and talk to people who were in that room that evening, they would tell you the moment they signed the deal, they knew there was a problem.

NARRATOR: Lewis and Thain finally signed the deal. It would take effect on January 1st. At Lehman Brothers, they spent the night drawing up the bankruptcy papers. The next morning, as Hank Paulson planned, the stock markets would wake up to the official announcement of the merger of Bank of America and Merrill Lynch.

LOUISE STORY: The press conference was in Bank of America's beautiful new headquarters. The two of them came in and they paused and shook hands, and it was actually an awkward moment because so many photographers wanted to capture it that they shook hands over and over, and over and over and over again.

NARRATOR: Despite the bitter back room dealings, it was a moment of triumph for Thain and Lewis.

CHARLES DUHIGG: It was a crowing achievement for both these men. You know, one of them had faced execution. The other one his entire life had been driven to build the largest bank in the U.S. And both of them managed to square the circle on that day.

MARIA BARTIROMO, CNBC: John Thain was a hero. He got $29 a share for his shareholders. That's what he's supposed to do, he's supposed to be working for shareholders.

CHARLES DUHIGG: He was the guy who saved Merrill from falling down the same hole that had just sucked in Lehman.

DAN FITZPATRICK: For Lewis, this day on September 15th, he finally is on top of the financial world. Bank of America would become the largest bank by assets in the country, larger than CitiGroup, larger than JPMorgan.

NARRATOR: Merrill had been saved. Ken Lewis and Hank Paulson had each gotten their wish. That same morning in Washington-

NEWSCASTER: Lehman announcing early this morning it will file for bankruptcy, confirming all those reports-

NEWSCASTER: It's been particularly unsettling--

NARRATOR: -Hank Paulson and his staff were waiting to see how the markets would react to the Lehman bankruptcy and the Merrill merger.

MICHELE DAVIS, Asst. Secy., Treasury, 2006-09: We hoped the Merrill purchase would stop the domino effect. That was definitely why we thought it would be good news on Monday morning.

NARRATOR: And it looked like it might be true. Paulson headed to the White House to reassure the markets.

HENRY PAULSON, Treasury Secretary: Good afternoon, everyone. And I hope you all had an enjoyable weekend. [laughter] Yeah. Yeah. Well-

JOHN CASSIDY, The New Yorker: The Fed and the Treasury thought that Lehman could go under without causing a major conflagration and that it would be a big event, but it wouldn't cause a cataclysm.

HENRY PAULSON: But the American people can remain confident in the soundness and the resilience of our financial system.

NARRATOR: Paulson had bet the markets would take care of themselves.

HENRY PAULSON: Thank you very much.

NARRATOR: He would soon discover he was wrong.

NEWSCASTER: The stock market dropped by-

CHARLES DUHIGG: Everything freezes, and that's what causes the crisis. And it really started because Lehman Brothers went into bankruptcy. No one forecasted that this was going to happen, but it turns out that this one decision made all the difference.

NARRATOR: Paulson had miscalculated. The first sign of trouble, the credit markets began to freeze.

MICHELE DAVIS: Hank was very nervous. He was getting calls from large manufacturing companies that were struggling because of the credit markets being frozen.

NARRATOR: Then the banks stopped lending.

MICHELE DAVIS: The longer it went on, the more trouble the economy was going to be in.

NARRATOR: The meltdown was happening.

PAUL KRUGMAN, Economist, Princeton University: I'm sure that Paulson is sitting there- and he doesn't strike me as the most reflective guy necessarily, but he must have been sitting there, everybody was sitting there saying, "My God, we may be presiding over the second Great Depression." This is the utter nightmare of an economic policy maker. You're sitting there and you may have just made the decision that destroyed the world. Absolutely terrifying moment.

NARRATOR: Three days after Lehman's bankruptcy, Paulson headed to Congress. He had decided to dramatically change his approach.

MARK LANDLER, The New York Times: At that point, Paulson bowed to the inevitable. One thing Paulson said to me in an interview is, "When the situation changes, you have to be willing to change with the situation."

NARRATOR: Fed chairman Ben Bernanke joined Paulson for the emergency meeting.

JOE NOCERA, The New York Times: On Thursday, late afternoon, they go to Nancy Pelosi's office and there's a meeting of the senior legislators from both parties in both House and Senate.

Sen. CHRISTOPHER DODD (D-CT), Chmn., Banking Committee: It was obviously a big meeting. I had no idea I was going to hear what I heard.

NARRATOR: Paulson now believed government intervention was necessary, and he'd need hundreds of billions from Congress to do it.

Rep. BARNEY FRANK (D-MA), Chmn., Financial Services Committee: They said they needed the authority to use $700 billion to unstop the credit markets.

Sen. CHRISTOPHER DODD: Sitting in that room with Hank Paulson saying to us, in a very measured tones, no hyperbole, no excessive adjectives, that unless you act, the financial system of this country and the world will melt down in a matter of days.

JOE NOCERA: Bernanke said, "If we don't do this tomorrow, we won't have an economy on Monday."

Sen. CHRISTOPHER DODD: There was literally a pause in that room where the oxygen left.

NARRATOR: Paulson received the money, $700 billion dollars, known as TARP, Troubled Asset Relief Program. On October 12th, he acted.

KEN LEWIS, CEO, Bank of America: I got a phone call on Sunday from Secretary Paulson and he basically said, "Ken, I need you to be in Washington Monday." And he said, "I really can't tell you a lot about it."

NARRATOR: With the Merrill merger not yet complete, Paulson also invited John Thain.

JOHN THAIN: He said, "Be at the Treasury at 3:00 o'clock tomorrow." I said, "Well, what's the topic?" "You'll find out when you get there." I said, "Well, who's coming?" "You'll find out when you get there. See you at 3:00." Click.

NARRATOR: Seven other heads of the nation's largest banks received a similar summons.

MARK LANDLER: They turn up at 3:00 o'clock and they all file into the conference room, which is across the hall from Mr. Paulson's office.

NARRATOR: They were told to sit on one side of the table.

MARK LANDLER: The titans of the finance world are arrayed almost like school children, waiting to hear from the Treasury secretary about a subject they're probably by then slowly beginning to figure out.

NARRATOR: John Thain's seat was in the middle. Lewis was put at the end.

KEN LEWIS: At first, I wondered why I was down toward the end. And then it hit me, obviously, that was in alphabetical order. And how else would you do it?

NARRATOR: Paulson got right down to business.

MARK LANDLER: Because it's Paulson, who's not a man who beats around the bush, it became clear relatively quickly what he was proposing.

CHARLES DUHIGG: He says, "I've got here documents that say the U.S. government is going to make an injection of capital into each one of your companies."

NARRATOR: Paulson was about to spend $125 billion dollars of that TARP money from Congress.

JOHN THAIN: They go through in a very, very rapid way that each of us is going to take this taxpayer money, the TARP money.

JOE NOCERA: And he basically says, "You can't leave this room until you agree to take this money."

JOHN THAIN: We're all going to do it for the good of the country, for the good of the system. And it's not really discretionary.

[www.pbs.org: More of the interview]

NARRATOR: It was unprecedented. In return for billions of dollars, the government would take an ownership stake in the banks. Some bankers fought back.

DAN FITZPATRICK: That was a very contentious meeting, lots of questions, lots of doubts.

NARRATOR: Richard Kovacevich, chairman of Wells Fargo, led the charge.

ANDREW ROSS SORKIN: Kovacevich stood up and said, "I don't want the money. I don't need the money. I don't want the money. I want to have nothing to do with this."

NARRATOR: But Ken Lewis took a different view.

ANDREW ROSS SORKIN: Ken Lewis says, "It's our patriotic duty to do this. Let's stop fighting, do this deal right this moment."

KEN LEWIS: We are so intertwined with the U.S. that it's hard to separate what's good for the United States and what's good for Bank of America. And so don't do it on the basis of being- us being told, do it on the basis that things could get a lot worse in America and therefore for us. And they're almost one in the same.

[www.pbs.org: More of Lewis' interview]

NARRATOR: Lewis also knew that he could expect two TARP shares, Merrill Lynch's and his own.

MARK LANDLER, , The New York Times: He also said, "Look, guys, we all know how this is going to end. We're going to sign this piece of paper." So he played a little bit of the elder statesmen role, explaining reality, although they all understood reality quite well.

NARRATOR: And if any bank didn't sign on, Paulson had a potent weapon.

CHARLES DUHIGG: There's a threat in the background. If you don't get with the program and if you don't sign this piece of paper, tomorrow morning you could turn on the television and see Hank Paulson talking about your bank in a negative way and that's going to destroy you.

NARRATOR: Paulson's notes, prepared for the meeting, show he gave the bankers no choice. "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.” Paulson gave each man a single piece of paper spelling out the conditions.

MARK LANDLER: Before they had to leave town that night, they were told, "Return this document with your signature on it." And all nine of them did so.

[www.pbs.org: Read the documents]

NARRATOR: The next day, Paulson told the country about his new way of doing business.

HENRY PAULSON, Treasury Secretary: Today we are taking decisive actions to protect the U.S. economy.

NARRATOR: In one day, everything had changed.

HENRY PAULSON: -that the Treasury will purchase equity stakes in a wide variety of banks and thrifts.

SIMON JOHNSON, Fmr. Chief Economist, IMF: I think we nationalized the banks in the U.S. on that day. Seriously. Substantially nationalized them. The government got a lot of say in how they're run, a lot of constraints, a lot of responsibilities. A lot of down side risk was taken on that day.

HENRY PAULSON: Government owning a stake in any private U.S. company is objectionable to most Americans, me included.

ANDREW ROSS SORKIN: Whether you like it or not, whether we think we have control of these firms or not, they're nationalized firms. They're owned by the U.S. taxpayer.

NARRATOR: The secretary of the treasury had become the most powerful banker in the nation.

ELIZABETH WARREN, Chair, Congressional Oversight Panel: This is the realm of the puppet master. This is the realm of the, "We're going to give you some money, but we're also going to tell you how to run the game. I'm going to pull the strings. I'm going to make it happen a certain way and use this bank as an instrument of some kind of plan to try to save this economy."

CHARLES DUHIGG: So Hank Paulson, the happy capitalist warrior who spent his life pursuing and defending free markets, is now the biggest interventionist Treasury secretary we've had since the Great Depression.

NARRATOR: As the fall wore on, for Paulson, one hopeful sign of life in the banking system was Bank of America. The pending Merrill Lynch merger still looked like a good deal.

ANDREW ROSS SORKIN: They were still a pillar of strength. Within a system where there was very little strength, they looked like they were stronger, from the outside.

NARRATOR: But the view from the inside revealed something else. The marriage between Bank of America and Merrill Lynch was already showing signs of strain.

SUSANNE CRAIG, Wall Street Journal: Almost from the beginning, there was just huge frustrations about pairing up with- you know, with Bank of America. People at Merrill Lynch compare themselves to, like, the Tiffany's of Wall Street and they're meeting up with Wal-Mart. I mean, it's just the Wal-Mart of banking.

CHARLES DUHIGG, The New York Times: The average salary at Bank of America at this point is about $75,000. The average salary at Merrill Lynch is, I think, something like $235,000. So they have vastly different expectations for what it means to be a Merrill Lynch person versus a Bank of America person.

PAUL MILLER, Bank Analyst : The gunslingers go to Merrill and the conservative branch goes to B of A, you know, and I think one of the comments that were made by one of the workers at Merrill, "I don't want to go to work with a bunch of toaster salesman."

NARRATOR: And with the official merger looming, there was trouble at the top between Lewis and Thain. The issue, those bonuses. Thain was still a Wall Street man. For having successfully sold Merrill to Lewis, Thain wanted a cut of the Bank of America deal worth as much as $10 million dollars.

SUSANNE CRAIG: Thain had lobbied behind the scenes very hard the compensation committee of Merrill Lynch to get a bonus, which just infuriated people at various levels, including on the board.

NARRATOR: In the end, Thain didn't get his bonus, but he made sure his top executives did. At the same time, on Merrill's trading floor, they learned Thain's fourth quarter results were going to be disastrous.

JOE NOCERA, New York Times: Thain still had a lot of stuff on his balance sheet that was junk. The assets continue to deteriorate. That's what keeps happening.

NARRATOR: The markets were brutal. Merrill's toxic assets were eating a hole in the balance sheet.

DAN FITZPATRICK: There was a period where the loss estimates were jumping by sometimes $2 billion or $3 billion over two or three days. That's a pretty big number.

NARRATOR: As the Merrill losses mounted up in New York, in Charlotte, Bank of America's stockholders were about to vote on whether to approve the merger.

DAN FITZPATRICK: And there were people inside Bank of America who felt like this number was big enough to disclose, that investors should know about this before they vote.

NARRATOR: But Ken Lewis decided not to tell the stockholders. He insists he didn't know the extent of Merrill's losses. He says he had enough losses of his own.

KEN LEWIS: We had this meltdown. The economy was deteriorating at such a rapid rate. A lot of companies were having bad quarters. We were seeing it in our own numbers. And so I was dealing with that, coming to the realization, "Hey, we're going to have a loss, and there's no use kidding about it."

NARRATOR: The merger was approved. But by mid-December, the truth about Merrill's balance sheet was unavoidable.

CHARLES DUHIGG: Ken Lewis has a meeting where he is told the projections for the losses that Merrill Lynch will have to report in the fourth quarter. And the losses are enormous. They're over $15 billion dollars. They're larger than anything that has been announced previously.

NARRATOR: Ken Lewis now knew the Merrill merger could break his bank.

MARIA BARTIROMO, CNBC: I don't think he anticipated the market deteriorating the way it did. And certainly, he did not anticipate how stunning the losses would become.

PAUL MILLER, Bank Analyst: I believe that's when Ken Lewis felt, "You know what? I made a mistake here."

CHARLES DUHIGG: And this is happening at a time when Bank of America doesn't have a lot of excess capital to offset those losses. So it's very, very bad news.

ANDREW ROSS SORKIN: Ken Lewis wanted out of the deal. I think there was a view that there truly was what they call a MAC, a material adverse change. Something material had changed that they did not see coming.

NARRATOR: Ken Lewis told Paulson he was considering invoking the MAC to get out of the Merrill deal. Paulson was stunned. He told Lewis to come to Washington immediately.

DAN FITZPATRICK: So Lewis goes to Washington D.C. on December 17th to meet with Bernanke and Paulson and tells them, "We can't do this. The losses are too big. We're going to pull out.

KEN LEWIS: I can't say a lot about the negotiations. But what I would say is, they had their view of both what that would do to Bank of America and what that would do to the financial system.

CHARLES DUHIGG: Hank Paulson and Ben Bernanke say, "If you do that, you'll destroy the tiny shard of a banking system that we still have left remaining. You can't pull out of this deal."

SUSANNE CRAIG: Keep in mind, these are men who have been through Lehman Brothers. They don't want this, they don't need it, and it can't happen.

NARRATOR: Lewis sat quietly. His options were limited. His new powerful partner, the secretary of the treasury, was calling the shots.

JOE NOCERA: The government already had $20 billion dollars inside Bank of America. It's its regulator. It's a bank. It's really kind of hard to tell the government to go shove it when it says, "We need you to do this deal."

SUSANNE CRAIG: He is in a really tough spot. He's almost damned if he does and damned if he doesn't.

NARRATOR: Paulson got tough.

ANDREW ROSS SORKIN: He's got a very strong voice, got a very strong will. I think he could convince anybody - and in this case, Ken Lewis -that if you don't follow along, if you don't go along with the program, you won't be part of the program anymore, meaning, "We'll toss you right out."

DAN FITZPATRICK: You have to buy Merrill, and we will make sure that happens up to and including removal of management, removal of the board.

SUSANNE CRAIG: From where Ken Lewis sat, I've had several people describe to me that Bank of America thought it was a threat and they needed to do this.

KEN LEWIS: There was- there was a time where that discussion was held and- but we, in fact- we, in fact, decided on our own, not- not anything to do with that, that it was in the best interests of all in- all involved to go ahead- to go forward.

DAN FITZPATRICK: Ken Lewis blinked. The full force of the government is being brought upon him. The rules of the game have changed. You know, Ken Lewis is on top of the financial services world, but he's not in charge. The government holds all the cards at the end of the day.

NARRATOR: Paulson then explained the offer that Lewis could not refuse, another $20 billion dollars, and a promise to cover another $118 billion on Merrill's toxic assets. The deal was kept a secret from stockholders, from Wall Street and the taxpayers for almost one month. Then, after the merger was completed, the story broke.

NEWSCASTER: CitiGroup and Bank of America have been losing money at a furious pace.

NEWSCASTER: In this country, two major banks sank deeper into the red, despite billions more from the government to prop them up.

NEWSCASTER: The stock market has been falling day after day, and now news that the biggest banks need more money.

CHARLES DUHIGG: Between January 15th and January 20th, Bank of America's stock drops more than 45 percent.

NEWSCASTER: The bank's shotgun marriage with Merrill Lynch in September was on the rocks.

NEWSCASTER: Merrill reported more than $15 billion in losses for the fourth quarter of 2008

PAUL MILLER: It shocked the market. Even though the market was looking for something bad, it wasn't expecting that. It wasn't expecting a $15 billion dollar loss.

DAN FITZPATRICK: There are major, major doubts suddenly about this bank's ability to make it through this crisis intact. B of A stock starts to tank in ways it hasn't in decades. It's down to, like, 1980s levels.

KEN LEWIS: The magnitude of the loss, obviously, at Merrill Lynch really stunned people. And so it was a bad day and it did shock a lot of people and disappoint a lot of people.

NARRATOR: In a matter of days, Lewis went from king of Wall Street to embattled CEO. His shareholders were up in arms.

SUSANNE CRAIG: There was just an immediate public outcry. They were just furious at what he had done.

CHARLES DUHIGG: They start calling for Ken Lewis's head.

DAN FITZPATRICK: They want to know why these losses weren't disclosed earlier, why the talks with the government weren't disclosed earlier.

JOE NOCERA: I mean, what kind of deal maker was Ken Lewis anyway? In effect, by buying Merrill, he had damaged Bank of America.

ANDREW ROSS SORKIN: It felt at that moment that it was going to be tough for him to keep his job.

NARRATOR: Bank of America needed to change the subject, take the heat off Ken Lewis.

SUSANNE CRAIG: This became a game of survival in Charlotte for Ken Lewis, and he needed to blame somebody and somebody had to be responsible for what was going on.

NARRATOR: That somebody was John Thain.

NEWSCASTER: Thain paid out $4 billion in company bonuses just days before the merger went through.

NEWSCASTER: -preaching cost cuts, he was also lavishly redecorating his office space to the tune of $1.2 million dollars-

ANDREW ROSS SORKIN: All of a sudden, this character who seemed like Clark Kent, who seemed like this great guy, this pillar of character and strength, was really the villain. The hero becomes the villain.

MARIA BARTIROMO: He was thrown under the bus. He makes a couple of stupid decisions, definitely, you know, some stupid moves, and the public turns on him entirely. It's pretty amazing.

NARRATOR: Not just the public. On January 22nd, CNBC had a scoop.

NEWSCASTER: Breaking news from Charlie Gasparino on the CNBC "Newsline," more news out of Merrill. Charlie?

CHARLIE GASPARINO: Bank of America, Merrill, Ken Lewis, the CEO of Bank of America will hold an emergency meeting with John Thain, the CEO of Merrill Lynch, today.

I got a tip that Lewis was flying down to Merrill. Everybody knew that Thain was on the ropes. And then I went to my sources at Bank of America and they basically said, "Yeah, he's all but done.'

NEWSCASTER: CNBC has learned that Ken Lewis, the CEO of B of A is meeting, or going to meet, with John Thain later this afternoon, I hear around 11:30, essentially to discuss decide his future, which will be very interesting.

JOHN THAIN: I have CNBC on in my office, so I can see the headlines are, you know, that- that I'm going to get- I'm going to get fired.

DAN FITZPATRICK: Ken flew from Charlotte to New York, walked into John's office and said-

KEN LEWIS: "John, it's not going to work out. And I'm sorry. I wish you the very best," and then left. It wasn't a very long conversation.

JOHN THAIN: There really wasn't very much for me to say because this wasn't a negotiation.

NARRATOR: Thain was gone. But Ken Lewis now faced a new problem, -the new president.

Pres. BARACK OBAMA: We arrived at this point due to an era of profound irresponsibility.

Vice Pres. JOE BIDEN: I mean, I'd like to throw these guys in the brig. I mean-

Pres. BARACK OBAMA: For years, too many Wall Street executives made imprudent and dangerous decisions.

Vice Pres. JOE BIDEN: And they're thinking the greed. They're thinking, "Take care of me."

Pres. BARACK OBAMA: What gets people upset are executives being rewarded for failure.

NARRATOR: With Hank Paulson out at Treasury, the new administration was calling the shots from the White House.

Vice Pres. JOE BIDEN: There aren't going to be any $40 million jets being bought. I mean, it's been outrageous!

Pres. BARACK OBAMA: And I will not tolerate it as president.

ANDREW ROSS SORKIN: The power on Wall Street has clearly shifted. There is no power on Wall Street anymore. The power is in Washington. The chairman of the board of these banks now lives at 1600 Pennsylvania Avenue. Now you need the approval of only one man. He's a new board member.

NARRATOR: Lewis's new board member was demanding that the banks fundamentally change the way they do business.

AUSTAN GOOLSBEE, White House Economic Adviser: Totally adamant on the part of the president, "We got to come in with a bang." It's like you're moving into a new house and the roof's on fire and the basement is flooded and there's gas in the kitchen, there's a dog in the back yard. The question is, how do you make this house livable, and the answer is you demand accountability and responsibility. And where there need to be fundamental changes, require these companies to make fundamental changes.

NARRATOR: And on Capitol Hill, the mood was no different. With their vaults now filled with taxpayer dollars, Lewis and the other bankers were fair game.

CHARLIE GASPARINO, CNBC: They have to do this. Every now and then, they're going to be called before Barney Frank and the- you know, rest of Congress and they're going to have Congressional committees, and they're going to get, like, you know, yelled at and grandstanded upon.

[February 11, 2009]

Rep. JUDY BIGGERT (R-IL), Financial Services Committee: Let me be frank. My constituents in Illinois are angry, and so am I.

Rep. MAXINE WATERS (D-CA), Financial Services Committee: What did the banks do with the taxpayers' money?

Rep. MICHAEL CAPUANO (D-MA), Financial Services Committee: I cannot believe no one's prosecuted you on this!

SUSANNE CRAIG: I think most Americans, when they saw that, thought of the heads of tobacco. That's where we're at. We have an industry that's just vilified to that point, and the frustration is so high. It was chilling to watch that, I mean, just to see them all lined up next to each other.

MAXINE WATERS: As of matter of fact, Bank of America, you paid yourself $30 million in fees just to accept our TARP money!

KEN LEWIS: I don't know what you're talking about.

Rep. JEB HENSARLING (R-TX), Financial Services Committee: The whole thing, frankly, had a bit of political theater element to it, that particular hearing. There seemed to be a little bit of a contest to who could get these guys by the scruff of the neck and slap them around the most.

KEN LEWIS: It was clear we were there to take a public whipping, you know, and we did. I just tried to think of it that way and think of it as, you know, "This too will pass," and just get through it.

Rep. KEITH ELLISON (D-MN), Financial Services Committee: There's been wide speculation that some of our larger banks around the nation may end up being nationalized. Do you feel that your bank should be considered one of those banks at risk?

KEN LEWIS: Are you talking to me?

Rep. KEITH ELLISON: Yeah. [audience laughter]

KEN LEWIS: Absolutely not. I don't know why you would ask the question.

DAN FITZPATRICK: I think we saw, in Ken before Congress, the defiance, sometimes impatience, you know, pride, anger, competitiveness, all the qualities that have been there for a long time.

NARRATOR: Then the president insisted Lewis and the other bankers come to the White House.

AUSTAN GOOLSBEE: The CEOs came to the White House. I'm not exactly sure what they were expecting, but the president was firm with them and said, " The American people blame you personally for where we are."

KEN LEWIS: The president made it pretty clear when he talked to us, you know, "We're between you and the pitchforks, guys, and you need to just acknowledge that."

AUSTAN GOOLSBEE: The president said, "You guys need to get with the program because the only thing between this massive backlash against you is if we can get the economy back on track."

NARRATOR: It was a new day, the president, openly signaling that he was in charge, insisting they increase lending and limit executive compensation and foreclosures, or else. Since that meeting, Bank of America's stockholders stripped Ken Lewis of his chairmanship, federal regulators ordered him to find new directors, and he had to sell off parts of his company to raise cash to satisfy new government regulations.

Lewis says he now deeply regrets taking the TARP money from Paulson - both times - and all that has followed.

KEN LEWIS: Little did I know the pain that would invoke with the Congress giving us the whipping that day, the constant articles in the paper about how bad we are, and then things around compensation and how you run your bank. It was a clear example of no good deed goes unpunished.

NARRATOR: But at the White House, they have little sympathy for bankers' complaints.

AUSTAN GOOLSBEE: They created the structures themselves that got them into this position. It wasn't the government who created this problem, they created this problem. Maybe they find it inconvenient that there's a whole lot of responsibilities that come along with the government being their lender of last resort and saving them when they actually fell into the- to the pit of fire. But you know, that's where we are.

NARRATOR: As far as Washington is concerned, they're still sorting through the financial wreckage.

JOE NOCERA, New York Times: This is the kind of disaster, like the aftermath of the Great Depression and the crash of '29, that causes people to say, "There's something fundamentally wrong here. There's something fundamentally broken. And we can't fix it with a new agency, or you know, just a piecemeal approach. We have to kind of tear down the structure and start all over."

NARRATOR: But whatever happens, the era that propelled John Thain, Ken Lewis and Hank Paulson to the top of the financial world is over.

ELIZABETH WARREN, Chair, Congressional Oversight Panel: The party's over. The financial institutions are down for the count. This is one of those pivot points in American history. That old economy, that old way of looking at things, that old way of putting on a party- it's over. It's over.

BREAKING THE BANK

WRITTEN AND DIRECTED BY
Michael Kirk

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ANNOUNCER: This report continues at FRONTLINE's Web site. Watch the program again on line and see some video extras, get inside the debate over bank nationalization, including our podcast interview with former IMF chief economist Simon Johnson, explore the interviews conducted for this report, the rise of Bank of America, the future of superbanks and more. Then join the discussion at PBS.org.

Next time on FRONTLINE/World, in Ghana-

- It's the dirty little secret of the high tech industry.

ANNOUNCER: Do you know who has access to your recycled hard drive?

- If somebody gets your hard drive, he can get every information about you.

ANNOUNCER: And in Egypt, a competition to turn around the Middle East.

- Some people laugh at me and our shareholders.

ANNOUNCER: These stories and more on the next FRONTLINE/World.

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posted june 16, 2009

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