Paulson's Upcoming Testimony Leaves Questions Unanswered

Tomorrow, Hank Paulson will testify before the House Committee on Oversight and Government Reform; he is expected to read aloud the remarks below, made public by the WSJ earlier today. There are basically two important issues at hand that need to be answered by Mr. Paulson.

1. Upon what legal basis did Federal Reserve lawyers determine that Bank of America's Material Adverse Change (MAC) assertion was unacceptable grounds for termination of the Merrill lynch "merger"?
2. What sort of logic and/or legal reasoning was used by the Fed/Treasury to determine that Bank of America's shareholders did not require disclosure as to the potential (or imminent) issues at Merrill Lynch?

As for the first question, Paulson grazes by the issue without so much as a cursory legal explanation as to why MAC was invalid given the situation. States Paulson:

"During this period, the clear conclusion of Federal Reserve lawyers was that exercise of the MAC clause was not a legally reasonable option and, accordingly, that the merger contract was binding."

Moving on to question two, we find Paulson's assertion that, despite what BAC's shareholders may think, a failure to consummate the merger would have led to a violent and immediate market reaction; the consequences of which would have been far more adverse to BAC shareholders - and the market in general - than had things stayed the course. Obviously, at this point, to argue with Paulson would be to enter the world of speculation and conjecture - a world where, conveniently, it is virtually impossible to prove somebody wrong. From Paulson:

"In my view, and the view of the numerous government officials working on the matter, the interests of the nation and Bank of America were aligned with respect to the closing of the Merrill Lynch transaction. An attempt by Bank of America to break its contract to acquire Merrill Lynch would have threatened the stability of our entire financial system and the viability of both Bank of America and Merrill Lynch. Those who participated in the discussions concerning this matter recognize this point. For example, as Mr. Lewis explained to this Committee last month, “I think they thought that by us—by all of this happening [i.e., the potential failure of the merger], and the uncertainty coming back into the financial system, that, in fact, that would hurt the system and us.”

Despite all the rhetoric, the underlying and unspoken message from Paulson's testimony, in our opinion, is as follows: When the Government determines that a certain outcome is in the best interest of the country's safety and well-being, it may take any and all steps necessary in order to secure that outcome. Anybody concerned with that reasoning?

*no position in BAC

Paulson Testimony on BAC Sphere: Related Content