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The merger between Bank of America and Merrill Lynch took place in September of 2008 in wake of Lehman Brother’s impending bankruptcy due to severe liquidity pressures. This deal was important to the health of the American economy. The housing bubble had recently burst and the markets were teetering. Lehman Brothers had invested the majority of its assets in risky mortgage backed securities and was in a position to fold because of it. It was apparent that Merrill Lynch, a company that had made similarly risky investments, stood to face the same fate. Should Merrill Lynch file for bankruptcy, it was popular opinion that other major financial institutions would follow suit as they were all interconnected. In this way, America’s fiscal health was dependent of the existence of each one of the major financial institutions.
In order to ensure that Merrill Lynch did not go bankrupt, the institution’s C.E.O. John Thain, brokered a merger with Bank of America’s C.E.O. Ken Lewis. Although Thain had initially intended to offer Lewis a 9.9% stake in Merrill Lynch in return for a large credit facility, the interaction resulted in the agreement that Bank of America would buy it out for fifty billion dollars. Lewis, unaware of the full extent of Merrill Lynch’s financial troubles, had been seeking to acquire the institution for the substantial brokerage firms, prestige and finances available to the company. By the time Lewis claims to have learned of the true financial peril Merrill Lynch was in, Bank of America’s stocks had plummeted and he had accepted funds from the federal government in the form of troubled asset relief program (TARP). This allowed secretary of the treasury Henry Paulson to hold leverage over Lewis and prevented him from pulling out of the merger, as he intended in the form of a material adverse change (MAC). The disastrous fallout caused the Obama administration to step in, asserting its authority as shareholder of all institutions that had received the TARPs in 2008. Lewis was ordered to resign his chairmanship, replace his directors and sold of part of Bank of America to pay for new regulations.[Need an essay writing service? Find help here.]
The series of events associated with the merger between Bank of America and Merrill Lynch had a devastating economic impact and signaled to the American public that the major financial institutions were operating on the basis of unsustainable practices and risky ventures.
Major Players, Influences and Speculation for Better Control
The three major players in this situation were John Thain, then C.E.O. of Merrill Lynch, Henry Paulson, secretary of the treasury and Ken Lewis, the C.E.O. of Bank of America. Each of them contributed to the resulting events and could have behaved in a manner that would have led to more productive consequences. Some of the primary attributes that influenced the fiasco that was the merger between the Bank of America and Merrill Lynch were the financially precarious position Merrill Lynch was in due to the acquisition of non-prime mortgages and Ken Lewis’ ignorance of it. Other major factors were the distribution of TARPs without government intervention or oversight of the taxpayer’s investment and the resulting decision of the accepting institutions to use funding for the compensation of its top executives. All of these factors could have been ensured better control by the individuals involved. With the perfect clarity afforded by hindsight, Merrill Lynch could have avoided this predicament by minimizing investment in risky assets in relation to more sound investments. Had Ken Lewis shown some skepticism over John Thain’s readiness to sell Merrill Lynch and taken more time to learn how dire the situation was, he would have been more hesitant to make the unwise purchase and perhaps John Thain’s preoccupation with compensation for the top executives would have been curbed. Henry Paulson’s push to use taxpayer money to purchase stakes of financial institutions regardless of the consent of the C.E.O.’s was flawed specifically in regards to the lack of oversight. Finally, the overall culture of Wall Street was the primary drive behind the fiasco. The emphasis on large payouts over security and the preoccupation with compensation for the top executives may seem like greed to the American public, but for the people who were so heavily entrenched in the financial world, it was just par for the course. [“Write my essay for me?” Get help here.]
Risk Considerations, Concerns and Final Thoughts
By the time the Obama administration intervened, it was clear that the standard business practices on Wall Street were unsustainable and the overall culture of the financial world was a toxic one. There was a resounding call to change the way business was done on Wall Street via the infamous congressional hearing wherein the members of congress represented their constituents by publicly reprimanding the top executives of the institutions that had accepted government funding. If anything is to learned from the situation, it is to be emphasized that risky investments with large payoffs will eventually lead to economic collapse. The myth that America’s financial institution is too big to fail has been dispelled and the confidence in the markets has wavered.
Finally, were one in the position of the major players in this situation, it would be best to behave more prudently. It would be best to overlook the trappings and braggadocio that had become so intrinsic to the world of Wall Street, cut unnecessary compensations and expenses associated with the show of power, expend more manpower into reading over contracts and investing more prudently by only accepting the safest purchases.[Click Essay Writer to order your essay]
Kirk, M. (Writer and director). (2009). Breaking the Bank [Television series episode]. In Kirk, M. (Producer), Frontline. Boston, MA: WGBH.