Breaking The Bank

Group 3
 Background Review

● Explains the banking crisis at 2009

● Consists of interview of
➔ Ken Lewis ( CEO of Bank of America)
➔ John Thain ( CEO of Merrilln Lynch)
➔ Henry Paulson ( State secretary Of treasury)

KEN LEWIS (CEO OF BOFA)

 Fall of Lehman Brothers

● Had bought lending companies which were subprime lenders

● Dealt with CDOS ( Collateral Debt Obligations)
● Used triple AAA rating and sold to investors
● With rising interest rate and decreasing housing prices, defaulters
increased
● Used Repo 105
● Filed bankruptcy on 15th september 2008
 Fall of Lehman Brothers

Assumptions
● Lending companies acquired by bank had given huge amount of
subprime loans
● Too much debt, not enough collateral
● Personal Rivalry
● Political criticism
 The merger between Merrill Lynch and Bank of America (BofA)

● Merrill Lynch was the next bank to go down after Lehman brothers
● Every part of wall street was connected in such a way that if one went
down all would go down
● It was important for Merrill to stay alive even after the Lehman brothers
downfall
● Henry Paulson, his former protégé John Thain, and Ken Lewis secretly
cut a deal to merge BofA and Merrill Lynch for 50 billion dollars
● Ken Lewis sent over his deal team to look at the books of Merrill Lynch
● Paulson needed to give some good news to the market on Monday so
he insisted the merger to be finalized within 48 hours
● On Monday morning, the market woke up with the news of the merger
● Despite the bitter backroom dealings, it was a moment of triumph for
both John Thain and Ken Lewis.
 The day everything changed

● The merger was supposed to save the American financial system

● But, they soon realised it had not worked
● Paulson thought the market would take care of itself but within days the
entire global financial system was collapsing
● 3 days after Lehman’s bankruptcy, Paulson headed to congress to change
his approach
● He now believed that government intervention was necessary
● Lewis, Thain and other top CEOs were called for an emergency
meeting
● Paulson told them they had no choice but to accept 125 billion dollars
TARP money
● Ken Lewis was initially supportive of the plan
● The next day Paulson announced it to the world and in one day the
entire banking system of America had changed
 BofA Wants Out Of Merrill Deal
● The merger between BofA and Merrill lynch was showing sign of strain
● The average salary of BoA is $75,000 and the average at Merrill lynch is
$23500
● Thane was still a Wall Street man for having successfully sold Merrill to
Lewis
● Thane wanted a cut of BoA deal worth as much as $10 million
● Merrill’s toxic assets were eating a hole in balance sheet, markets were
brutal
● As the merrill losses mounted up in New York in Charlotte, BoA’s
stockholders were about to vote on weather to approve merger
● But, Ken Lewis decided not to tell the stockholders
● The merger was approved by Mid- December
● When fourth-quarter losses at Merrill grew to $15 billion, Lewis began to
look for a way to get out of the deal
● The rules of the game have changed
● Paulsen explained the offer that Lewis could not refuse
● Deal was kept secret from stockholder, after the merger was completed the
story broke
 A New Day
● Between Jan 15 to 20th , BoA’s stock drops more than 45%
● In a matter of days, Lewis went from king of Wall Street to embattled
CEO
● People outcry, wanted to know why these losses weren’t disclose earlier
● Became a game of survival in Charlotte
● Blame John Thane
● The new President
● Ken lewis regrets taking the trap money from Paulson
 ANALYSIS
● Started when enron took advantage of deregulation and lehman with the
relaxed credit conditions
● Main cause because of poor management ,greed and fraud and in
lehman due the presence of loopholes in the financial regulatory system
and the shaky corporate governance
● Lehman took help of many Structured Investment Vehicles which acted in
the same manner as off-balance sheet vehicles in Enron to alter the
extent of liabilities on its balance sheet
● There was no government support given to lehman
● The Sarbanes-Oxley Act of 2002 was passed but violated by lehman brothers
● In 2001 ken became the CEO, he followed the footsteps of his predecessor Hugh
McColl
● Merrill lynch was a dream of a company, one that had an enormous emotional
attachment for him
● Belief that a merger of the lender’s commercial banking operations and Merrill’s
retail brokerage arm would be a intimidating combination in the US financial
services industry
● Bank of America’s deposit base had reached a 10 percent market share, and under
federal rules, banks aren’t allowed to expand beyond that mark
● Overpaid for an asset he could have had for much less had he just waited a few extra
days
● When Lewis saw Merrill's write-downs mounting, he wanted to get out of the deal
● BofA also faced a disastrous fourth quarter as losses
● Lewis feared that BofA no longer had enough capital to absorb a damaged Merrill
● Lewis told Bernanke and Paulson that because Merrill's losses were so much
worse than expected
● BofA was in a position to invoke a "material adverse effect" clause from the
merger contract to cancel the deal
● Lewis testified that the federal government threatened to remove board members
 Effects of the Crash
● Immediate effects: failure of the housing market, stock market crash, and a
sharp increase in unemployment.
● Long term effects: continued unemployment, reduced investment in
American companies, and the looming national deficit.
● A drop of more than 4% or a loss of $2 trillion in global economic growth
● Lehman Brothers and Meryl deals became a case of eye opener to the
global economy
 Conclusion
● Banks failing followed a domino effect which pushed all of the parts to act
desperately to save each other
● The bankruptcy of the Lehman Brothers created a greater impact beyond
everyone’s initial beliefs
● TARP the “ Troubled Asset Relief Program”
● Commercial banks benefits from the merger with Financial institutions
● Commercial bank merges with a financial services institution there may be some
issues
 References

● https://essays.pw/essay/analysing-the-corporate-governance-of-lehman-br
others-finance-essay-144110
● 2008 Recession - Economic Effects (weebly.com)
● https://www.youtube.com/results?search_query=breaking+the+bank+fron
tline
● https://www.nytimes.com/2009/10/03/business/03nocera.html
● https://www.forbes.com/2009/07/15/paulson-lewis-fed-markets-equity-ba
nk-america-bernanke.html?sh=4badb6704f87
● https://digitalcommons.montclair.edu/cgi/viewcontent.cgi?article=1008&
context=acctg-finance-facpubs
● https://hub.jhu.edu/2016/07/22/lehman-brothers-collapse-fed-laurence-ba
ll/