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http://www.nytimes.com/2009/07/18/business/18nocera.html?8dpc

�Did they first bring up the bailout to you, or did you bring it 
up to them?� asked Congressman Edolphus Towns, the chairman of 
the House Committee on Oversight and Government Reform.

�I prefer to use the word �rescue,� � replied Henry Paulson Jr., 
the former secretary of the Treasury.

�

It was Thursday morning, and Mr. Paulson was once again before 
Congress, as he had been so many times last fall, defending his 
actions during the financial crisis. This time the subject was 
the Bank of America�s $50 billion purchase last year of Merrill 
Lynch, which Mr. Towns�s committee had become almost bizarrely 
obsessed with. In the middle of all the important issues 
Congress is currently tackling, it has managed to devote three 
full days of hearings to this seven-month-old deal.

Each hearing has had only one witness: the first to be grilled 
was Bank of America�s chief executive, Ken Lewis. Then came the 
Federal Reserve chairman, Ben Bernanke. Thursday was Mr. 
Paulson�s turn on the hot seat. The questions, from both 
parties, were uniformly hostile.

�Mr. Lewis, isn�t it true that ...�

�Yes or no, Mr. Bernanke ...�

�Isn�t that why you issued that threat, Mr. Paulson?�

The congressmen claimed to be investigating the events of last 
December. You�ll recall that just weeks before the Bank of 
America deal with Merrill Lynch was supposed to be consummated � 
and after shareholders had approved it � Mr. Lewis suddenly got 
cold feet. With Merrill Lynch�s toxic assets rapidly 
deteriorating, Mr. Lewis called Mr. Paulson and Mr. Bernanke to 
tell them he was thinking of pulling out of the deal.

Terrified that this might set off renewed panic in the financial 
markets, Mr. Paulson and Mr. Bernanke persuaded Mr. Lewis to 
stick by the deal. Quietly, over the next few weeks, they agreed 
to lend Bank of America an additional $20 billion from the 
Troubled Asset Relief Program to help shore up the bank�s 
capital. (They also agreed to backstop some $118 billion in 
troubled assets � though that part of the deal was later 
abandoned.) The first time the world learned of the additional 
government assistance was when the bank made its quarterly 
financial disclosure in January 2009 � weeks after the deal had 
closed.

To the congressmen at the hearings, something nefarious must 
have taken place during those negotiations. But what exactly? 
Dennis Kucinich, a Democrat from Ohio, told me that Mr. Lewis�s 
failure to inform shareholders was a �potential violation of 
securities law.� He felt that Mr. Lewis had gamed the banks� 
regulators to get more money.

Mr. Towns, for his part, seemed to think that Mr. Paulson and 
Mr. Bernanke should have fired Mr. Lewis as a condition of more 
bailout money � that the government had been too nice to an 
incompetent management. Republicans, meanwhile, felt that Mr. 
Paulson and Mr. Bernanke had overreached, using intimidation and 
threats to force through a private transaction. And they all 
cited e-mail from the Fed that expressed skepticism at Mr. 
Lewis�s motives, and emphasized the need to keep things quiet 
for as long as possible.

I had watched the first two hearings with a growing sense of 
bewilderment. It always seemed obvious to me that if the Bank of 
America-Merrill deal hadn�t gone through, Merrill Lynch would 
have been in a horrible position, akin to Lehman Brothers or the 
American International Group. The government very likely would 
have had to spend an awful lot more than $20 billion to save it. 
Surely, the end result was worth whatever arm-twisting and 
additional government aid was required.

So why the anger? Why the suggestions of �cover-up� and �lies�? 
On Thursday, as I watched Mr. Paulson being castigated, it 
dawned on me. Seven months later, with the palpable fear of a 
financial collapse largely subsided, it really all boils down to 
how you view what happened last year. Was it, as Mr. Towns 
believes, a bailout of a handful of unworthy but too-big-to-fail 
institutions? Or was it, in the eyes of Mr. Paulson, a rescue of 
a teetering financial system? My vote is for the latter.

�

In retrospect, the events of last December have a kind of 
irrefutable logic. Mr. Lewis, scared by the mounting losses at 
Merrill, tells the government he is thinking of invoking the 
�material adverse event� clause in the contract to get out of 
it. Even though the clause is pretty airtight � among other 
things, it says that deteriorating assets are not enough to 
create a material adverse effect � it is still a useful weapon, 
and a common tactic. No matter what the actual wording, invoking 
it usually prompts litigation or a renegotiation of the terms, 
or both.

Mr. Paulson and Mr. Bernanke understand this, of course. But 
having just finished giving Citigroup another round of TARP aid, 
they fear that even a rumor that the Merrill deal is in trouble 
will set off a rerun of the awful events of last September, when 
the financial system melted down. They persuade Mr. Lewis to 
take one for the team.

�They needed to say to Ken Lewis, �You haven�t had very good 
capital ratios, and we�ve looked the other way,� � said Nancy 
Bush, a prominent bank analyst. ��Now it is payback time. We�ve 
let you do deal after deal after deal. Now it�s time to take one 
on the chin.� �

That appears to be exactly what happened. Instead of 
renegotiating the deal with Merrill Lynch, Mr. Lewis wound up 
renegotiating it with the federal government. Mr. Paulson 
helpfully pointed out that as Bank of America�s regulator, the 
Federal Reserve had the right to remove him and his management 
team from their jobs if it no longer trusted his judgment. I can 
almost picture Mr. Lewis gulping as he listened to �Hammerin� 
Hank� laying down the law.

Seen in this light, virtually all the Congressional objections 
seem almost laughably na�ve. Mr. Lewis gamed the regulators? 
Hardly. Bank of America is paying 8 percent interest on the $20 
billion. Unlike Goldman Sachs or JPMorgan Chase, it lacks the 
financial wherewithal to pay it back. And accepting the extra 
money means it has now taken as much overall TARP money as 
Citigroup, the very symbol of a crippled bank. Plus, of course, 
it has to abide by strict executive compensation rules.