Breaking the Bank (full documentary) | FRONTLINE

Summary

Highlights

• The 2008 crisis stemmed from a burst housing bubble that destabilized banks nationwide 😱.
• A key moment was Merrill Lynch's merger with Bank of America, orchestrated under pressure from Hank Paulson 📞.
• Hank Paulson's push for banks to accept bailout funds was crucial to averting a complete meltdown 🆘.
• Wall Street's hegemony was challenged as the government stepped in to control and stabilize major financial institutions 🏢.
• The documentary highlights the intense scrutiny executives faced amidst financial turmoil and public outrage 😡.

Key Takeaways

• In 2008, the housing bubble burst, sending shockwaves through the financial system 🌪️.
• Bank of America and Merrill Lynch merge under governmental pressure to stabilize the system 🤝.
• Hank Paulson forces top banks to take bailout money to prevent economic collapse 💰.
• The government's intervention marked a significant shift in the financial landscape, reducing Wall Street's power 🏦.
• Executives faced public and governmental scrutiny for their roles in the crisis 🔍.

Overview

Chapters

• 00:00 - 30:00: Introduction and Build-up The chapter titled 'Introduction and Build-up' describes the ambitious growth of a major bank in America. It highlights the motivations of its leaders who sought to challenge and outperform traditional financial hubs like New York and Wall Street. Despite the prestigious brand of Merrill Lynch and the hero-like leadership of individuals like Ken Lewis, the chapter foreshadows underlying troubles as they ascend to the top of the financial world.
• 30:00 - 60:00: Crisis Unfolds The chapter "Crisis Unfolds" depicts a chaotic scenario where survival becomes paramount. With major doubts in the air, the government takes decisive actions, including nationalizing banks and assuming control over the financial system, effectively eliminating Wall Street's power. This marks the end of an era, as the government now holds all decision-making power in the financial sector.
• 60:00 - 90:00: Government Intervention The chapter titled 'Government Intervention' discusses the impact of the 2008 housing bubble burst and its ongoing consequences. It highlights how, even two years after the burst in 2008, there are still fears that the market has not fully reached the bottom. The financial markets are unstable, with profits in the banking industry significantly declining. At 10:00 Eastern time, there is a particular focus on a moment when it was unclear just how severe the financial situation would become.
• 90:00 - 120:30: Aftermath and Reflection The chapter titled "Aftermath and Reflection" describes a significant weekend in September when the American financial system underwent profound changes, catalyzed by urgent phone calls from Federal Reserve officials to bank leaders. The events initiated a period of reflection on the restructuring of the financial system.

Breaking the Bank (full documentary) | FRONTLINE Transcription

• 00:00 - 00:30 [Music] tonight on front line you're either growing or dying so we grew they created the largest bank in America he wants to give the middle finger to New York and to Wall Street miral Lynch is this hugely prestigious brand they had long sought this prize John was a hero Ken Lewis finally is on top of the financial world but it was troubled from the beginning the market
• 00:30 - 01:00 was in complete chaos this became a game of survival there are major doubt suddenly the government took over you can't leave this room until you agree to take this money we nationalized the banks in the US on that day there is no power on Wall Street anymore the government holds all the cards that old way of putting on a party it's over tonight on front line Breaking the Bank
• 01:00 - 01:30 we learned today just two years ago 2008 the housing bubble had burst over theast week there remains fears that it hasn't yet reached ground Flor the markets were teetering profits in the banking industry are plunging at 10:00 Easter time and Stern nobody knew how bad it was going to get
• 01:30 - 02:00 on one weekend in September the entire American Financial system would be changed it began with a phone call about 4 or 5:00 the uh various officials from the Federal Reserve started phoning the bank Chiefs cell phon started going off and
• 02:00 - 02:30 they said you need to be down here at 6:00 we want to talk to you I got a phone call about 5:00 saying be at the FED at 6:00 that evening I was in maril Lynch's Midtown facilities and I I live in Westchester so I was trying to get out of the city early because the traffic's always bad on a Friday night I went by myself and for the most part the CEOs of the large investment Banks and
• 02:30 - 03:00 Commercial Banks were all there by themselves so everybody converged at that point it was just the CEOs of the main houses and very senior advisers that night at the New York Federal Reserve the issue was Leman Brothers wall Street's fourth largest Investment Bank heavily invested in the mortgage Market was in a death spiral bring everybody in the room the interested parties and you say look we
• 03:00 - 03:30 have to solve this problem and you lock the door till they come up with a solution the Secretary of the Treasury Henry pson had convened the meeting Paulson thought perhaps he could get everybody together create a big old fund and try to resolve Leman Tim gner the president of the New York Federal Reserve led the meeting Tim gner says somebody needs to buy Leman you need to figure out how to rescue Leman because otherwise they're going to
• 03:30 - 04:00 go bankrupt inside the fed the picture of Leman Brothers was a financial institution that was melting away before its eyes 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 convening a council of powerful Wall Street Bankers came naturally to Hank Paulson
• 04:00 - 04:30 he used to be one of them Paulson comes from the great breeds of Masters of the Universe that have come from Wall Street Henry Paulson came from Goldman Sachs he was a very powerful Wall Street figure Paulson made his fortune in the freewheeling 90s when the unregulated free market was King Paulson does not have the mentality of a regulator he has the mentality of an investment banker that the Market
• 04:30 - 05:00 rewards and the market punishes so you don't need a lot of Regulation and at the FED that night and throughout the weekend Paulson would push the bankers to handle the Leman crisis on their own it was a very high stakes game of signaling that he was playing he he wanted to show these guys you know all of his old buddies on Wall Street that uh that they were going to need to step up and do something themselves but the bankers left the FED that night uneasy
• 05:00 - 05:30 they knew that leman'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 Leman wasn't alone it is about so much more than just Leman it's about Merill it's about City it's about all the banks everyone's carrying in the back of their mind a list a hit list of who's going to who's next to go down and it's
• 05:30 - 06:00 meril 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 you know the CEOs talked openly with Jon in the room thing in the room saying well you know if we try to save Leman brothers that's all great but we're going to be back here next weekend and we're going to be talking about Merill I did not want to be the equivalent of Leman the following weekend sitting there he was absolutely
• 06:00 - 06:30 dead next and dead and next of the of two appropriate terms 53-year-old John th was one of the newest CEOs in the room a graduate of MIT and Harvard Business School his career had been a Rocket Ride he's been on Wall Street for years he was the number two guy at Goldman Sachs he was Hank Paulson's number two uh considered a very tough manager considered a pretty smart guy you know he had been this Golden Boy Sachs
• 06:30 - 07:00 doesn't get the top job though he's passed over for the top job and he jump ship early perhaps smartly goes to the New York Stock Exchange as the CEO he was Mr Fixit he could go into any situation and he had for the New York Stock Exchange and a number of other settings and had taken companies that were having problems and had made them work and meril Lynch had plenty of problems once conservative and careful they'd abandoned caution for the quick
• 07:00 - 07:30 Riches of exotic mortgage-backed Securities they got into it very heavily uh they courted a lot of nonprime lenders uh and they let money to them bought their mortgages and and sold them into bonds and they thought the gravy Trend would never end when F took over the housing bubble had burst and Merill was a mess 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 a Goldman Sachs and he could turn meril Lynch
• 07:30 - 08:00 around but they had little time to turn Merill around 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 waterers coming in faster than you can get it out and that's really what we were in over the course of uh really all of 2008 that September weekend as the crisis meetings at the FED wore on th realized he would have to act I really
• 08:00 - 08:30 changed my thought process and just focused on all right what can I do to make sure that Marilyn doesn't go the way of leaving Hank Paulson was also worried about his former deputies Bank he had come to the realization that no one was prepared to buy Leman but if Leman failed Paulson had to keep the contagion from spreading to Merill threatening the entire economy every every single part of Wall
• 08:30 - 09:00 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 unforseen ways so if just one company goes down in this case lhan it can drag everyone else with them 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
• 09:00 - 09:30 not able to sleep because what are we going to do about this Paulson decided the key to reassuring the market was finding a buyer to keep Merill alive and he had one in mind a bank outside of Wall Street it had been called a Pillar of Strength the super Bank Bank of America Bank of America is the story of some of the most ambitious aggressive Bank builders on the face of the planet
• 09:30 - 10:00 they're sharks but they're not Wall Street Sharks it's a different type of of uh of sea that these people are swimming R swimming in what had first been North Carolina National Bank had grown into a formidable Southern competitor to Wall Street nation's Bank humac call ran it in the ' 80s and '90s after the Civil War most of the cap in the South was wiped out what I saw as
• 10:00 - 10:30 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 um candidly have been fairly successful at it they bought and bought and bought and they would buy a 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 they were the ones who ended up taking over the
• 10:30 - 11:00 show even the bank's name was acquired they bought the California based chain Bank of America in 1998 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 in business so we grew when he retired mcll chose one of his longtime mergers and acquisition Specialists Ken Lewis to run it all well I'm I'm really nobody when when you
• 11:00 - 11:30 look at my my background I I came from a very modest uh beginning and my my mother raised my sister and I so a one parent family and and she was a nurse this is not somebody with an ivy Le Ivy leak backgrounds it's not somebody with blue blood and parents this is somebody sort of driven by a need to prove himself especially to to prove himself against people from wall Street someone
• 11:30 - 12:00 once described Ken Lewis to me as the most competitive person in the history of the United States including the Union Army he practiced smiling which is not Ken Lewis's default expression he started wearing glasses to to soften his 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 he wants to give the middle finger to New York and to Wall Street and he
• 12:00 - 12:30 wants to beat him at their own game and I think he Revels in it the idea that these guys in Charlotte can be beating up the guys on Wall Street Lewis took over at a critical moment when the rules limiting Bank mergers were being dismantled a race to become the biggest super Bank was on he wrote out a wish list of companies he wanted to acquire or businesses he wanted to be in and one by
• 12:30 - 13:00 one year after year he made that happen Fleet Boston MBNA Countrywide Lal us trust Ken's eyes have always been bigger than his stomach that's part of his problem he's always been a dealmaker I mean that's kind of his modus operand that's how you know Bank of America was built so during that weekend meeting at the FED Paulson's idea that bank of a America could be a Lifeline to Merill
• 13:00 - 13:30 was gaining traction on Saturday morning th made a fateful telephone call I walked outside of the Federal Reserve and called from my cell phone standing outside on the street John called and said uh I I I think we should talk I said Ken I think we should talk about a strategic um Arrangement he said i' I'd like to do that
• 13:30 - 14:00 Lewis's corporate jet was waiting at the Charlotte Airport I said I can be there around I think it was 2:00 and so I'll meet you at at our apartment we agreed to meet at their corporate Department in the Time Warner Center at uh 2:30 in the afternoon this is like music to Ken Lewis's ears because Ken Lewis had wanted to by Merl Lynch for a
• 14:00 - 14:30 while they had long sought this prize and they had you know over the years approached Merill several times meril Lynch has this big huge brokerage Network it basically deals with you know millions of small millions of small investors and you know small investors that are very rich too across the country through these brokerage offices that has 16,000 Brokers that probably manages through those Brokers trillions a couple trillion dollars worth of assets so that's what he wanted for Ken Lewis it was the final crowning item on
• 14:30 - 15:00 his list miril Lynch is this hugely prestigious brand it it's a little akin to Holiday in getting to buy the Ritz hotel and and the Ritz is down on their luck and they turn to Holiday Inn and they say will you save us and holiday in says sure Ken Lewis waited alone for John th at the Bank of America Corporate apartment in the Time Warner building it's just the two of us then and um so I
• 15:00 - 15:30 proposed to him that uh we would be interested in selling a 9.9% stake in Merill to bank America and we would want them to provide us with a large credit facility But Ken Lewis hadn't flown to New York to take a minority position in Merl Lynch I responded to John that's not really what I have envisioned here uh I want to buy the whole company not not invest 9 to 10% and th says well I didn't come here to sell Marl Lynch
• 15:30 - 16:00 uh and Lewis's response is well that's what I want you have to remember that you know I had only been the CEO of uh of mar Lynch for 9 months so the last thing in the world that I want to do is sell the company that was a hard decision in the end th realized he had no choice he agreed to sell maral Lynch to Bank of America for $50 billion it was just this really defining moment of these two
• 16:00 - 16:30 men it was clear who had the leverage that weekend by late Saturday afternoon Lewis had sent his deal team over to Merill to look at the books they would have to work fast Hank Paulson was adamant the deal had to be done by Monday morning in 48 hours you can't do due diligence you can't really take A bank's book go through them and figure out where
• 16:30 - 17:00 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 the reason Paulson was so insistent was that with no buyers and no government bailout Leman Brothers was headed for bankruptcy they had this meeting and and one of the advisers um Harvey Miller very well-known bankruptcy lawyer on Wall Street and he warned them in this
• 17:00 - 17:30 meeting this will be Financial Armageddon he he warned them what to expect Monday morning if if Leman was put into bankruptcy Paulson desperately needed to give the markets some good news when they opened on Monday morning the way the government and Hank Paulson and Tim gner and Ben Bernan were perceiving what was going to happen on Monday morning Bank of America was going to save the system because even though Leman Brothers was going to go down the next Domino mayor Lynch was going to
• 17:30 - 18:00 stay up and that was very very important Hank in particular uh was very strongly encouraging me to make sure that I got a transaction done uh prior to the opening on uh Monday by Sunday evening at the offices of Bank of America's law firm the broad outlines of the deal were set but there was a problem the night that they are signing this deal the conversation is not about the
• 18:00 - 18:30 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 to this into this contract you know they were supposed to sign the deal at 10:00 at night it ends up going to 1:2 in the morning because they're talking about comp at a time when Rome is burning comp compensation bonuses the bankers from Charlotte were now
• 18:30 - 19:00 dealing with Wall Street someone from the Merill team left went out of the room and came back with a piece of paper for the top five Executives at Merill the paper came back and it said $40 million for Donan and other high eight-digit figures for the other four on his team in the end Bank of America agreed to let Merill spend up to 5.8 billion on the comp if you're Ken Lewis and you
• 19:00 - 19:30 just ponied up this enormous amount of money for this company and 5 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 th's Pockets with that would sour you too selfish things start to crop up at the very end and frankly it it it it extends things to the point that I have never really been real happy by the time that champagne pours H usually you're
• 19:30 - 20:00 mad at each other by by then and uh and you you drink it politely and then leave and uh that was about how I felt with this one 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 lisis and th finally signed the deal it would take effect on January 1st
• 20:00 - 20:30 at Leman Brothers they spent the night drawing up the bankruptcy papers the next morning as Hank pson planned the stock markets would wake up to the official announcement of the merger of Bank of America and Merl Lynch the press conference was in Bank of America's beautiful new headquarters
• 20:30 - 21:00 the two of them came in and they paused and shook hands and it was actually an awkward moment gentl because so many photographers wanted to capture it that they shook hands over and over and over and over and over again despite the bitter back room dealings it was a moment of Triumph for th and Lewis it was a crowning 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
• 21:00 - 21:30 largest bank in the US and both of them managed to square the circle on that day John 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 he was the guy who saved Merill from falling down the same hole that had just sucked in Leman for Lewis this day on September 15th he finally is on top of the financial World Bank of America would
• 21:30 - 22:00 become the largest bank by assets in the country larger than City Group larger than JP Morgan Merill had been saved Ken Lewis and Hank Paulson had each gotten their [Music] wish that same morning in Washington L announcing early this morning it will file for bankruptcy confirming all those been particularly unsettling Han pson and his staff were waiting to see how the markets would react to the Leman
• 22:00 - 22:30 bankruptcy and the Merill merger we H the meril purchase would stop the domino effect that was definitely the why we thought it would be good news on Monday morning and it looked like it might be true Paulson headed to the White House to reassure the markets good afternoon everyone and I hope you all had an enjoyable weekend yeah yeah the fed and the
• 22:30 - 23:00 treasury thought that Leman could go under without causing a major configration and that it would be a big event but it wouldn't cause a cataclysm but the American people can remain confident in the soundness and the resilience of our financial system Paulson had bet the markets would take care of themselves thank you very much he would soon discover he was
• 23:00 - 23:30 wrong everything freezes and that's what causes the crisis and it really started because Leeman 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 pson had miscalculated the first sign of trouble the credit markets began to freeze Hank was very nervous he was getting calls from large manufacturing companies that were struggling because
• 23:30 - 24:00 of the credit markets being frozen then the banks stopped lending the longer it went on the more trouble the economy was going to be in the Meltdown was happening I'm sure that pulson 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 grade depression this is the utter nightmare of an
• 24:00 - 24:30 economic policy maker you're sitting there and you may have just made the decision that destroyed the world absolutely terrifying [Music] moment 3 days after leman's bankruptcy Paulson headed to Congress he had decided to dramatically change his approach that's at that point Paulson
• 24:30 - 25:00 bowed to the inevitable one thing Paulson said to me in an interview is uh when the situation changes you have to be willing to change with the situation fed chairman Ben Bernan joined Paulson for the Emergency meeting on Thursday late afternoon we go to Nancy Pelosi's office and there's a meeting of the senior legislators from both parties in both House and Senate it was obviously a
• 25:00 - 25:30 big meeting I had no idea I was going to hear what I heard pson now believed government intervention was necessary and he'd need hundreds of billions from Congress to do it they said they need the authority to use $700 billion to uh unstop the credit Market sitting in that room with Hank Paulson saying to us in a very measured tones no hyperbole no excessive adjectives that un unless you act the financial system of this country and the
• 25:30 - 26:00 world will melt down in a matter of days banki said if we don't do this tomorrow we won't have an economy on Monday there was literally a pause in that room where the oxygen left pson received the money $700 billion known as tarp troubled asset relief program on October 12th he Ed I got a phone call on Sunday from secretary pson
• 26:00 - 26:30 and he basically said K I need you to be in Washington Monday and he said I really can't tell you a lot about it with the meril merger not yet complete Paulson also invited John F he said be at the treasury at 3:00 tomorrow I 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 click
• 26:30 - 27:00 seven other heads of the nation's largest banks received a similar summons they turn up at 3:00 and they all file into the conference room which is across the hall from Mr Paulson's office they were told to sit on one side of the table the titans of the finance world are arrayed almost like school children waiting to hear from the treasur secretary about a subject they're
• 27:00 - 27:30 probably by then slowly beginning to figure out John F's seat was in the middle Lewis was put at the end at first I wondered why I was down toward the end and uh and and then it then it hit me obviously that it was in alphabetical order and uh how else would you do it Paulson got right down to business because it's Paulson who's not a man who beats around the bush it became clear
• 27:30 - 28:00 relatively quickly what he was proposing he says I've got here documents that say the US government is going to make an injection of capital into each one of your companies Paulson was about to spend $125 billion of that tarp money from Congress they go through in a very very Rapid Way that each of us is going to take this taxpayer money the tarp
• 28:00 - 28:30 money and he basically says you can't leave this room until you agree to take this money we're all going to do it for the good of the country for the good of the system and it's not really [Music] discretionary it was unprecedented in return for billions of dollars the government would take an ownership stake in the banks some bankers fought back that was a very contentious
• 28:30 - 29:00 meeting lots of questions lots of doubts Richard kovich chairman of Wells Fargo led the charge kovich stood up said I don't want the money I don't need the money I don't want the money I W to have nothing to do with this but Ken Lewis took a different view Ken Lewis says it's our patriotic duty to do this let's stop fighting do this deal right this moment we are so intertwined with the US that it's hard
• 29:00 - 29:30 to separate what's good for the United States and what's good for Bank of America and uh so don't do it on the basis of being us being told uh do it on the basis that things could get a lot worse in America and therefore for us uh and and uh they're almost one and the same Lewis also knew that he could expect two tarp shares maril Lynch's and his own he also said look we all know how this is going to end we're going to
• 29:30 - 30:00 sign this piece of paper so he played a little bit of the Elder Statesman role explaining reality although they all understood reality quite well and if any Bank didn't sign on Paulson had a potent weapon 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 think in a negative way and that's going to destroy
• 30:00 - 30:30 you 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 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
• 30:30 - 31:00 so the next day Paulson told the country about his new way of doing business morning today we are taking decisive actions to protect the US economy we regret in one day everything had changed that the treasury will purchase Equity stakes in a wide variety of Banks and thrifts I think we nationalized the banks in the
• 31:00 - 31:30 US on that day seriously substantially nationalized them the government got a lot of saying how they run a lot of constraints a lot of um responsibilities a lot of downside risk was taken on that day government owning a stake in any private us company is objectionable to most Americans me included whether you like it or not whether we think we have control of these firms or not they're National firms they're owned by the US
• 31:30 - 32:00 taxpayer the Secretary of the Treasury had become the most powerful Banker in the nation shending oh 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 so Hank pson the happy capitalist Warrior who
• 32:00 - 32:30 spent his life pursuing and defending free markets is now the biggest interventionist treasury secretary we've had since the Great Depression as the fall wore on for Paulson one hopeful sign of life in the banking system was Bank of America the pending marilin murder still looked like a good deal they were still a Pillar of
• 32:30 - 33:00 Strength within a system where there was very little strength they looked like they were stronger from the outside but the view from the inside revealed something else the marriage between Bank of America and meril Lynch was already showing signs of strain almost from the beginning there was just huge frustrations about pairing up with you know with Bank of America people at meril Lynch compare themselves
• 33:00 - 33:30 like the Tiffany's of Wall Street and they're meeting up with Walmart I mean it's just the Walmart of banking the average salary at Bank of America at this point is about $775,000 the average salary at Merl Lynch is I think something like $235,000 so they have vastly different expectations for what it means to be a Merl Lynch person versus a Bank of America person the Gunslingers go to Merl and
• 33:30 - 34:00 the conservative Branch goes to BFA you know and I think one of the comments that were made by one of the workers at murl I don't want to go work with a bunch of toaster salesmen and with the official merger looming there was trouble at the top between Lewis and th the issue those bonuses th was still a Wall Street man for having successfully sold Merill to Lewis th wanted a cut of the back of a America deal worth as much as $10
• 34:00 - 34:30 million they had lobbied behind the scenes very hard the compensation Committee of Merl Lynch to get a bonus which just infuriated people at at various levels including on the board in the end th didn't get his bonus but he made sure his top Executives did at the same time on Merrill's trading floor they learned things 's fourth quarter results were going to be
• 34:30 - 35:00 disastrous D still had a lot of stuff on his balance sheet that was junk the assets continue to deteriorate that's what keeps happening the markets were brutal Merrill's toxic assets were eating a hole in the balance sheet there was a period where the loss estimates were jumping by sometimes 2 or three billion over two or three days that's a pretty big number as the meril losses mounted up in New
• 35:00 - 35:30 York in Charlotte Bank of America's stockholders were about to vote on whether to approve the merger 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 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 we had
• 35:30 - 36:00 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 realization hey we're going to have a loss um and there's no use kidding about it the merger was approved but by mid December the truth about Merrill's balance sheet was unavoidable Ken Lewis has a meeting where he is told the projections for the
• 36:00 - 36:30 losses that Merl Lynch will have to report in the fourth quarter and the losses are enormous they are over $15 billion they're larger than anything that has been announced previously Ken Lewis now knew the Merill merger could break his bank I don't think he anticipated the market deteriorating the way it did and certainly he did not anticipate how St the losses would become I believe that's
• 36:30 - 37:00 when Ken Lois felt you know what I made a mistake here 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 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 Ken Lewis told Paulson he was
• 37:00 - 37:30 considering invoking the mack to get out of the meril deal Paulson was stunned he told Lewis to come to Washington immediately so Lewis Goes to Washington DC on December 17th to meet with banki and Paulson and tells them we can't do this the losses are too big we're going to pull out I can't can't say a lot about the negotiations but what I would say is
• 37:30 - 38:00 they had their view of both uh what that would do to Bank of America and what that would do to the financial system Hank Paulson and Ben banki 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 keep in mind these are men who have been through Leman Brothers they don't want this they don't need it and it can't
• 38:00 - 38:30 happen Lewis's options were limited his new powerful partner the Secretary of the Treasury was calling the shots the government had already had $20 billion inside in 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 he is in a really tough spot he's he's almost downed if he does and downed if
• 38:30 - 39:00 he doesn't Paulson got tough 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 you have to buy merrow and we will make sure that happens up to
• 39:00 - 39:30 and including removal of management removal of the board from where Ken Lewis sat I've had several people describe to me the Bank of America thought it was a threat and they needed to do this there was there was a time where that discussion uh was held and uh but we we in fact um we in fact decided own our own not not anything to do with that that it was the best interest of all all
• 39:30 - 40:00 involved to go ahead to go forward Ken leis 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 Paulson then explained the offer that l could not refuse another $20
• 40:00 - 40:30 billion 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 1 month then after the merger was completed the story broke City group and Bank of America have been losing money at a furious Pace country two major Banks sank deeper into the red despite billions more from the government Mar
• 40:30 - 41:00 tumbled the stock market has been falling day after day and now news that the biggest banks need more money between January 15th and January 20th Bank of America's stock drops more than 45% the bank's shotgun marriage with Merl Lynch in September was on the rocks with reported more than5 billion in losses for the fourth quarter of 2008 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
• 41:00 - 41:30 loss there are major major doubts suddenly about this bank's ability to make it through this crisis intact B stock starts to tank in ways it hasn't in decades it's down to like 1980s levels the magnitude of the loss obviously at at miral Lynch really stunned people and so it was it was a bad day and it
• 41:30 - 42:00 did shock a lot of people and disappoint a lot of people in a matter of days Lewis went from King of Wall Street to embattled CEO his shareholders were up in arms there was just an immediate public outcry they were just furious at what he had done they start calling for Ken Lewis's head they want to know why these losses weren't disclosed earlier why the talks with the government weren't disclosed
• 42:00 - 42:30 earlier I mean what kind of dealmaker was Kent Lewis anyway in effect by buying Merill he had damaged Bank of America it felt at that moment that it was going to be tough for him to keep his job Bank of America needed to change the subject take the heat off Ken Lewis this became a game of survival in Charlotte for Ken Lewis he needed to blame somebody and somebody had to be
• 42:30 - 43:00 responsible for what was going on that somebody was John F F paid out $4 billion in company bonuses just days before the merger he also was lavishly redecorating his office space to the tune of $1.2 million courtesy 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
• 43:00 - 43:30 villain the hero becomes the villain 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 not just the public on January 22nd CNBC had a
• 43:30 - 44:00 scooping news from Charlie gasperino on the CNBC newsline more news out of Merill Charlie Bank of America Merill Ken Lewis the CEO Bank America will hold an emergency meeting with John F the CEO merln today I got a tip that Lewis was flying down to Merill everybody knew that thing was on the ropes and then I went to my sers at Bank America and they basically said yeah he's he's he's all but done CNBC has learned that Ken Lewis
• 44:00 - 44:30 the CEO of BFA is meeting or going to meet with with John Fain uh later this afternoon I hear around 11:30 essentially to decide his future which will be very interesting I have CBC on in my office so I can see the the headlines are you know that uh that uh I'm going to get I'm going to get fired Ken flew from Charlotte to New York uh walked into to John's office and um and said John is not going to
• 44:30 - 45:00 work out and I'm sorry I wish you the very best and and then left it wasn't a very long conversation there really wasn't very much for me to say because this wasn't a negotiation thing was gone but Ken Lewis now faced a new problem the new president we arrived at this point due to an Era
• 45:00 - 45:30 of profound irresponsibility sensibilities I mean I'd like to throw these guys in the BR I mean for years too many Wall Street Executives made imprudent and dangerous decisions they're thinking greed they're thinking upset our Executives being rewarded for failure with Hank pson out of Treasury the new Administration was calling the shots from the White House there ain't going to be any $40 million jets being bought I mean it's been out rageous and I will not tolerate it as president the power on Wall Street has
• 45:30 - 46:00 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 Lewis's new board member was demanding that the banks fundamentally change the way they do business totally adamant on the part of the president we
• 46:00 - 46:30 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 backyard the question is how do you make this house livable the answer is you demand accountability and responsibility and where there need to be fundamental changes require these companies to make fundamental changes here come to order before the and on Capitol Hill the mood was no
• 46:30 - 47:00 different with their vaults now filled with taxpayer dollars Lewis and the other Bankers were fair game they're going to have to do this every now and then they're going to to be called before Barney Frank and the you know the rest of Congress and they're going to have the congressionals Committees and they're going to get like you know yelled at and grand stand upon let me be frank my con constituents in Illinois are angry and so am I what did
• 47:00 - 47:30 the banks do with the taxpayers money I cannot believe no one's prosecuted you on this 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 as a matter of fact Bank of America you paid yourself 30 million in fees just to accept our tar money I
• 47:30 - 48:00 don't know what you're talking about the whole thing frankly had a bit of political theater uh 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 it was clear we were there to take a public whipping and and we did I just tried to think of it that way and think of it as you know this two will pass and just get through it there's been uh wide
• 48:00 - 48:30 speculation that some of our larger banks around the nation may end up uh being uh nationalized do you feel that your bank should be considered one of those banks at risk are you talking to me yeah absolutely not I don't know why you would ask the question I think we saw in Ken before Congress the you Defiance some s impatience and pride
• 48:30 - 49:00 anger competitiveness all the qualities that have been there for a long [Music] time then the president insisted Lewis and the other Bankers come to the White House 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
• 49:00 - 49:30 blame you personally for where we are the president made it pretty clear when when he talked to us you know we're between you and the pitchforks guys and you need to just acknowledge that 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 it was a new day the president openly signaling that he was
• 49:30 - 50:00 in charge insisting they increase lending and limit executive compensation and foreclosures or else since that meeting Bank of America 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 set safy new government regulations Lewis says he now deeply
• 50:00 - 50:30 regrets taking the tarp money from pson both times and all that has followed little did I know the pain that would in vote with the Congress giving us the whipping that day the constant articles in in the paper about how bad we are and then things around compensation and and how you run your bank it was a clear example of no good deed goes [Music]
• 50:30 - 51:00 unpunished but at the White House they have little sympathy for Bankers complaints 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
• 51:00 - 51:30 are as far as Washington is concerned they're still sorting through the financial wreckage 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 uh a new agency or or you know just a peac meil
• 51:30 - 52:00 approach we have to kind of tear down the structure and start all over but whatever happens the era that propelled John th Ken Lewis and Hank Paulson to the top of the financial world is over well the part's over the financial institutions are are down for the count this is one of those pivot Points in
• 52:00 - 52:30 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 [Music] next time on Frontline World in Ghana
• 52:30 - 53:00 it's the dirty little secret of the high-tech industry do you know who has access to your recycled hard drive if somebody gets your hard drive he can get every information about you and in Egypt a competition to turn around the Middle East some people who laughed at me they are now shareholders these stories and more on the next Frontline world
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