by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
This is getting too easy. Financial Times interviewed Bank of America CEO Ken Lewis. His answers reveal why the quasi-government agency that BAC has become is destined to fail. Read the whole article. You’ll swear your reading Orwell’s Animal Farm.
FT: Do you regret your acquisition of Merrill Lynch?
Lewis: I’d be less than honest to say that I haven’t had my moments, but I always try to step back and say don’t judge it by this time and look forward. I still think it’s a compelling, strategic acquisition and we’re going to be awfully happy to have done it over time.
BRADY (commentary): Ken Lewis gleefully overpaid for the world’s largest securities’ firm out of pride and ego. The prospect of commanding the largest mortgage originator and securities firm appealed to Mr. Lewis’ ego. His feckless behavior showed contempt for his shareholders and will be an expense to the people of the United States but why should he care?
FT: Was there a moment when you would have preferred to pull out of the deal?
Lewis: We did in fact think about doing that . . . and consulted with the government about filling the hole [in Merrill’s balance sheet] if we didn’t get out. We were strongly advised that the best thing to do was to go forward with the deal on time. While we made the final decision, we relied heavily on that advice because we respected the opinions of the various agencies.
BRADY: Ken ain’t calling the shots at BofA; he’s an overpaid government employee now. Wanna know how I know? Read the next question.
FT: Have you been surprised by the strings attached to the Tarp money?
Lewis: I’ve been surprised at the reaction of the public for those that have taken the Tarp money when we were doing what we thought was in the best interest of the country.
BRADY: Read the last five words. Ken Lewis’ responsibility is to do what is in the best interest of the BAC shareholders not the country.
The answer is, of course, to break up the banks and stop the government from competing with the healthy banking institutions. Consider Warren Buffet’s letter in his annual report to Berkshire shareholders:
Clayton’s lending operations, though not damaged by the performance of its borrowers is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee — banks with FDIC-insured deposits, large entities with commercial paper backed by the Federal Reserve, and others who are using imaginitive methods (or lobbying skills) to come under the government’s umbrella — have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower, but often scarce for others no matter how creditworthy they are.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with favored status. Government is determining the “haves” and the “have nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit rating is pristine — we are one of only seven AAA corporations in the country — our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one.
Read that last line again…
At the moment it is far better to be a financial cripple with a government guarantee than a Gibraltar without one.
NOW, go throw up.
Tom Vanderwell says:
Do seasickness pills work to prevent what I’m feeling?
March 9, 2009 — 9:14 pm
Doug Quance says:
It’s getting worse by the day.
Try this Adam Smith excerpt:
http://tinyurl.com/ek9pe
I hope history does NOT repeat itself.
March 9, 2009 — 9:29 pm
Eric Blackwell says:
Tom-
That nausea in the pit of your stomach is simply confirmation that Brian is correct on this. When Free Enterprise is no longer free (and the government now has bought the right to dictate what these companies do), it soon ceases to be an enterprise.
GSE is an oxymoron on it’s face, IMHO.
Eric
March 10, 2009 — 3:25 am
Jennifer K Giraldi says:
It seems the government takeover is imminent. Between the year 2000-2010 we have lost more rights and civil liberties in this country than any other decade in our history. The government is now going to own the banks and companies. Very scary.
March 10, 2009 — 6:27 am
Don Reedy says:
Brian,
Thanks for giving us permission to throw up. A couple of thoughts on that, from the well published “20 Reasons Throw up is better than dorm food”:
After you throw up, you feel better.
You can throw up whenever you want.
When you throw up, you don’t have to wait in line.
You don’t have to pay to throw up.
Throw-up is SUPPOSED to look like that.
They don’t ration throw-up.
A dog will eat throw-up.
After you throw up, at least there’s some taste in your mouth.
Brian, THE TASTE IN MY MOUTH RIGHT NOW IS PRETTY RANCID.
March 10, 2009 — 9:14 am
Paul Francis, CRS says:
And the mainstream media have become the sheep baaaing “Four legs good… two legs bad”…
Or is it “Government owned banks Good… Capitalism Bad”?
Rush has certainly ended up as Snowball…
It certainly is a good time to pick up and read Animal Farm again to see all of the correlations taking place.
March 10, 2009 — 1:39 pm
Thomas A B Johnson says:
@ Tom Vanderwell:
Seasick pills will not help. The Titanic is not moving, so there is no motion to cause seasickness-except toward the ocean floor…
March 10, 2009 — 2:02 pm
Mark Green says:
I dunno Brian, I think BoA was brilliant to snap up Countrywide’s rancid subprime portfolio at the low, low price of $5 billion 🙂
We’ll be scratching our heads about that one for a while too!
March 10, 2009 — 2:29 pm
Paul Francis, CRS says:
Squealer is alive and well:
http://consumerist.com/5166884/andrew-cuomo–barney-frank-demand-names-of-million-dollar-bonus-execs
And the sheep continue to chant: “Government control is good.. Capitalism is Bad”… Baaaah..
March 10, 2009 — 5:46 pm
Geno Petro says:
Look at those yo-yos….that’s the way they do it.
hmmm
March 11, 2009 — 7:15 am
Michael Cook says:
Lot of doomsday here as usual. I wonder if this is based on perspective. If this was a union based site, I suppose they would be saying the government isnt going far enough.
For the record, I think temporary nationalization is better then throwing a lot of good money down the black hole that is our current banking system. Bring in new management, wipe out the share holders, put reasonable risk policies in place, then auction off the pieces. Obviously, that is much harder than it sounds.
Ironically and certainly in my opinion, a lot of people here are making these comments with limited information. Big picture, Ken Lewis made terrible decisions on ML and CW. Thats not hard to see. It would seem to me a bit harder to see a laissez-faire way out of this current crisis. If the government does not attempt to create jobs and/or avert financial disaster, what is the alternative. Lax regulation has done a lot to get us here and continuing with the “hands off” attitude would only seem to perpetuate the disincentives that got us to this point.
I would love to hear some original thought on getting us to a better place, rather than the bemoaning towards people who are at the very least doing something to move us in a different direction.
March 12, 2009 — 9:49 am
Brian Brady says:
“I would love to hear some original thought on getting us to a better place, rather than the bemoaning towards people who are at the very least doing something to move us in a different direction.”
I offered it six months ago:
https://www.bloodhoundrealty.com/BloodhoundBlog/?p=4598
which is a bit less drastic than this:
“For the record, I think temporary nationalization is better then throwing a lot of good money down the black hole that is our current banking system. Bring in new management, wipe out the share holders, put reasonable risk policies in place, then auction off the pieces.”
Dismantling the supermarkets, either way, is the answer. It’s going the happen whether the government madates it or not. MC.
March 12, 2009 — 10:35 am