Gaby Lapera: We're going to be talking about Bank of America and Merrill Lynch. As many
of you may have noticed, if you're a Bank of America customer, Merrill Lynch and Bank
of America are in some way joined. I think Maxfield can give us a little more background
on exactly how they came to be together.
John Maxfield: That’s right. Bank of America purchased Merrill Lynch in September of 2008.
To set the scene a little more, one of the things we've seen in the years since the financial
crisis is that some banks have recovered, and even actually thrived as a result of the
financial crisis. Wells Fargo is a perfect example of that. It's more than doubled in
size, it's making more money than it's ever made, and even in this tough interest rate
environment, Wells Fargo is such an incredibly vibrant and viable business model that you
wouldn't even guess that it had just survived the financial crisis. JPMorgan Chase is doing
pretty well, too. But Bank of America is really struggling. Mind you, this is the nation's
second-largest bank. It's a really important bank of the United States.
The question is, why is it struggling? And one of the reasons it seems to be struggling
is because of the acquisition of Merrill Lynch that it did in September of 2008, in the trough
of the financial crisis. It was over a very fast weekend, the same weekend that Lehman
Brothers failed. The Treasury Department and the Federal Reserve approached Bank of America
to see if they would be willing to basically just buy Merrill Lynch over the course of
the weekend, and that's what they did. They paid something like $50 billion for Merrill Lynch.
But the thing that's important to keep in mind in all of this is, that happened before
the post-crisis regulatory regime changed the name of the game for banks.
Lapera: Yeah, and I think what listeners have to understand, too, is that people were worried
about a domino effect, just like they were worried about Vietnam and communists being
a domino effect. People were worried about banks. So, Lehman Brothers failed, and then
they were convinced that the banks, from smallest to largest, would fail one right after the
another. That's why the federal government stepped in and asked Bank of America, "Hey,
do you want to buy Merrill Lynch before it fails?"
Maxfield: That's right. If we go back in time to 2008, in March of that year is when the
Treasury Department directly approached JPMorgan Chase to say, "Can you guys step in and save
Bear Stearns?" Bear Stearns was the fifth largest investment bank. Lehman Brothers was
the fourth largest, and Merrill Lynch was the third largest, then you had Morgan Stanley
and Goldman Sachs. To Gaby's point, it looked like that was the way the dominoes were tumbling.
You had Bear fall in March, you had Lehman fall in September. And the thought was, if
you didn't draw the line somewhere, all five of them would go, and that would cause a global
catastrophe.
Lapera: Do you think Merrill Lynch actually would have failed if Bank of America hadn't
bought them up?
Maxfield: That's a great question. (laughs) Gaby, I have to be honest, that's an amazing
question. Let me answer it this way -- there are some banks out there, JPMorgan Chase and
Wells Fargo in particular, who basically said, "We don't need the federal government to step
in to save us." And to a certain extent, that is right, because Wells Fargo and JPMorgan
Chase had plenty of liquidity and plenty of capital. They were fine as institutions. It
was really just a handful of other commercial banks that were struggling, then all the investment banks.
But had the government not stepped in and basically backstopped the entire credit market
in the United States, every single bank was a threat of failure. JPMorgan Chase may have
been fine, but all of its counterparties that owed JPMorgan Chase money ... when one counterparty
owes another counterparty money, that's an asset to the company that the money is owed
to. So basically, JPMorgan Chase's assets could have been decimated not because of JPMorgan
Chase, but because of all its counterparties failing.
So, the fact of the matter is, yes, I think there's an argument to be made that, if the
government didn't step in, not only would have Merrill Lynch failed, but even the biggest
and soundest financial organizations in the country would have been at threat of failure.