After less than 48 hours of due diligence, Bank of America struck an agreement to buy the battered securities firm for $50 billion in stock, or $29 a share. (The value of the deal has since declined along with Bank of America's share price.) "I look forward to a great partnership with Merrill Lynch," Mr. Lewis said, toasting the deal with a glass of champagne.
A month later, Mr. Lewis was at the Treasury Department along with eight other chief executives of large U.S. financial institutions, summoned there by Mr. Paulson. The Treasury secretary wanted the executives to accept a round of government capital totaling $125 billion as a way of shoring up confidence in the banking system.
Mr. Paulson explained that saying no wasn't an option, according to a person who attended the meeting.
"We are going to do this," Mr. Lewis replied, urging the other CEOs to call their boards if they needed approval.
After persuading the nine financial institutions to take taxpayer money, the government, at first, refrained from flexing its muscles.
Bank of America executives remained confident about the deal. Doubts began to creep in shortly before Thanksgiving. With more than a month to go until the end of the fourth quarter, the pretax quarterly losses at Merrill were approaching $9 billion, according to people familiar with the figures. By month's end, the figure had exceeded $13 billion, or $9.29 billion after taxes.
Most of the losses were coming from the securities firm's sales and trading department. But business was even suffering in Merrill's lucrative wealth-management unit, which saw its revenue drop to $797 million in December, from $1.08 billion in October. Still, not all the losses, which included expected write-downs on assets such as Merrill's investment in rental-car company Hertz Global Holdings Inc., should have come as a surprise to Bank of America.
In meetings with Merrill managers, Mr. Thain acknowledged big losses, but said they weren't any worse than those of the firm's Wall Street rivals, noting that November had been a horrible month for everyone, say people who heard his remarks.
At Bank of America, executives debated whether Merrill's losses were so severe that the bank could walk away from the deal, citing the "material adverse effect" clause in its merger agreement. Merger agreements typically specify certain "adverse" conditions that give an acquirer the right to abandon a deal.
But lawyers from inside and outside the bank concluded that the losses likely were in line with other firms, and recommended that Bank of America move forward with the purchase, according to people familiar with the discussions.
The deliberations continued up until a few days before shareholders of Merrill and Bank of America were scheduled to vote, one of these people says. Senior Bank of America executives had "mixed emotions," this person says, but "everyone wanted to see the deal go through."
On Dec. 5, the deal was approved at separate shareholder meetings in Charlotte and New York. Nothing was said about Merrill's problems. "It puts us in a completely different league," Mr. Lewis said about the deal's completion.
On Dec. 8, Merrill's board gathered in Manhattan for its last meeting. Mr. Thain said the firm faced continuing losses, but they weren't unusual, given upheaval in the markets, directors recall.
The next day, Bank of America Chief Financial Officer Joe Price gave a detailed presentation to the bank's directors about its financial situation and Merrill's fourth-quarter woes, according to a person familiar with the meeting.
Within a few days, Merrill's quarterly net losses had swelled to about $14 billion. People close to Bank of America say the losses ticked higher due to trading losses, as well as further asset write-downs. The trading losses stem largely from legacy positions Merrill Lynch took in previous years.
Mr. Lewis told Bank of America directors in a conference call that the bank might abandon the acquisition, which was supposed to close in two weeks.
In mid-December, Edward Herlihy, a partner at law firm Wachtell, Lipton, Rosen & Katz who had helped set the merger talks in motion, reached out to Ken Wilson, a former Goldman Sachs Group banker and a top deputy of Mr. Paulson. By then, Merrill's losses had reached almost $21 billion on a pretax basis, roughly equivalent to about $15 billion in net losses, and some of Bank of America's lawyers felt there was sufficient grounds to invoke the legal clause to torpedo the deal.
Mr. Herlihy, a longtime adviser to Bank of America, expressed concern to Mr. Wilson about the size of the losses, according to people familiar with the matter. Mr. Wilson was stunned by the news. Get Mr. Lewis to call Mr. Paulson, Mr. Wilson said, according to people familiar with the conversation.
At the meeting the next day, Dec. 17, Messrs. Paulson and Bernanke asked Mr. Lewis to give government officials time to think through their options, according to people with knowledge of the discussions. Mr. Lewis agreed and returned to Charlotte.
People close to Mr. Thain say he was unaware of Bank of America's concerns. On Dec. 19, he hopped a plane to Vail, Colo., with his family, people familiar with the matter said.
That same day, about 20 people in Charlotte and Washington dialed into a conference call that included Mr. Lewis, other Bank of America executives, Messrs. Paulson and Bernanke, and other Treasury and Fed officials. Mr. Bernanke told Mr. Lewis that Fed staff members had concluded there was no way for the bank to invoke the material-adverse-change clause in the takeover agreement that would allow it to abandon the deal.
Government officials also warned Mr. Lewis that withdrawing from the deal would frazzle the markets, spark a flurry of lawsuits against Bank of America and tarnish the bank for years. A senior Fed official ratcheted up the pressure, telling Mr. Lewis that any future requests for government assistance would cause officials to consider taking a heavier hand in Bank of America's operations.
The government's tone wasn't hostile. But the implication was obvious, people close to Bank of America say. As the bank's primary regulator, the Fed can force out executives if the agency concludes they are behaving irresponsibly. Mr. Lewis responded matter-of-factly that that government should do what it had to do, and Bank of America would do the same.
Asked what he needed to move ahead with the deal, Mr. Lewis responded that Bank of America wanted additional capital and protection against future losses on Merrill's assets -- something akin to the protection J.P. Morgan Chase & Co. received from the government when it agreed to take over Bear Stearns Cos. last March. Messrs. Paulson and Bernanke agreed to keep talking.
Over the next several days, government officials sifted through the books at Bank of America and Merrill, wrangling over which toxic assets to guarantee and how to value them, people close to the bank say. It became increasingly clear that Bank of America's balance sheet also was packed with assets that faced bruising write-downs, these people say.
Later, talks slowed because bank executives were concerned about the 8% interest rate the government wanted on new preferred shares it would take in Bank of America, these people say. Executives also complained that executive-compensation restrictions were being forced on it, despite government assurances that officials didn't want to punish the bank. The bank wound up agreeing to limit total compensation, including bonuses, to a fraction of the amounts awarded in recent years.
On Jan. 16, Bank of America announced the new bailout. At the same time, it disclosed Merrill's fourth-quarter net loss of $15.31 billion. Shareholders were floored. Bank of America reported a net quarterly loss of $1.79 billion.
Asked by an analyst about his decision to go ahead with the Merrill deal, Mr. Lewis responded: "We did think we were doing the right thing for the country."
