Pigs, Pokes and Bank of America

In a story a little while ago, I speculated that the only way to explain Bank of America chief Ken Lewis's obsession with buying companies--Countrywide and Merrill Lynch--with potentially near liabilities could only be explained by Lewis's certainty that if anything went wrong, the government would bail him out. Mea culpa. The truth is, nothing can explain it. Yes, the government is bailing out Bank of America. But that doesn't mean Lewis won't be out of a job.

This seems like a good time to review the old saw about buying pigs in pokes. The issue with those unseen pigs is what you can think of as a problem of asymmetric information. The problem is not only that buyer of the pig in a poke doesn't know what's in the bag. It's that the seller does know, so the trade gets executed in a way that's guaranteed to be advantageous to the seller and disadvantageous to the buyer. The buyer can't just take his chances and hope for the best, because the seller has all the information necessary to mislead him. It turns out that the basic rule about farm animals in sacks applies very well to investment banks with enormous liabilities. It's not just that Lewis didn't know just how big Merrill Lynch's liabilities could be--it's that Merrill's John Thain did. Now Thain is out of a job, but he never wanted to work for Lewis anyway. Whatever is left on Wall Street will have a place for him. For Lewis, however, the only open spot seems to be in the Megalomaniac Hall of Fame.