Economic Outlook: The bold and reckless

If the United States needed a financial soap opera -- a dubious premise, perhaps -- the purchase of Merrill Lynch by Bank of America is shaping up as a doozy.

Investigators from the corridors of Congress, New York State and the Securities and Exchange Commission are probing the deal with fine-toothed combs, trying to figure out if bank executives withheld details of Merrill Lynch's losses from shareholders before they voted to approve the purchase Dec. 5.

That seems simple enough -- perhaps a bit bland. To spice it up, executives at both operations allegedly struck a secret deal to pay Merrill Lynch employees billions of dollars in bonuses after the deal closed, despite the losses and billions more in taxpayer funds the banks were using to stay afloat.

Still, it's not a soap opera yet. So far, it's just suspicious, potentially unlawful behavior. Soap operas require, if you will, more counter-punching purpose than that. And this one doesn't disappoint.

It starts with Bank of America Chief Executive Officer Kenneth Lewis's claim that former U.S. Treasury Secretary Henry Paulson Jr. and other top officials threatened to remove bank executives from their jobs if Bank of America backed out of the deal, which Lewis threatened to do under an "material adverse clause" after the shareholders' vote, The Washington Post reported Wednesday.

But documents handed over by the bank Friday reveal that Bank of America's attorney's at Wachtell, Lipton, Rosen & Katz advised the bank that backing out of the purchase was a perilous proposal, which has led to a darker theory, namely that Lewis was using the threat to abandon the deal to scare the Treasury into providing more financial aid. Billions more after-the-fact taxpayer dollars showed up at Bank of America's door later in January.

This sullied scenario, however, has more back story than most soap operas provide. It doesn't take place in Nameless Suburbia; it takes place in the midst of a financial unwinding that caught many a three-piece suit by surprise in Washington and on Wall Street. This is what happens when "Fear Factor" meets "Days of Our Lives."

For the "stay-tuned" hook, House Oversight and government Reform Committee Chairman Edolphus Towns, D-N.Y., postponed a hearing scheduled for Thursday to conduct more interviews, the Post reported.

Investors digested housing news Tuesday, as the Commerce Department reported housing starts rose just 0.5 percent in September, a disappointment that helped turn stocks flat after a strong run-up Monday.

Behind the lukewarm number, investors are concerned about the expiration of an $8,000 tax credit for first-time home buyers scheduled to wind down at the end of next month.

"The expiration of the tax credit has the potential to prolong the pain," Robert Denk, assistant vice president for forecasting and analysis at the National Association of Home Builders, told the Post.

Housing and Urban Development Secretary Shaun Donovan, however, has said the White House is undecided on whether or not to support an extension of the tax break. Allowing it to expire would not be "catastrophic," Donovan told a Senate committee Tuesday.

In market movement Wednesday, the Nikkei 225 index in Japan fell 0.03 percent, while the Shanghai composite in China lost 0.45 percent. The Sensex average in India dropped 1.24 percent, while the Hang Seng index in Hong Kong shed 0.3 percent.

The S&P/ASX in Australia slid 0.16 percent.

In midday trading in Europe, the FTSE 100 in Britain and the DAX 30 in Germany both dropped 0.74 percent. The CAC 40 in France fell 1.07 percent while the pan-European DJ Stoxx 50 lost 0.39 percent.