Can’t believe I’m doing this….

As I’ve watched this story unfold the past few days it has progressed from tragedy, to comedy, to farce. For the SEC to come after Ken Lewis because the Bank of America CEO complied with the direct instructions of the US Treasury Secretary and the head of the Federal Reserve system would be lunacy.

You have to understand the midset of a banker — particularly that of Lewis during his run as head of BofA. Treasury and the Fed are the guidestars by which every banker steers his ship. If a federal regulator suggests changes to the color of the balloons in the lobby, a banker does not ask why, it just gets done. Same deal with loans, make more. OK. Done. And it has been this way for decades.

Then we have BofA, which for years before last fall’s financial meltdown cooperated closely with the Fed and federal regulators in expanding the availability of mortgage loans to “underserved” communities, for just one example. More pointedly, have we already forgotten Countrywide?

BofA took a $2b. stake in Countrywide in August 2007, months after federal regulators got a good look at the loosey-goosey bank’s books as Countrywide shifted to federal thrift status. By January 2008 Lewis was spending $4b. for a bank which ostensibly held $80b. in loans. Everyone understood what was going on: BofA was stepping in to help protect the feds, Fannie and Freddie especially, from exposure to Countrywide’s emerging toxic asset pool. Even Lewis admitted federal regulators had to be thrilled by the move, even though he steadfastly held the feds had not brokered the deal.

That official hands-off stance did not last.

Only nine-months later the feds were brokering bank deals left and right, matching up buyers and sellers, liquidators and the liquidated, often with only hours notice. In that environment Hank Paulson and Ben Bernanke tell Lewis they need him to buy Merrill and otherwise keep ML’s problems on the down-low.

What was Lewis supposed to do?

Yes, he was being essentially blackmailed by Paulson, Bernanke, and NY Fed chief Tim Geithner. So? That is the way America’s financial system had been run for two solid decades. Do what we say, and you won’t get hurt — and you probably get rich to boot. Push back, well, looks like East Podunk Community Bank needs a new SVP. Good luck with your new opportunity.

Look, the feds — long before the recent expansion in regulatory powers — had the power to seize and shut down or — in the case of Lehman Bros. — allow to fail multi-billion houses of finance. That cannot be ignored when trying to assess Lewis’ conduct.

More than anything Ken Lewis turns out to have been sadly naive when it came to protecting himself as events unfolded in the waning days of 2008. At a minimum he should have gotten a wavier, a statement, compact something, which addressed in writing SEC compliance. And he should have probably tossed in NY state disclosure and fraud law as well, knowing that Andrew Cuomo would tear the deal apart looking for scalps quite apart from the specifics or its merits.

Those failures are on Lewis’ head, now and forever. But to scream for that head on pike right now, as so many seem to be doing, misses the larger offense of nearly unchecked government power compelling Lewis to act against the interests of his company and shareholders.

I think a special prosecutor should be appointed and that Bernanke and Geithner should resign.