Monday, April 27, 2009

The blind rolling the blind, with the force of government

Busting Bank of America
A case study in how to spread systemic financial risk. * APRIL 27, 2009
The cavalier use of brute government force... story of how Hank Paulson and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It's a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse.
... they all but ordered him to deceive his own shareholders. And ...they have so mistreated Bank of America that bank executives everywhere have concluded that neither Treasury nor the Federal Reserve can be trusted...in December Mr. Paulson threatened him not to cancel a deal to buy Merrill Lynch. BofA had discovered billions of dollars in undisclosed Merrill losses, and Mr. Lewis was considering invoking his rights...to kill the merger. But Washington decided...BofA had to risk its own solvency to save it. ...Paulson, who says he was acting at the direction of Federal Reserve Chairman Bernanke, told Mr. Lewis that the feds would fire him and his board if they didn't complete the deal.****Since when does Treasury work for the Federal Reserve System? ***... the government would provide cash from the Troubled Asset Relief Program (TARP) to help BofA swallow Merrill. But... Paulson and Bernanke rejected Mr. Lewis's request to get their commitment in writing."We do not want a disclosable event," ...Mr. Paulson told him. "We do not want a public disclosure." ... Lewis executed the Paulson-Bernanke order without informing his shareholders...merger closed on January 1. ...wait weeks to learn that the government had invested another $20 billion plus loan portfolio insurance in BofA, and that Merrill had lost a staggering $15 billion in the last three months of 2008....second time in three months that Washington had forced Bank of America to take federal money....But it is the Merrill deal ...transaction fundamentally increased systemic risk.... feds spread the risk to one of the country's largest deposit-taking banks.... should have made the public case for it....make sure that their Merrill "rescuer" of choice -- BofA -- had the capacity to bear the losses. Instead they transplanted the Merrill risk to BofA shareholders, the bank's depositors and the taxpayers... And then they had to bail out BofA too....also undermined the transparency that is a vital source of investor confidence. Disclosure ...is the foundation of the American regulatory system and a reason investors have long sought to keep their money within U.S. borders....Mr. Paulson ...also kept former SEC Chairman Christopher Cox out of the loop while forcing BofA to rescue Merrill. Mr. Cox wasn't the only one.... Minutes of the meeting show no mention of BofA or Merrill....Let's hope they treated their government colleagues better than they've treated Ken Lewis, whom they hung out to dry.... no banker in his right mind trusts the Fed or Treasury, and no wonder nobody but Pimco and other Treasury favorites i... Washington has been complicit every step of the way, from the Fed's easy money to the nurturing of Fannie Mae and Freddie Mac, and since last autumn with regulatory and Congressional panic that is making financial repair that much harder. The men who nearly ruined Bank of America have some explaining to do.

No comments:

Post a Comment