The biggest systemic risk to the United States is a bunch of government officials—for example, the current and former Treasury secretaries and the chairman of the Federal Reserve—deciding that a coverup is needed to protect financial institutions from “systemic risk.” And we are going to discover that some of the country’s top officials—particularly in the Bush administration—deemed that hiding information or lying about the true state of the financial system was more important than encouraging companies to adhere to laws protecting investors. Those laws require disclosure of significant financial events—such as a proposal to buy a pig in a poke—to shareholders.
Why would Paulson cut the SEC out of the loop unless he did not want to have the issue raised of just when was Bank of America going to disclose that its losses would be massive?
As more and more facts and assertions emerge from the steaming pile created by former Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke during the formation of the Troubled Assets Relief Program, or TARP, it becomes clearer and clearer that the two viewed public disclosure of financial problems as poison.
This is apparent from documents sent to Congress Thursday by New York Attorney General Andrew Cuomo, who dug up some startling revelations in his investigation of Merrill Lynch bonuses paid out soon after Bank of America acquired the fabled Wall Street brokerage.
Based on the now-public documents and testimony of Bank of America CEO Kenneth Lewis, Thursday’s Page One headline of The Wall Street Journal screamed: “ Lewis Testifies U.S. Urged Silence on Deal.” The subhead continued: “Bank of America Chief says Bernanke, Paulson barred disclosure of Merrill Woes Because of Fears for Financial System.”
Boiling it down, here’s what apparently happened. After agreeing on the fateful day of Sept. 15, 2008, to take over Merrill Lynch, the Bank of America chief executive began having second thoughts about what a huge turkey he was buying as Merrill Lynch’s assets deteriorated significantly and rapidly in mid-December.
On December 14, Lewis expressed his concerns to then-Treasury Secretary Paulson—and signaled BofA was considering invoking the bank’s legal right to categorize Merrill’s undisclosed and staggering losses as a “material adverse change” sufficient to void the merger agreement.
On page five of the letter to the Senate, House, and Securities & Exchange Commission, Cuomo says: “Notably, during Bank of America’s important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities & Exchange Commission, appears to have been kept in the dark. Indeed, Secretary Paulson informed this office that he did not keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.”
Why would Secretary Paulson cut the SEC out of the loop unless he did not want to have the issue raised of just when was Bank of America going to disclose that its losses would be massive?
According the testimony Ken Lewis gave on February 27, 2009, to Cuomo deputy Eric Corngold, Paulson—at Bernanke’s request—essentially bullied BofA to consummate the deal and shut up. Lewis says Paulson told him the alternative was to be fired, along with his board of directors. So the feds sweetened the deal by tens of billions of dollars as Paulson told BofA to swallow Merrill Lynch for the good of the country and the detriment of the BofA shareholders.
Paulson exudes the dominant air of moral authority attendant to a Harvard Business School graduate and former chairman and CEO of Goldman Sachs. He leaned hard on Mississippi-born Lewis, a Georgia State graduate who rose through the ranks of North Carolina banking to become chairman, CEO and president of BofA. Lewis might have bucked up better by remembering that Paulson worked in the Nixon White House for John Ehrlichman in 1972 and 1973 as the Watergate scandal unfolded.
Lewis, now 62, may style himself a great patriot for succumbing to what was no doubt immense pressure from Paulson. Still, Lewis has little to be proud of in the handling of the Merrill deal. He should have disclosed what was going on at Merrill Lynch. He needed to be willing to walk away and tell Paulson that he would go public with the government threats being made against him and his board. He did not do that.
These days, Lewis defends his deals for Countrywide and Merrill Lynch, saying that two or three years from now they will look like steals. Maybe, but I doubt that he will still be around at BofA to pat himself on the back.
Even if his board backs him, and hesitates to bounce him immediately, the best he can hope for is a decent interval to negotiate a delicate exit. He probably will get through the company’s annual meeting next week. Then, with his credibility damaged and his judgment challenged, he will have to be replaced.
The bigger question then will be what other companies did Paulson et al threaten? Which companies did Paulson force to remain silent about toxic deals?Which executives were told to shut up, take the government money and a toxic deal for the good of the country, if not the shareholders? Which companies—for better or worse—tried to stand up and got destroyed instead?
For instance, on September 15, 2008, after Lehman Brothers collapsed, the government swung into action with an $80 billion bailout of AIG. Now we need to ask: Did Treasury Secretary Timothy Geithner, then-head of the New York Federal Reserve, Paulson, and Bernanke know that the AIG deal was grossly underestimated from day one? Did they deliberately conceal the real damage and hope $80 billion would fly? Was that number picked because in the short run it would be politically defensible and maybe enough to soothe the roiled markets? We need to know the truth.
Allan Dodds Frank is a business investigative correspondent who specializes in white-collar crime.