The spectacle of Ben Bernanke and Henry Paulson running roughshod over Kenneth Lewis and his minions at the Bank of America (BofA) raises a pivotal question for all Americans: Is the US a nation of laws, or a nation of banks?
Let’s start by examining the facts disclosed last week in a letter by New York Attorney General Andrew Cuomo, while taking pains to present the actions of each player in this drama in the fairest possible light.
Both Bernanke and Paulson, in mid-December, knew BofA was obliged by statute to publicly disclose the huge losses Merrill Lynch & Co had racked up that month. You don’t get to be chairman of the Federal Reserve or, in Paulson’s case, secretary of the Treasury or head of Goldman Sachs Group without learning this basic tenet of US securities laws. Instead of making sure the public was fully informed of the losses before BofA completed its purchase of Merrill on January 1, they did all they could to keep it secret.
Neither Bernanke nor Paulson told the Securities and Exchange Commission, according to the letter Cuomo wrote to lawmakers and regulators. They didn’t tell Lewis or anyone else at BofA to do the right thing and obey the law. And while they promised BofA lots of money to keep it from calling off the deal, they were careful not to commit any of their agreements to writing for fear this would bind the government into disclosing them itself.
Market dupes
It didn’t matter that investors were buying and selling billions of the banks’ shares without a clue that Merrill had lost more than $12 billion during the fourth quarter. Bernanke and Paulson had a singular objective — to get the Merrill deal done, on time — even if that meant duping the stock market and threatening to fire Lewis as chief executive officer.
The best that can be said about Bernanke and Paulson is that they believed the ends justified the means, and that preventing system-wide harm to the world’s financial markets took priority over strict adherence to the law. And yet, if you think they didn’t breach the public’s trust, ask yourself this:
Knowing what we know now, how could you ever trust anything Bernanke says again?
What about Paulson’s successor as Treasury secretary, Timothy Geithner, who at the time was still the president of the Federal Reserve Bank of New York? How could he have been out of the loop? Or was he playing the quiet role of boy wonder?
As for Lewis and the rest of BofA’s board, it’s a foregone conclusion that their word is now mud. The more honorable and legally appropriate path for them would have been to resign rather than participate in the cover-up.
Zip it, Ken
During his February 26 sworn deposition, Lewis told lawyers for Cuomo’s office that “it wasn’t up to me,” to decide whether to disclose Merrill’s losses or BofA’s deal with the government. He said his decision not to disclose the information was based on direction from Paulson and Bernanke: “I was instructed that ‘We do not want a public disclosure.’”
Even if Lewis’s account of what they said is true, though, it WAS up to him to make full disclosure. And it was up to a lot of other BofA officers and directors who failed in their duties, too. That doesn’t get Paulson and Bernanke off the hook. If they had wanted BofA to follow the law, they would have left no room for ambiguity.
All this puts the SEC and the rest of the government in a horrible spot. It is a matter of public record that the law wasn’t followed, thanks to Cuomo’s disclosures last week. And yet the agencies and policy makers responsible for enforcing the law are probably powerless to do anything about it.
It would be nice to think that SEC Chairman Mary Schapiro might call for a sincere, thorough investigation. But there’s nothing in her professional background that suggests she has the spine or the nerve to take on a major financial institution, much less a former Treasury secretary or the sitting Fed chairman.
We probably won’t get any searching inquiries out of the banking industry’s elected overseers in Congress. Senate Banking Committee Chairman Christopher Dodd took VIP loans from Countrywide Financial Corp, now a subsidiary of BofA. His counterpart in the House, Barney Frank, declared last July that Fannie Mae and Freddie Mac were “not in danger of going under,” about two months before they did.
That leaves you and me, the American public, with the uncomfortable realisation that we are slipping toward a state of lawlessness in this country, all in the name of saving our financial system by creating even bigger banks out of combinations of banks that were dangerously big already. This doesn’t inspire confidence. It destroys it.
(Jonathan Weil is a Bloomberg News columnist.)
