Blaming Bankers When Government Is Really at Fault

It is becoming clearer and clearer what it means to have government involved in the affairs of banks and businesses. All of the initial talk was about the “moral hazard” presented by government bailing out the private sector. This means that in the future banks and other financial organizations will take on more and more risk because they know that if things go bad, the government will be there with a rescue net to save them.

Now, we are seeing the other side of the bailout business. In the case of AIG, executives and others were angry because the government interfered with bonuses and other executive decisions. And, we have the government putting lids on executive pay. And, we have government wanting to rewrite mortgages, and cap interest rates on credit card debt, and so on and so on.

This is the other side of the coin.

And, now we learn from testimony given by Ken Lewis, the CEO of Bank of America (BAC), that Hank Paulson and Ben Bernanke put a “sock” in his mouth and strongly advised him that he say nothing to the shareholders or anybody else about the implications of the merger between Bank of America and Merrill Lynch.

Furthermore, we hear from New York Attorney General Andrew Cuomo that Paulson threatened to fire Lewis and remove the entire Board of Directors if Bank of America did not go through with the merger with Merrill Lynch! The reward—money from the Government to help BofA through the process.

The shareholders? Well, they lost on the value of their stock. And, they also will have higher taxes or an inflation tax that they will have to pay in the future.

In addition, why should any company, financial or non-financial, even think of making an acquisition in the future? The government may force the management to swallow hard, take on something that is not necessarily desirable for the company, and, of course, not inform investors as to the implications of the merger transaction.

And, why should the stockholders of any company approve any acquisition that is at all questionable? The precedent has been set that they might be approving something that will cost them considerable wealth as the stock of their company tanks, and they are given no information to give them any confidence that the transaction might be worthwhile.

What if the shareholders balk? What if they fail to approve such a merger? Will the government step in and force through the merger anyway?

Two thoughts come to mind.

First, the combination of Paulson and Bernanke was a disaster as far as I can see. I have written about how Bernanke seemed to panic last fall and the result was the TARP.

Paulson didn’t do much better in his handling of the crisis and the creation and oversight of the TARP. I always thought that Paulson found the whole bailout idea not to his taste and had hoped that he would be able to get out of Washington before the collapse. Unfortunately for him—and for us—he didn’t make it. As a consequence here was a man doing something that he despised, and his heart and mind were really not in it wholly. He has left us a very unhappy legacy!

The second thing has to do with the fact that the bankers, and other business leaders, are getting pelted with all the blame for the financial collapse and crisis that we have experienced. Thus we have the “bad guys” in our sights. Thus, they should pay.

But, what if the conditions that existed were created by the government and these bankers and other business leaders were just responding to the incentives initiated by the government? We had a credit bubble connected with the stock market in the 1990s. The credit bubble resulted in negative real rates of interest and consumers stopped saving. The saving rate fell from 7.7% of disposable income in 1992 to about 2.0% by the end of the decade. Then there was the huge deficits that resulted from the 2001 tax cuts and the “war on terror.” This was accompanied by negative real interest rate gains, which resulted in the credit bubble in the 2000s and the housing boom. The consumer savings rate remained around two or below, even becoming negative for a short period of time.

The foreign exchange market in the 2000s indicated fear of a renewal of inflation as the value of the dollar fell by more than 40% against major currencies. What were financial managers to do in such an environment? Generally, because spreads narrow in such times and arbitrage opportunities are based on smaller differences, you tend to leverage up and mismatch maturities. This response is a normal one to gain the needed returns on equity to keep money from leaving your fund or institution.

Is this greed? Yes, but it is also just the natural response of competitive people to the incentives that are created, in this case, by the government. The Bush 43 administration may have been composed of “Free Market Capitalists” but this “gang that couldn’t shoot straight” did more to harm capitalism than most other administrations in the history of the United States.

So, government gets it both ways. It can create the crisis. And, then it can impose itself on the economy to right the system after the crisis occurs. And, best of all, the blame can all be put on “greedy” bankers and the lack of regulation.

I am sure that before this is over we will hear many more horror stories.

Comments

[Glen L.:]

We are seeing what happens when government and its banking cartel (The FED) is allowed to macromanage monetary policy: sooner or later the policy fails, the way all socialistic policies fail (the macro economy being much too large and complex to manage at all), and private companies help ensure the failure by refusing to follow the script. Inevitably, rather than give up and let the free market repair the damage, they resort to micromanaging the affairs of private companies; threats, veiled or otherwise, are the usual steps when the unraveling process begins. Once the private sector is sufficiently cowed and obedient, the next steps are much easier.

Having seen that the ultimate socialist model (communism, which can only exist at all under totalitarianism) has utterly failed, our masters have settled on the compromise (fascism) that affords them maximum power, and have attempted to perpetuate their hold on power through the political device of democracy, which gives the taxpaying serfs the illusion that they can throw the bastards out if they get out of line. Of course, history shows us that never happens, and recent history should be driving that point home to the serfs who call themselves Democrats.

Of course, at some point the whole house of cards must collapse, as Hitler found out when his Thousand-Year Reich died after a mere decade. The US is fortunate that it enjoys military superiority that Hitler could only dream of, so it will not be destroyed by force of arms, plus an economy so vast that it will take much longer to collapse. Nevertheless, the fascist model is a proven loser, and fail it will. The only question worth considering now is what will rise from the ashes.

Apr 24 11:25 AM

[Dr. Liz:]

And let's not forget "Government Sachs". Paulsen pushed JPMorgan to pay only $1 for Bear Sterns. John Thain (former CEO of Merrill) once worked for Paulsen. Was Paulsen looking out for his friend in the BAC merger? Why hasn't anyone taken the Merrill board and Thain to task for their misrepresentation of ML's balance sheet, and their pre-emptive payment of bonuses prior to the merger?

Apr 24 11:30 AM

[Ishortyou:]

Well I think the fall of Lehman for a good moral hazzard phylosophy spoke for itself, if you think the fall of Lehman sent us to the middle ages, just wait till the rest of the financial sector follows the same phylosophy and rout...be ready to hunt for food like a caveman.

Apr 24 12:02 PM

[Lilguy:]

I have no doubt that the USG Administraton (both) is a large part of the fault for our present financial--and broader economic--situation, but the financial sector is equally at fault for all the hugely bad investment and risk assessment decisions it has been making for more than two decades.

Besides the Administrations and banks, you can throw in Congress, the regulators, highly leveraged consumer/homebuyers, and a few other cats and dogs as well.

We're all in it together and, by in large, we all contributed to the mess we are in, directly or indirectly. The question now is: What's the best way out of this horrific mess?

Apr 24 12:11 PM

[Ishortyou:]

Glen..Hitler's risky, overlevered and wreckless all out gambling bet on the Russian campaign was not any different than the all out risky, overlevered gambling bets of Wall Street, when the bet was a loss there was not much that it could have been done but go extinct. His controllling EGO and POLITICAL poisoned mind blind him to asses adequate risk/reward ratio to his favor, if the bet would have work though...just imaging how the world would have look like without an ex-Soviet Union, Russia's Putin, Cold War, Communist China, Vietnam, North Korea, Communist Cuba, Communist Latin America(Venezuela, Argentina), etc etc, it would have been probably better.

Apr 24 12:13 PM

[Pj568:]

I can't agree with any statement that diminishes the role played by the Bankers. Although bankers are trying to deflect their responsibility in this mess, the situation would not even exist if they had demonstrated any type of common sense in their desire to increase ROE though increased leverage and failure to understand the risk of their products and off balance sheet structures.

Apr 24 12:14 PM

[schlumpf:]

Great article,

but the market see it different. The bank stocks are going higher.
expl BAC yesterday + 7 % today + 6 %, and with stress test
+ ????? 30 % ?????
remember we have the month "better then expected". Be sure the FED buys banking stocks when the test will be published.

Apr 24 01:11 PM

[schlumpf:]

....... and the shorts have to cover

Apr 24 01:20 PM

[schlumpf:]

the guys from the goverment are from Goldman, they know to
handle the market.

Apr 24 01:26 PM

[Speedspirit:]

Part of an article written By Ellen Brown--
In 1974, the Basel Committee on Banking Supervision was created by the central bank Governors of the Group of Ten nations (now expanded to twenty). The BIS provides the twelve-member Secretariat for the Committee. The Committee, in turn, sets the rules for banking globally, including capital requirements and reserve controls. In a 2003 article titled “The Bank for International Settlements Calls for Global Currency,” Joan Veon wrote:
“The BIS is where all of the world’s central banks meet to analyze the global economy and determine what course of action they will take next to put more money in their pockets, since they control the amount of money in circulation and how much interest they are going to charge governments and banks for borrowing from them. . . .
“When you understand that the BIS pulls the strings of the world’s monetary system, you then understand that they have the ability to create a financial boom or bust in a country. However, it was not in the game plan that U.S. banks should escape the BIS net. When they managed to sidestep the first Basel Accord, a second set of rules was imposed known as Basel II. The new rules were established in 2004, but they were not levied on U.S. banks until November 2007, the month after the Dow passed 14,000 to reach its all-time high. It has been all downhill from there. Basel II had the same effect on U.S. banks that Basel I had on Japanese banks: they have been struggling ever since to survive.
Basel II requires banks to adjust the value of their marketable securities to the “market price” of the security, a rule called “mark to market.”9 The rule has theoretical merit, but the problem is timing: it was imposed ex post facto, after the banks already had the hard-to-market assets on their books.
Imposing the mark-to-market rule on U.S. banks caused an instant credit freeze, which proceeded to take down the economies not only of the U.S. but of countries worldwide. In early April 2009, the mark-to-market rule was finally softened by the U.S. Financial Accounting Standards Board (FASB); but critics said the modification did not go far enough, and it was done in response to pressure from politicians and bankers, not out of any fundamental change of heart or policies by the BIS.

And there you have it. THE BIS BANKING COMMITTEE IS TOO BLAME.

Apr 24 06:27 PM

[yellowhoard:]

Who are the principal shareholders of the BIS?

Apr 24 07:12 PM

[JayC:]

As someone who worked in Insurance Regulation in the 90's- the government does not know what the hell they are doing!!!

Apr 25 09:04 AM

[ArtfulDodger:]

This is the US government for you: it is forever sticking its snout in things, screwing them up, then blaming someone else.

The next thing: it grows its snout even longer, creates new legislation or regulation to cure the problem that it caused, and as soon as it goes bad, either hushes it up or blames someone else.

Apr 25 12:09 PM

[JK Corcoran:]

As the author stated, the bankers were responding to regulation creating new opportunity. "But, what if the conditions that existed were created by the government and these bankers and other business leaders were just responding to the incentives initiated by the government?" They took full advantage of the opportunity afforded by Clinton, Dodd and Frank forcing a huge increase in CRA loans down the throats of the banks. Bankers do not want to make bad loans, but when the government forces them to, don't blame the banks for trying to make a profit from a bad situation.


On Apr 24 12:14 PM Pj568 wrote:

> I can't agree with any statement that diminishes the role played
> by the Bankers. Although bankers are trying to deflect their responsibility
> in this mess, the situation would not even exist if they had demonstrated
> any type of common sense in their desire to increase ROE though increased
> leverage and failure to understand the risk of their products and
> off balance sheet structures.

Apr 25 12:15 PM

[Econ 101:]

Congress! Dont forget about congress! Pelosi, Frank, Dodd, Rangel and Reed are the leaders. Obama was the single largest campaign contribution receiver from Fanie Mae. These people (congress) are the bigggest criminal organization in the history of the world and we keep reelecting them.

Apr 26 12:58 AM

[ArtfulDodger:]

JK Corcoran & Econ 101:

You two are dead-on target. Excellent comments, the both!

Apr 26 02:39 AM

[flow5:]

Man are you crazy? The bankers are the government.

Apr 27 11:16 AM

[Freya:]

JayC: which State?

Where they still examining Books every 3 years?

Apr 25 11:38 AM

[Freya:]

Please consider, no matter how large a Majority owner's stake in a company, it must get Minority Shareholder approval on Material Changes.

There are Court Cases galore supporting Minority Shareholder rights, these rights are being abrogated.

I can't wait for the Government to be sued, Not as the Government but as the Majority Owner of a Public corporation.

Apr 25 03:17 AM

[Freya:]

I could have sworn this was very old News.

Didn't someone from the NYT or WSJ write an op-ed on the push the Gov. was giving to BofA before the shareholder vote? I could have sworn that BofA wanted to walk away but was told to continue. The Gov. then promptly injected $20 Billion to cover the whole losing transfer.

Be it as it may, If the national guard mobilizes and heads for the Border, it will be a sign that things are worse than being disclosed and lets you know why the IMF gave Mexico a $48 Billion line of credit last weekend.

The Swine flu appears to be a Pandemic on initial scrutiny. NovaVax, NVAX has a shorter term Tech. for bringing Vacines to market than its peers.

It looks like I"m going to Sam's tommorow to buy a bunch of flour, yeast, dehydrated milk, coffee and canned goods (I have a Breadmaker) on a just in case basis. Strictly for storage.

Apr 25 03:08 AM