TARP Watch: Riskier, Less Transparent and More Corrupt

In addition to the increasingly centralized control of the American economy over the past 7 months, the other troubling aspect of the Paulson-Geithner TARP era has been the lack of transparency.

Of course, the two go together: bureaucrats run the economy but don’t want people looking over their shoulders. Shareholders can vote out a CEO but no member of society (other than the president) can vote out a Treasury Secretary or Fed chairman.

Since January, we have been hearing how Paulson pressured BofA (BAC) to bail out Merrill Lynch, despite the latter’s desperate straits. Under pressure, BofA bought Merrill, destroying more than $100 billion of shareholder equity.

An unsigned editorial entitled “Busting Bank of America” in the WSJ yesterday morning summarizes the sordid saga. It begins:

The cavalier use of brute government force has become routine, but the emerging 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.

In the name of containing "systemic risk," our regulators spread it. In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated Bank of America that bank executives everywhere have concluded that neither Treasury nor the Federal Reserve can be trusted.The two men used the coercive power of government to force private shareholders (I among them) to involuntarily assume a huge risk.

Evaluating the policy of Messrs. Bernanke and Paulson on their own terms, this transaction fundamentally increased systemic risk. In order to save a Wall Street brokerage, the feds spread the risk to one of the country's largest deposit-taking banks. If they were convinced that Merrill had to be saved, then they should have made the public case for it. And the first obligation of due diligence is to 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 who ensure those deposits. And then they had to bail out BofA too.This has undermined investor confidence:

Messrs. Bernanke and Paulson also undermined the transparency that is a vital source of investor confidence. Disclosure is not a luxury to be enjoyed only when markets are rising. It is the foundation of the American regulatory system and a reason investors have long sought to keep their money within U.S. borders. Could either man have believed that their actions wouldn't eventually come to light, with all of the repercussions for their bank rescue plans?

It wasn’t just that they kept BofA shareholders and the public in the dark. The two men also misled the chairman of the SEC. For about three weeks, they also kept Merrill’s problems a secret from the Financial Stability Oversight Board, the government agency nominally in charge of the bailout program.

The WSJ editorialists conclude:

The political class has spent the last few months blaming bankers for everything that has gone wrong in the financial system, and no doubt many banks have earned public scorn. But 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.

Some might say this is just the aberration of a few individuals. However, history shows that hubris and secrecy is an inherent risk of any centralization of government power. In its commentary on Lord Acton’s famous maxim, the New Dictionary of Cultural Literacy offers this dry summary: “An observation that a person’s sense of morality lessens as his or her power increases.”

Comments

[floridauser:]

Ken Lewis's job was on the line, not his life. He could have backed out of the deal or demanded better terms, saving the shareholders. Inspite of its implied threat, in the end, the Fed would have still backed BofA. Like ML, it was also too big to fail.

Apr 29 01:45 AM

[Zyx007:]

Completely agree. "I am from the government, and I am here to help you" - has always been delusional and misguided at best, and a complete disaster at worst. A panicking Fed Chairman and Treasury Secretary (incidentally the very same weekend they decided to let Lehman fail) have added very significantly to the current financial crisis.

Apr 29 02:12 AM

[huskerbob:]

So what member of our government is to be held responsible? Looking back through the long history of government blundering, the answer will be: no one.
Whatever. I doubt Treasury's negotiations with GS were too stressful.

Apr 29 04:42 AM

[Allan Frain:]

"It wasn’t just that they kept BofA shareholders and the public in the dark. The two men also misled the chairman of the SEC."

It is easy to see the failure of the SEC in the Madoff ponzi.

Meanwhile, the Banks, the Fed, and The Treasury have become so incestuous that together they represent an entity that the SEC does not have a prayer of controlling.

The Bank/Government coalition codified in the Federal Reserve Act was positively reinforcing for nearly 100 years. The tide turned very quickly and the infighting, recently begun, will worsten. The extent of damage to the Dollar and American Sovereignty is yet to be seen.

Apr 29 01:36 PM

[Moon Kil Woong:]

TARP, shut it down. Unrestrained, unaccountable, and untransparent government is by nature corrupt.

Apr 29 01:39 PM

[Hot Richard:]

No, no, no. You got it all wrong. I want more money sent thru TARP to more entities and even less transparency. Triple whatever is currently sent thru TARP to triple the goodness. Then we change leaders and do it all over again but with the other side in charge.

Embrace it! Breathe deeply as you would a sexy perfume.

Apr 29 02:18 PM