Contrary to the claims of current Treasury Secretary Timothy Geithner, Federal Reserve Chairman Benjamin Bernanke, former Treasury Secretary Henry Paulson, and so many economists, the fundamental reason that our economy is falling apart is NOT subprime mortgages, or insolvent banks. The problems are far deeper than that, because such things are only symptoms of the underlying disease.
History teaches us that economic depression and/or hyperinflations are NOT caused by banks or the money supply. Such events, whether they occured in ancient Rome, or the modern United States of America, are caused by a perception, by the People, that their leaders are lying, cheating, stealing, and cannot be trusted. The Great Depression of the 1930s, is a modern case in point. Contrary to the claims of Benjamin Bernanke, and most mainstram economists, it was NOT caused by a “credit contraction” or a “contraction in the money supply”. These were merely symptoms. It was caused by broken promises and lies.
In the late 19th and early 20th century, the U.S. government was sworn to its people, and to the world, to be following a pure gold standard. That is, the dollar was supposed to be "good as gold", and interchangeable at any American bank at a rate of a little over $20 per ounce. The government was supposed to be keeping a stockpile sufficient to redeem all proffered dollars, but it lied.
In the late 1920s, at the urging of Wall Street interests, far more Federal Reserve Notes (dollars) were printed up than there was gold to back them. This resulted in a huge temporary boom, much like the one we saw between 1987 and 2000. But, finally, it resulted in a serious recession in 1930-31, when the irrational investment that the boom had stimulated began to unwind.
By the early 1930s, so many people were demanding to convert dollars to gold, that there was a likelihood that the United States Treasury would run out of gold. When that became clear, the People lost faith in sanctity of the dollar, and the nation fell from a recession, that began to improve in 1930, to the biggest depression the world had ever seen, in 1931-1934.
Eventually, in 1933, President Franklin Roosevelt felt compelled to violate the Constitution and issue an infamous gold confiscation order, wherein the government robbed the people of their personally held gold.
The current "Credit Crisis" is another perfect example of how loss of confidence in government, not the money supply, is the root cause of all economic dislocation, including both depressions and hyperinflations. The Federal Reserve is now in the process of tripling its balance sheet. It has already expanded from about $900 billion to $2.2 trillion in merely 7 months.
Yet, all that money will do little or no good. It will spur irrational and inefficient investments, causing an irrational rise in the stock market to dizzying heights, sometime in the medium term future, but, in the long term, the nation will suffer greatly either by way of a severe deflationary depression, or, much more likely, a hyperinflation the likes of which the world has never seen before.
So far, in spite of the huge injection of cash by the Federal Reserve, because the irrational investment mentality has not yet taken hold, instead of hyperinflation, we are falling, deeper and deeper into economic depression. In the 1st quarter of 2009, the government reports that the nation’s gross domestic product (GDP) fell by 6.1%. Mortgage loan demand is deeply down. The Baltic Dry Index, which measures shipping prices, after a mild pop due to the increasing cost of avoiding the pirate infested horn of Africa, is falling again.
Yet, the Federal Reserve has made sure that bank loans are very available to anyone with a decent credit history. Even more, in their ill conceived fixation on increasing the money supply to increase demand, the Fed and U.S. Treasury have embarked on innovative new ways to inject cash into the system.Insolvent money center banks may be retreating a bit from making loans, but plenty of money is available, at some of the lowest rates in history, from a huge number of smaller banking institutions, including credit unions. Yet, our economy falling apart. Why?
The fundamental reason is that, just like in the 1930s, the People have lost respect for, and trust in the United States government. They have lost respect for the institutions that were previously icons of American prosperity. It is right and proper that this should be so. Neither this government nor those institutions have, so far, proven themselves worthy of any trust or respect.
Instead, our government has become increasingly corrupt. Our public servants can no longer be trusted. They act with a level of arbitrariness and capriciousness that is unparalleled in American history, with little understanding or, perhaps, concern for the profoundly negative effects of their misbehavior. They are lying to the People day by day. They think nothing of using the Fed's primary dealers to induce massive manipulations of both the stock and commodities markets. Indeed, as we will shortly discuss, in the process of coercing business leaders to their bidding, government officials have now gone so far as to promise market interventions that constitute high crimes under our sovereign laws, and define the nature of securities fraud. How can anyone respect people like that?
The Bank of America (NYSE:BAC) scandal brings all these issues sharply into focus. Thankfully, there are still honest voices ringing out, amidst this sea of corruption. The ambitious, but relatively honest, Attorney General of New York State, Andrew Cuomo, recently released a shocking report, outlining the results of an investigation into the merger of Bank of America and Merrill Lynch. The report reads like a thriller, describing a power mad Treasury Secretary, Henry Paulson, intent on manipulating the markets, as well as rewarding old friends and punishing new enemies. He seems to have worked in tandem with a pawn at the Federal Reserve, known as Chairman Benjamin Bernanke.
According to Cuomo’s findings, in mid-September, during negotiations designed to save Lehman Brothers from collapsing, Bank of America CEO Ken Lewis saw and took what he believed was a great opportunity for Bank of America.
Unfortunately, however, he appears to have been given a set of fanciful loss numbers, prior to considering the deal. The deal was “signed, sealed, and delivered”, subject to the usual “material changes in condition” (MAC) caveat. In all such deals, the law provides an escape valve if the facts that were presented at the time of the agreement materially change later on. This MAC would normally allow Bank of America to withdraw, if, for example, Merrill Lynch’s financial condition changed significantly between the time the deal was struck and the time of acquisition.
Somewhat later, it became clear that Merrill Lynch had not fully and honestly disclosed the full extent of its losses from toxic debt paper. Billions of additional dollars worth of losses were revealed. There was serious risk to the financial stability of Bank of America, itself. Bank of America’s board of directors instructed Lewis to exercise the MAC caveat. This would kill the deal.
When former Treasury Secretary Henry Paulson heard about it, he became angry. How dare a bank, based in obscure Charlotte, North Carolina, challenge the closure of an important deal he had worked so hard to put together?! The deal was set to benefit a lot of his old friends in the New York financial community, and that trumped any consideration of the danger to America’s then-largest bank.
Paulson had been Chairman and CEO at the large politically connected New York investment house, Goldman Sachs (NYSE:GS), from 1998 until 2006. He left only to take the job as George W. Bush’s Treasury Secretary. John Thain, who was now CEO of Merrill Lynch, had been a close political ally of Paulson, during their time, together, at Goldman Sachs. He had became Chief Operating Officer of the company in 1999, and had only left the company, to take the reins of power at the New York Stock Exchange, and, later, at Merrill Lynch, after being edged out in the competition to become CEO of Goldman Sachs, by Lloyd Blankfein. Mr. Thain’s business reputation, and by extension, the reputation within the New York financial community, of Henry Paulson, himself, may have been dependent upon avoiding the bankruptcy of Merrill Lynch by merging it with Bank of America.
One can also assume, with a reasonable amount of confidence that, Merrill Lynch was a key cog in Goldman Sachs’ intricate web of counter party obligations. If Merrill Lynch were to fall, Goldman Sachs would certainly incur big losses. The credit default swap books of the various companies involved are not open for inspection.
However, it is reasonable to assume that Goldman Sachs is probably the beneficiary of tens of billions of dollars worth of deals that depend on the financial solvency of Merrill Lynch. If Merrill topples, so do those deals.
In light of all this, Mr. Paulson appears to have sought out the aid of Fed Chairman Ben Bernanke, and both men decided to put the screws onto North Carolina based Bank of America. The Federal Reserve is a designated regulatory authority, with the power to dismiss bank executives and boards of directors for good cause shown. Working with Bernanke, Paulson threatened to take government action to dismiss Lewis and the entire Bank of America Board of Directors if they killed the Merrill Lynch deal.
In contrast, if Lewis would just play footsie, according to Mr. Bernanke, the Federal Reserve would “do something that when the public hears about it your stock goes up.”
Obviously, manipulating the stock market, and dismissing management in retaliation for protecting company shareholders, is not what Congress envisioned when it passed the Federal Reserve Act into law so many year ago. Threatening a private corporation, and/or making promises to influence the market if the head of that corporation does as he is told, is not only bad faith, but, also, a violation of all legal and ethical standards that must underlie official actions by America’s public servants. Such misbehavior shows contempt for the rule of law, and places the entire financial system, and, yes, our Republic, itself, into jeopardy.
Frightened, and promised special favors if he kept to the deal, Ken Lewis and his Board backed down. Merrill Lynch was acquired, in spite of serious implications to the solvency of Bank of America, and the investments of millions of its shareholders.
According to Lewis’ testimony, not only did Paulson and Bernanke threaten him and promise special favors, but they also sent a secondary message. The whole affair should be kept “hush hush”. Shareholders and the public were to be kept in the dark. The matter should be kept confidential. There shouldn’t be any publicity about the probability of huge losses at Merrill Lynch.
While spokesmen for the Federal Reserve deny that Bernanke pressured Lewis to stay silent, according to Cuomo’s office, when they interviewed him, separately, former Treasury Secretary Henry Paulson confirmed the facts as they were described. Apparently, Paulson, and his sidekick, Bernanke, had very specific ideas about where and how high the stock market would be manipulated, and they didn’t want the market to fall at the time these events were occurring.
We could speculate that, perhaps, any negative information was to be kept from public investors until AFTER traders at Goldman Sachs had been given an opportunity to establish extensive short positions. Later, when the Fed did that special “something” to raise the share price of Bank of America, things would be very different. That would help pump up the market. Given Paulson’s close connections to Goldman Sachs, common sense tells us that their trading, during this time period, should be carefully investigated.
At any rate, once the acquisition was finalized, and the truth came out, Bank of America’s stock sank like a stone, under the weight of heavy losses. A short time later, the government announced unprecedented measures to stabilize the now tottering BAC, which had previously been one of the more stable of America’s banking institutions. In the end, tens of billions of dollars of additional taxpayer money were injected into the company, in order to bail it out from the burden of the acquisition.
Bank of America President Ken Lewis and his Board of Directors should have stood up against the illegal threats of Paulson and Bernanke. The fact that they didn’t proves that they are weaklings. They are all unfit to run one of the most important banking institutions in our nation. They violated their fiduciary duty to the company, and looked after their personal interests, rather than those of the shareholders. All must now be dismissed.
But, more important is what to do about the corrupt men who created the scandal, Henry Paulson and Benjamin Bernanke? Shall we allow such men to retain high positions of authority in our society, and/or to retain their assets, while Bank of America shareholders, and other market investors, lost so much money at their hands? Shall we empower men like this, who act irresponsibly to destroy our institutions and our way of life? Under 18 USC § 241:
If two or more persons conspire to injure, oppress, threaten, or intimidate any person in any State, Territory, Commonwealth, Possession, or District in the free exercise or enjoyment of any right or privilege secured to him by the Constitution or laws of the United States… They shall be fined under this title or imprisoned not more than ten years, or both…
The Fourth Amendment of the U.S. Constitution created rights that are supposed to protect Americans against unreasonable seizure of their property. By forcing Bank of America to acquire Merrill Lynch, using unfair threat and coercion, Paulson and Bernanke acted under “color of law”, and used their positions in the Federal government, to illegally seize property belonging to Bank of America shareholders. They both took actions that are far beyond the scope of permissible conduct under the responsibilities of their respective offices. It is axiomatic that, in America, private corporations must be administered according to the free determinations of a freely elected Board of Directors and executive officers, responsible to their shareholders.
In the absence of a Congressional declaration of War, and a specific delegation of power from Congress for the purpose of raising armies or other means of defending the nation, neither man had any right to make such threats against a private corporation. As a result of the misconduct of Paulson and Bernanke, severe financial loss has been suffered by millions of Bank of America shareholders.
Aside from Constitutional issues, securities fraud, itself, can result either civil or criminal prosecution, or both. To state a cause for action, under section 10(b) of the Securities & Exchange Act, and Rule 10b-5 of the Regulations, one must show that
the defendant (i) made a misstatement or an omission of a material fact; (ii) with knowledge that they were doing so; (iii) in connection with the purchase or the sale of a security; (iv) the plaintiff must have reasonably relied on the representation; and (v) the plaintiff's reliance was the proximate cause of the loss.
Omission and nondisclosure of material information is, in fact, what gives rise to most securities fraud cases. Persons who make “a material misstatement (or omission)…
can be potentially prosecuted criminally under Rule 10b-5, and money damages can also be obtained. A misrepresentation is any act or omission that conveys a false impression of the facts or is misleading.[i] This is determined by inquiring "into the meaning of the statement to the reasonable investor and its relationship to the truth.
Threatening and coercing a corporation’s management and directors into withholding material information, concerning an acquisition that is reasonably likely to devastate the company’s balance sheets, permanently or transiently, fulfill these legal requirements. There are numerous other potential causes of action, including RICO liability, and state blue sky acts.
Members of the executive branch of government, below the Presidential level, are entitled to “qualified immunity”, meaning that they are not immune to all prosecutions for criminal and/or civil damages arising out of illegal actions taken while in office. The level of liability depends “upon the scope of discretion and responsibilities of the office and all the circumstances as they reasonably appeared at the time of the action on which liability is sought to be based.”[ii] The question must be determined on a case by case basis.
Although the Federal Reserve is a private bank, it is chartered by the Federal government to set interest rates, and electronically “print” money by buying and selling Treasury debt paper, and its Chairman inherits some level of partial immunity from that charter. In any event, the question of whether or not Paulson and/or Bernanke are liable is one for a jury to decide, not for us. If Lewis' allegations prove correct, however, there is no question, whatsoever, that both men must be permanently barred from any involvement with government decision making.
This incident is a wake-up call for Americans. If we are to provide a future for our children and our children's children, we must stand firm, now, for we are now at the brink of a dangerous precipice. A deep chasm lies ahead. At the bottom there is only tyranny and the death of our Republic. We are unbalanced, and in danger of falling. Yet, we must hold fast. We must not falter. We must move forward, not backward, and we must away from the cliff. We cannot afford to stumble, for to stumble, will be to fall, and to fall, will be to die.
We did not arrive at this precipice alone, or of our own accord. Chasing us there were the dark forces of greed and materialistic desire. From these forces, up until now, we have always run. And, the corruption of our society has increased with time. Now, we can no longer escape from those unscrupulous men who have seized the reins of power. These are men who hate liberty, truth and justice. For their deeds imperil our livelihood, the level of our honor in world affairs, and, most importantly, our liberties and the future of our children.
What shall we do? Shall we continue to flee, though one more step will mean certain death of all we hold dear? As Americans of good conscience, we cannot accept the death of our precious Republic, as the citizens of Rome once did. Ours is a unique experiment in human liberty and was, until recently, a shining beacon of light to the rest of the world. It is worth preserving. It is worth fighting for.
Pummeled we may be. On the precipice, we may stand. Yet, in spite of it all, we can still stand proud, for we are still a great nation. We have our forefathers to thank for that. Our body politic has been strong enough to keep the cancer constrained, at least so far. Not all our institutions have been completely corrupted, at least not yet. A few avaricious men are destroying our ideals, our hopes and our dreams for a better America. They are a festering cancer, a force which has brought us to this precipice -- to the brink of disaster. We cannot hesitate. Cancer of the body politic grows quickly. It must be cut out, forthwith, lest it turn so malignant and widespread that no amount of surgery can possibly cure it, without killing the patient. Those who abuse power must be removed from office and punished.
Rather than expecting state prosecutors, and/or private parties, to take on powerful federal officials, it would be better for Congress to supplement their abilities, with a Special Prosecutor, invested with such powers as are needed to bring this important matter to a close. The Special Prosecutor should be a person who has no connections to the securities industry and, therefore, no conflicts of interest. Strong legislation must also be passed to insure that all the activities, especially all funds transfers, undertaken by the U.S. Treasury and Federal Reserve, are completely opened to public inspection. Evil can only grow in the darkness, and we must begin to shed a lot of light on this subject. The Special Prosecutor should also make a full inquiry into the trading practices of Goldman Sachs.
Disclosure: No positions in Bank of America or Goldman Sachs.