In this NY Times' piece written by Joe Nocera, the author speculates as to why Congress is making such a fuss over the developments that led to the Bank of America-Merrill Lynch merger. According to Nocera, two concerns lie at the heart of the matter.
Members of Congress are concerned that they were bullied and cowed by Wall Street and the Bush administration into giving trillions for an industry that is now reporting billions in taxpayer escorted profits. Making matters worse is that foreclosures and unemployment are on the rise, while the financial sector wants to continue playing by the old rules. Middle America is not happy.
Called to testify include Federal Reserve Chair Paul Bernanke, Bank of America CEO Ken Lewis, and former Goldman Sachs CEO and immediate past Treasury Secretary Hank Paulson.
What we have is one group that is embarrassed and upset that they were gamed, while the other see themselves as maligned and misunderstood saviors. As you can imagine, the perceptions of both groups are no recipe for shedding light on the bailout events under scrutiny. Still, as Nocera suggests, Congress sees a chance to grandstand over the Lords of the Bailout. I agree.
What makes the show constituent-worthy for Congress is that several members believe Bank of America's Ken Lewis either gamed the panic conditions of the times (in December) to get more money for merging BofA with a crippled Merrill Lynch. Others believe they see something else: Lewis extorted money from the government by threatening to pull out of the Merrill Lynch deal, which would have made the panic conditions of the times worse.
According to Nocera, it was at this time that Secretary Paulson and Chairman Bernanke decided to play hard ball with Lewis.
According to one account, Paulson and Bernanke probably reminded Lewis of the easy times his industry had enjoyed from the regulators, essentially telling him, ‘You haven’t had very good capital ratios, and we’ve looked the other way ... Now it is payback time. We’ve let you do deal after deal after deal. Now it’s time to take one on the chin.’ ” According to Nocera, Bernanke and Paulson probably also reminded Lewis that as regulators they could simply fire him.
Still, in spite of their tough guy bravado, to soften the blow of taking on more taxpayer bailout money, Bernanke and Paulson agreed to cough up an additional $20 billion (to be paid back at 8% interest) to placate Lewis.
According to Nocera, by accepting the extra money BofA has now accepted as much overall TARP money as Citigroup, which is the very symbol of a crippled bank. The end result is that the BofA-Merrill Show will do little more than allow members of Congress to say to their constituents, "See, look at me beat up on ___________."
Most troubling for me, though, is that the underlying problems still exist: A bailout culture that breeds incompetence, the same regulatory infrastructure that encouraged stupidity and greed, favorable legislation for a crippled industry, etc. I have no problems with Congress settling scores. But they also need to fix what got us into this mess. Niether the BofA-Merrill Show, nor the recently announced Financial Crisis Inquiry Commission, move us in this direction.
As I suggested in March, we may be setting ourselves up for an Extreme Do Over. Stay tuned.
- Mark
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