Tuesday, April 28, 2009

TARP: 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 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 this 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 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.”

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