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Did Big Ben Bernanke and Heavy Hank Paulson Break The Law in Buying Ken Lewis’ Silence?

Posted by Larry Doyle on April 28, 2009 12:15 PM |

The intrigue involved in Bank of America’s takeover of Merrill Lynch goes well beyond standard Wall Street negotiations. Did Fed chair Ben Bernanke and then Treasury Secretary Hank Paulson break the law in the process of pressuring BofA CEO Ken Lewis to complete this bank merger? Bloomberg’s Jonathan Weil has easily distinguished himself amongst all journalists in aggressively addressing this topic. Weil pulls no punches in writing One Nation, Under Banks With Justice For No One.

Lewis, as CEO of Bank of America, possessed material non-public information about Merrill Lynch and was obligated by law to release that information to his shareholders. Lewis unequivocally maintains Bernanke and Paulson pressured him not to release that information which would have potentially derailed the merger. Why didn’t Lewis get Bernanke’s and Paulson’s position in writing? Did Lewis ask for it in writing?  Did Paulson and Bernanke knowingly avoid  a legal quagmire by not contractually committing in writing to increased government support for Lewis’ acquiescence?

Weil provides a clear expose of this situation. I commend him! He writes:

The spectacle of Ben Bernanke and Henry Paulson running roughshod over Kenneth Lewis and his minions at Bank of America Corp. raises a pivotal question for all Americans: Is the U.S. a nation of laws, or a nation of banks?

Let’s start by examining the facts disclosed last week in a letter by New York Attorney General Andrew Cuomo while taking pains to present the actions of each player in this drama in the fairest possible light.

Both Bernanke and Paulson in mid-December knew Bank of America was obliged by statute to publicly disclose the huge losses Merrill Lynch & Co. had racked up that month. You don’t get to be chairman of the Federal Reserve or, in Paulson’s case, secretary of the Treasury or head of Goldman Sachs Group Inc. without learning this basic tenet of U.S. securities laws. Instead of making sure the public was fully informed of the losses before Bank of America completed its purchase of Merrill on Jan. 1, they did all they could to keep the secret safe.

Neither Bernanke nor Paulson told the Securities and Exchange Commission, according to the letter Cuomo wrote to lawmakers and regulators. They didn’t tell Lewis or anyone else at Bank of America to do the right thing and obey the law. And while they promised Bank of America lots of money to keep it from calling off the deal, they were careful not to commit any of their agreements to writing for fear this would bind the government into disclosing them itself.

Market Dupes

It didn’t matter that investors were buying and selling billions of the banks’ shares without a clue that Merrill had lost more than $12 billion during the fourth quarter. Bernanke and Paulson had a singular objective — to get the Merrill deal done, on time — even if that meant duping the stock market and threatening to fire Lewis as chief executive officer, along with the company’s board.

The best that can be said about Bernanke and Paulson is that they believed the ends justified the means, and that preventing system-wide harm to the world’s financial markets took priority over strict adherence to the law. And yet, if you think they didn’t breach the public’s trust, ask yourself this:

Knowing what we know now, how could you ever trust anything Bernanke says again?

What about Paulson’s successor as Treasury secretary, Timothy Geithner, who at the time was still the president of the Federal Reserve Bank of New York? How could he have been out of the loop? Or was he playing the quiet role of boy wonder?

As for Lewis and the rest of Bank of America’s board, it’s a foregone conclusion that their word is now mud. The more honorable and legally appropriate path for them would have been to resign rather than participate in the cover-up.

Zip It, Ken

During his Feb. 26 sworn deposition, Lewis told lawyers for Cuomo’s office that “it wasn’t up to me,” to decide whether to disclose Merrill’s losses or Bank of America’s deal with the government. He said his decision not to disclose the information was based on direction from Paulson and Bernanke: “I was instructed that ‘We do not want a public disclosure.’”

Even if Lewis’s account of what they said is true, though, it WAS up to him to make full disclosure. And it was up to a lot of other Bank of America officers and directors who failed in their duties, too. That doesn’t get Paulson and Bernanke off the hook. If they had wanted Bank of America to follow the law, they would have left no room for ambiguity.

All this puts the SEC and the rest of the government in a horrible spot. It is a matter of public record that the law wasn’t followed, thanks to Cuomo’s disclosures last week. And yet the agencies and policy makers responsible for enforcing the law are probably powerless to do anything about it.

Wouldn’t It Be Nice

It would be nice to think that SEC Chairman Mary Schapiro might call for a sincere, thorough investigation. But there’s nothing in her professional background that suggests she has the spine or the nerve to take on a major financial institution, much less a former Treasury secretary or the sitting Fed chairman.

We probably won’t get any searching inquiries out of the banking industry’s elected overseers in Congress. Senate Banking Committee Chairman Christopher Dodd took V.I.P. loans from Countrywide Financial Corp., now a subsidiary of Bank of America. His counterpart in the House, Barney Frank,  declared last July that Fannie Mae and Freddie Mac were “not in danger of going under,” about two months before they did.

That leaves you and me, the American public, with the uncomfortable realization that we are slipping toward a state of lawlessness in this country, all in the name of saving our financial system by creating even bigger banks out of combinations of banks that were dangerously too big already. This doesn’t inspire confidence. It destroys it.

We can have our freedom. Or we can have our systemically failure-prone financial institutions. We probably can’t have both.

The costs embedded in the moral hazard of this situation should not be underestimated. While both the Bush and Obama administrations have and will continue to rationalize these types of behaviors, the unknown costs to free market capitalism are not small. Those costs will hang over our markets and our economy for a long time.  I commend Weil for addressing them.

LD

  • Bugsy

    Buying Ken Lewis’ Silence?”…What currency exactly were the hirsute Chairman and the follicly challenged Secretary using? Lewis should have brushed up on his Shakespeare: “The fault, dear Brutus, is not in our stars, but in ourselves.” Lewis was a serial-acquirer who was staring down one of two futures: walk, talk and be blamed for the subsequent meltdown (and it’s hard to imagine BAC would not have suffered anyways; you know, a little thing called beta) or hopefully come through this and with a splash of eau de Jamie Dimon. Bernanke and Paulson’s arm twisting echo Nixon’s denouement: “When the President does it, that means it is not illegal.” The whole thing reminds me what I told George Raft about money back in the day: “It’s only dirty paper. I’ll make more.” What a bunch of amatuers. Bugsy

  • sunup

    LD
    “The more honorable and legally appropriate path for them would have been to resign rather than participate in the cover-up.”
    But we all know there “is no honor among thieves”. What a choice we have today. Rats or Thieves.

  • bonddadddy

    i’m more shocked that Cuomo has been silent sincce this bomb was dropped by Lewis . That he’s not out there doing handstands for the media promising to blow the lid off this outrageous story tells me Team Obama has been in touch with Cuomo and promised him something VERY GOOD if he drops it .

    See today that CalPers is making it clear they will NOT support Lewis and the BAC board for reelection ……why aren’t they instead suing Lewis and the Board for securities fraud is the better question ? or any big mutual fund that owned BAC …….. silence since Lewis erupted with his explanation of what Bernanke / Paulson by both Cuomo and stockholders inexplicable in my mind .

  • So far the only evidence we have that Bernanke and Paulson pressured Lewis to break the law is Lewis’ own testimony. Both Bernanke and Paulson deny they threatened Lewis or told him to break the law, and there’s no other evidence that they did.

    And Lewis has clear ulterior motives to lie, since he’s already admitted that he withheld materially important information from shareholders, and now he’s desperately trying to squirm out of the consequences.

  • Mountainaires

    I still say Lewis LET himself be bullied because he just wanted to keep his job. I have no doubt that Bernanke and Paulson threatened and bullied Lewis; but Lewis let himself be bullied. He can’t whine now, that he’s made the deal with the devil, ya know what I mean?

    He never should have done the dirty deal; and now, he’s going to face the music, and he’s going to be damned angry about the fact that he’s the fall guy and nothing happens to Paulson and Bernanke.

    Obama doesn’t care whether or not Bernanke pressured Lewis to do the deal; he’ll keep Bernanke on now, because Bernanke can’t be allowed to leave, knowing the secrets he knows.

    Lewis was stupid. Bernanke and Paulson were corrupt, and so was Lewis, but he should have protected himself, if he was going to do any deal with Paulson.

    I have complete contempt for all of them, so frankly my dear…

    Buh-Bye Ken.






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