Congressman Darrell Issa: "Paulson and Bernanke Crossed The Line (With Merrill BAC Interference) And Both Will Be Asked To Testify"
Almost forgotten this week was testimony from Bank of America CEO Ken Lewis regarding BofA's purchase of Merrill Lynch. The key question remains: was Lewis unlawfully forced by the government to complete the acquisition? Republican Congressman Darrell Issa offered his take Thursday on Bloomberg.
There are three take-aways from this interview:
1) Issa and others believe former Treasury Secretary Henry Paulson and Fed Head Benjamin B-52 Bernanke 'inappropriately' exerted undue influence on Lewis to complete the merger.
2) The Hammer and B-52 have agreed to testify (without subpoenas) before the committee. This is great news and should make for salacious TV when it happens. A caveat, Issa doesn't clarify whether they will be asked to testify together or separately. Obviously, it's almost useless if they aren't on the same stage. Together is our request.
3) Though the hearings are backward-looking and BAC is currently happy with the Merrill deal, the purpose of the hearings is to demonstrate to the markets that future undue government influence in private business will not be tolerated. An attempt to assuage certain market fears.
Here's my take. It's rarely a good idea for the government to show its heavy hand with private. This is one exception. Henry and Benjamin were in crisis prevention mode from September onward, and the financial markets could have easily re-initiated their death spiral had the deal been scuttled, thus undermining 3 harrowing months of panic deterrence.
If BAC scraps the merger, Merrill is left scrambling for support. Highly unlikely anyone (any non-government entity) would have emerged to save them. Barclays was the only suitor for Lehman and in the end they balked without Fed help. So who would be there to take Merrill--likely no one. Then Hank and the Helicopter and (Lloyd Blankfein of Goldman Sachs) would have been forced to contemplate government help (depending upon Goldman's exposure to Merrill) for the trash pile of assets known as Merrill. Here's the problem: Since Merrill would have been perceived as worthless, the market might figure out that every one of them was worthless (insolvent).
Don't kid yourselves, they WERE all insolvent, and guess what, everyone of them still is insolvent. Lehman, Merrill, Goldman, Morgan Stanley and Citigroup would each be wiped out if forced to value their entire asset base fairly. It's been ages since we've heard discussion of Level 2 and Level 3 assets (The change to fasb 157 and fair-value accounting took care of those trillion dollar problems, apparently) and anybody remember the trillions of junk sitting off-balance sheet? Yet despite the silence, these pesky issues remain. We've simply done the Zen thing and chosen not to recognize them.
Instructions:
1) Dig hole.
2) Place head in hole.
3) Add sand.
4) Whistle 'Yankee Doodle'.
We're still waiting for the asset de-leveraging to begin...the only question: who will be the buyers?
Jun 13, 2009 at 4:52 PM
Reader Comments (8)
"Don't kid yourselves, they WERE all insolvent, and guess what, everyone of them still is insolvent. Lehman, Merrill, Goldman, Morgan Stanley and Citigroup would each be wiped out if forced to value their entire asset base fairly."
Well, that about sums it up.
Did you ever catch Christopher Whalen's speech at "The Deflating Bubble, Part V" back in March? It is definitely worth listening to.
"http://app2.capitalreach.com/esp1204/servlet/tc?cn=aei&c=10162&s=20271&e=10724&&espmt=2"
Among a peasant bank revolt against FDIC and FASB, impending CMBS carnage, Stress Test nonsense and government credibility, and a FNM/FRE/AIG/C Zombie Dance Party, Chris mentions the following five [well six] practical steps:
0. Admit that we cannot subsidize the operating losses of all of these big insolvent corporations.
1. Announce that the deposits in all banking institutions in our respective countries, foreign or domestic, are 100 percent backed.
2. Agree to national treatment for our respective problems.
3. Put AIG into a Chapter 11 bankruptcy.
4. Devolve the entire Citigroup organization into a single national bank and put the parent holding company, Citigroup, which is a shell and has no operations,into bankruptcy.
5. FDIC liquidates troubles assets in court.
Chris has my vote. Here are some choice statements from the speech:
"All I can say is I don’t think this process is credible, and every day that goes by that our government supports this, promotes this, holds this out as a credible policy objective for our citizens and for the rest of the world to look at, we are losing credibility."
"We have got to get people involved in this process who know what they’re talking about, can articulate that to the public, and be credible when they do it. Because the biggest problem we have right now is that we’ve got a Secretary of the Treasury and a Federal Reserve Board Chairman who are not credible with the financial markets."
"So lets talk about four trillion dollars in operating losses that the government is proposing to fund. They do not have authorization from the Congress, and so far they have been funding a lot of this off the books of the Federal Reserve System. And I would tell you that those operations are illegal."
"Fed officials are not officers of the United States. That is just something I’ll let you think about. They do not have the power to incur liabilities on behalf of the US public."
"So first and foremost, I think we’ve got to admit that we cannot subsidize the operating losses of all of these big insolvent corporations, and indeed, by stretching this process out we’re actually hurting ourselves, hurting our credibility, hurting our ability to act every day. Every day that goes by we lose flexibility, we lose the ability to choose when we act. And somebody else is going to be telling us to act. That’s when you’re right on the verge of bankruptcy. OK? As a country. I’m not talking about banks any more. I’m talking about a sovereign default by the United States."
"The Founders didn’t suggest to the Congress that they have bankruptcy in Federal Courts, they told them. They said, 'You will.' Because it was that important. It gives finality, which is what everyone in our country is hungering for now."
"What the derivatives guys have done to us over the last twenty years is they’ve leveraged the real economy. They’re safe. They’ve already paid the members of Congress to change the laws so that they’re safe, but everybody out there who’s got a real claim on a real company or real asset is absolutely left out to dry."
Thanks for the Whalen. As AB is fond of saying, I would follow Chris Whalen "through the gates of hell" to fight the bailouts. I wonder if it couldn't hurt to just start faxing Chris Whalen articles to every member of Congress -- non-stop. The White House, too. And let's not forget Treasury ;-)
(Wow, Alex Pollock [the AEI moderator] knows a few words of Irish! He mentioned "Finnegan's Wake," too.) Pretty cool.
Be careful when you fight the monsters, lest you become one.
Friedrich Nietzsche
I will watch the Whalen video later, not sure if I have seen that 1 before or not.. Thanks for the link.
@James
I took a "7 Irish Authors" Class as an undergrad...then i tried reading Finnegan's wake over that summer.
Be careful when you fight the monsters, lest you become one.
Friedrich Nietzsche
Keep commenting, Gobias. You bring some amazing knowledge to the table. That was our first quote from Nietzsche on these boards. Love it.