I know, I know. The last thing readers want to hear about right now is more doom-and-gloom prognostication about the economy. But I can’t resist.
Last week brought several pieces of bad news on the financial front which, really, is no different than the preceding weeks. I point them out not because they were the most distasteful or gluttonous news items of the bunch (oh, so much to choose from!) but rather because they highlight serious structural flaws in our regulatory oversight of financial actors.
Exhibit 1: The Wall Street Journal reported that former Treasury Secretary Henry Paulson and Fed Chair Ben Bernanke pressured Ken Lewis, CEO of Bank of America, to do the deal with Merrill Lynch in December. When Lewis told them he was having second thoughts (which in hindsight appears very well founded), the article says Paulson and Bernanke “forcefully urged Mr. Lewis not to walk away.” Since then, Lewis has come under fire for the much larger than expected losses coming from Merrill. The Treasury’s attempt to threaten an executive into doing a “bad deal” would represent a dangerous departure from the fiduciary standards which govern the responsibility of corporate executives and boards to look out for the interests of their shareholders. If the allegation is indeed true and Lewis did the Merrill acquisition for a reason other than to enhance shareholder value, then that is really bad news for both investors and taxpayers. What other TARP deals were executed under similarly questionable conditions? And was the Treasury really so desperate then to think that forcing that pig down the python would help in the crisis?
Exhibit 2: At a contentious hearing at a House Financial Services subcommittee, Harry Markopolos, a private fraud investigator from Boston, detailed his persistent efforts (over a decade) to tip a clueless SEC off about Bernie Madoff. In his utter lambasting of the agency, he called the SEC “inept” and “lacking the financial literacy” to tackle major frauds. So given that the SEC can’t find first base in Fenway Park, where does that leave taxpayers? In left field, apparently.
Exhibit 3: Elizabeth Warren, head of the Congressional Oversight Panel, told the Senate Banking Committee last week that the Treasury overpaid for assets. According to the COP, the Treasury paid $254 billion for shares of preferred stock and warrants from more than 200 financial institutions and got assets worth about $176 billion. Huh? This analysis raises three possible explanations for me. One, Paulson is incompetent in valueing financial assets (doubtful since he formerly ran Goldman Sachs). Two, Paulson determined that there was a broader public policy benefit from paying above market rates for these assets (if this is the case, taxpayers have yet to hear the logic behind this decision). Three, Paulson used his position in government to subsidize his former industry and benefit his Wall Street friends at taxpayer expense. Which of these three sound most plausible to you?
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