Ed Brayton is a journalist, commentator and speaker. He is the co-founder and president of 
I'm sure this will come as an enormous shock to you, but it looks like Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke lied to the public about the soundness of banks that were getting hundreds of billions in government loans to stay afloat.
Special Inspector General Neil Barofsky generally found that the government had acted properly in October 2008 as it scrambled to implement the Troubled Asset Relief Program to avert the collapse of the U.S. financial system.But the report said that then-Treasury Secretary Henry Paulson and other officials were wrong to contend at an Oct. 14 press conference that all nine institutions receiving the first round of support -- $125 billion -- were sound.
"These are healthy institutions, and they have taken this step for the good of the economy," Paulson had declared at the time.
More details:
Barofsky said that the fact that Citigroup Inc. and Bank of America Corp. soon required billions in additional assistance highlighted the inaccuracy of that claim and raised questions about the whole effort. In addition, Merrill Lynch, which was also in the original nine, was in the process of being acquired by Bank of America because of its weakening financial position."Statements that are less than careful or forthright -- like those made in this case -- may ultimately undermine the public's understanding and support," the report said. "This loss of public support could damage the government's credibility and have long-term unintended consequences that actually hamper the government's ability to respond to crises."
Gosh, and I was sure every word the government told us about the bailout was true. By the way, this is the same Inspector General that the Obama administration has been trying to get fired because he actually does his job.
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In addition to this perspective on the lying, Bank of America's investors really got screwed and will most likely lose more on their investment than the taxpayers (I don't sympathize with them, merely reporting the facts).
After BofA made a bid on Merrill Lynch given some heavy-arm twisting from Paulson and Bernancke to buy them out so they didn't fail like Lehman Brothers had just done, a small number of their very top executives, including BofA CEO Ken Lewis, realized their bid for Merrill was way more than the company was worth given that previous valuations of both assets and current & projected earnings were greatly inflated. They purchased it anyway at price well above its cash flow valuation, taking a fairly healthy company (BofA), even in consideration of the financial crisis, and putting it in the crapper with most of the rest of the big banks. It seems the motivation was personal ambition, a CEO who was running a bank from the South (Charlotte, NC) with fantasies of being a Lord on Wall Street which grossly clouded his judgment.
The state of New York's AG has already begun criminal investigations given Lewis and some other BofA execs have a fiduciary responsibility to their investors where the evidence strongly favors they consciously violated.
What I find ironic about all this was that just as Lehman was going down and the market and the government realized the implications to the entire global system, the media started touting of well-run BofA was to avoid the mess that both the Wall Street firms and aggressive lenders like Countrywide got themselves into. Ambition and egos subverting well-quantified positions can infect anyone, something CEO Ken Lewis should have been reminding himself given all the examples of such when he took on purchasing Merrill.
Posted by: Michael Heath | October 8, 2009 9:35 AM
As one who has followed the markets closely for quite some time, I am convinced that the crisis of last autumn was neither trumped up nor exaggerated. The global financial system was truly in meltdown, and restoring confidence was of the utmost priority. Banks and financial institutions, unlike manufacturing companies, have little in the way of hard assets; all they have is the willingness of people to hold their paper and do business with them. In that realm, panic begets panic and confidence begets confidence. A bank that has the confidence of the markets can survive even very bad news, while one that lacks that confidence is toast.
While I am not crazy about government officials lying, I would liken this to a wartime situation in which it may be necesary to put out false information to mislead the enemy. If we look at these 2 institutions today, Bank of America, due to the restoration of confidence in itself and the system in general, is more or less sound. Citi is probably not, but they were in a much deeper hole to start with.
Overall, I give Paulson and Bernanke (and Greenspan) an F for their failure to forsee and avert the crisis, but I have to give them a B for managing a very bad situation pretty well once the you-know-what hit the fan.
Posted by: JusticeLeague | October 8, 2009 9:47 AM
Just what we needed, another, "Kenny boy".
Posted by: democommie | October 8, 2009 9:47 AM
JusticeLeague -
The TED Spread (the margin between interbank loans and Treasury Bills) easily corroborates the urgency of the crisis given it had spiked so high no bank could borrow from another since no banks believed the other bank's asset valuations were correct (which they weren't). So I concur with both your point and am unaware of anyone arguing there was no crisis. I guess I find your observation odd given I've heard not arguments there was no crisis. Here's one graph showing the TED Spread and its elements: http://en.wikipedia.org/wiki/File:TED_Spread_Chart_-_Data_to_9_26_08.png
I'm not sure if you are fisking my point or not. I too am inclined to give both Paulson and Bernancke a passing grade; remembering full well both guys entered late into this game where their predecessors made extremely huge errors (though Paulson was running Goldman Sachs when they co-developed the very strategy that caused the huge disequilibrium in the home mortgage market). My point never stated or meant to infer that Paulson and Bernancke were wrong to pawn off Merrill to BofA, in fact I think they were right to do so; that was a smart move on their part. My point was that BofA's CEO knowingly paid way too much for Merrill, so much so I'm convinced he's criminally culpable.
Posted by: Michael Heath | October 8, 2009 10:12 AM
Michael Heath:
Revisit the Congressional debates over the TARP. Sentator Shelby, Eric Cantor and other members of "The Party of No" did in fact say that they didn't see an urgent crisis. There were enough left-wing Dems who objected to giving any money to banks to join them to kill the TARP in the House on the first go. Until then, the market (at least for non-financial stocks) had held up resonably well, despite the horrible TED spread, LIBOR rates, etc. But when the TARP went down, the market crashed. The world got the message that ideology and scoring political points was more important in Washington than dealing with the crisis.
I see this as a quasi-wartime situation. Hedge funds and other speculators had brought down Lehman, forced Merril to go with BoA and were gunning for Morgan Stanley and even Goldman Sachs. A little deception by Hank and Ben to throw them off their game is what any decent general would do.
As far as Ken Lewis, if you read the excellent article in the recent New Yorker, he was basically told to do the deal by Paulson, Bernanke and Geithner. Moreover it had to be done over the weekend, before markets opened on Monday. Yes, he overpaid ridiculously, but he felt he had little choice. To use the wartime analogy, when the invading armies are at the border and the President tells the contractors he wants those tanks now and doesn't care about OSHA and EPA regs, it would be rather unfair to turn around and prosecute them once the invaders were turned back.
Posted by: JusticeLeague | October 8, 2009 10:51 AM
Justice League - Point taken on some in Congress wanting to avoid dealing with the issue, I forgot about that.
My criticism of Lewis was not at the early point you describe, but a couple of weeks later after Merrill's financials were better understood, where Lewis had both contractual rights and legal protections that wouldn't have forced BofA to close on the initial deal as originally crafted. I don't think Lewis, Bernacke, or Paulson were doing anything inappropriately at the beginning of the process; Lewis certainly was just prior to the deal closing.
Posted by: Michael Heath | October 8, 2009 11:28 AM
Michael Heath:
As far as I know, the Feds made it clear that the deal had to close with BoA. If the deal fell through, there were no other buyers, since the only ones who had expressed interest, Barclay's, couldn't swallow Merrill without a big hand from the UK government, which Gordon Brown refused to give them. That would have meant bankruptcy for Merrill, which would have been 5x worse than Lehman.
I'm not trying to say Ken Lewis is an angel, but in his peer group (an admittedly low standard) he is one of the better ones, IMO. BoA maintained some semblance of lending standards during the wild years. During the crisis, he was placed in a difficult position. When the Treasury Secretary and Fed Chairman tell you the future of the US economy depend on your doing a deal, even if it screws your shareholders, it's hard to say no. Especially when there is a very good chance they're right. Because if the US economy goes into the toilet, BoA and BoA shareholders are dead anyway and I wouldn't want to be the guy that has to explain why I said no to Paulson and Benanke and caused the Great Depression of 2008.
Posted by: JusticeLeague | October 8, 2009 11:46 AM
Justice League - I never claimed BofA should have not done the deal. I did claim it was criminal that BofA's execs did the deal as originally crafted given new information which was divulged after the initial acceptance of an offer which was not divluged by BofA's Board. In fact the law provides 'outs' that provided plenty of escape clauses for BofA to either a) extract themselves out of the deal or, b) use those rights as leverage to get a deal that better reflected the net present value for Merrill. The reality is that they stuck with a deal they knew was overvalued and kept that information from their own Board in spite of their fidicuary responsibility to communicate such material information to their Board.
After acceptance of the offer and prior to the closing, Lewis was not responsible to Merrill*, Paulson, or Bernacke, he was responsible to BofA and its Board.
*beyond the normal clauses in a purchase agreement during its contingency period, which are irrelevant to this issue.
Posted by: Michael Heath | October 8, 2009 12:23 PM
Michael Hearh:
Not having been in the room, it's hard to say. Of course, one should always try to negotiate the best possible deal. To do so, however, requires a willingness to walk away. It seems Lewis felt, rightly or wrongly, that Hank and Ben wouldn't let him walk away. That made it tough to play hardball.
We've acheived the old Chinese curse-we live in interesting times...
Posted by: JusticeLeague | October 8, 2009 1:03 PM
-Ben Bernanke lied to the public about the soundness of banks that were getting hundreds of billions in government loans to stay afloat.-
Yes they were sound, which is why they suddenly needed lots and lots of money to stay afloat. Umm...
Posted by: Richard Eis | October 9, 2009 8:30 AM