Commentary by Caroline Baum
April 27 (Bloomberg) -- Oil and water don’t mix. Neither do business and politics, a truism becoming increasingly obvious with each new government initiative, or the exposure of fissures in the old ones, to save the financial system.
The latest example of what happens when the business of government is business was last week’s release of testimony from Bank of America Chief Executive Officer Kenneth Lewis to New York Attorney General Andrew Cuomo. In it, Lewis says he was strong-armed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke to seal the deal to buy Merrill Lynch without telling his shareholders about the brokerage’s mounting fourth-quarter losses, which came to $15.4 billion.
According to the letter Cuomo sent to Congress and regulators, Lewis wanted to invoke the “material adverse event” clause to back out of the merger, but the bazooka-toting Paulson told him to stay mum and threatened to give him and his board the boot.
Paulson said via a statement that while the words were his, the sentiment was “what he knew to be the Fed’s strong opposition to Bank of America” backing out of the deal.
“No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure,” said Fed spokeswoman Michelle Smith.
Pop-quiz question: Does this threat strike you as something that the soft-spoken Bernanke would say? Or is it more in keeping with someone who told nine (now eight) banks they had to take money from the Troubled Asset Relief Program so the public couldn’t distinguish the good from the bad and then had the chutzpah to tell them how to use it?
Right. Let’s move on.
Conflicting Interests
So what’s a CEO like Lewis to do in this kind of situation?
Quit, obviously. His first responsibility is to the owners of the company, the shareholders, not the federal authorities, even if one of them happens to be a regulator. When push came to shove, Lewis, like other bank CEOs, was happy to be paid to play.
Once the government starts making decisions that affect a broader constituency, the results are predictable.
“When the government feels compelled to interject its will in a free transaction among adults, it’s a sign they have conflicting interests,” says Michael Aronstein, president of Marketfield Asset Management in New York. “There’s as much evidence that it’s harmful as there is about smoking.”
Yet we keep doing both.
It’s easy during a crisis to turn to government to solve the problem. But government isn’t some sphinx-like entity with a ready list of solutions. It has to fumble around like the rest of us. The only difference is, it’s using our money and we’re not parting with it voluntarily.
Capitalizing on Crisis
It’s been said that the way to eternal life is as a federal government program. And there’s some truth to it. When Rahm Emanuel, President Barack Obama’s chief of staff, said government should “never let a serious crisis go to waste,” he wasn’t talking about shrinking the size of government.
Examples abound of the failed results when government superimposes its own needs on those of the private sector. Take Fannie Mae and Freddie Mac, the mortgage finance agencies seized by the government in September to avert collapse. The two companies operated in that netherworld between public (a mission to promote affordable housing) and private (the companies were shareholder-owned).
Congress closed its eyes to the growing risks as the companies lowered their lending standards (public mission) and increased the size of their balance sheets (private profits), aided by its funding advantage, as long as more folks got access to the American Dream.
The dream turned into a nightmare, and taxpayers got stuck with the losses.
Economic Policy Tool
David Moffett, former CEO of Freddie Mac, resigned in March after six months on the job reportedly because the government was using the company to conduct economic policy -- buying mortgages no one else wanted -- instead of restoring it to good health. Moffett agreed to return as a consultant following the suicide of Chief Financial Officer David Kellermann last week.
The Fed’s Term Asset-Backed Lending Facility, designed to increase lending to households and small businesses by financing the purchase of asset-backed securities, has gotten off to a slow start: The Fed extended $4.7 billion in loans in March and $1.7 billion in April. That has inauspicious implications for the Public-Private Investment Program, which will buy “legacy” assets (formerly “toxic” but renamed in a transparent PR campaign) and loans from banks. Recipients of TARP funds, like institutions participating in TALF and PPIP, are subject to compensation limits set by the government. That’s one reason investors are reluctant to participate. The other is the rules are evolving all the time (a nice way of saying, making it up as they go).
Light Reading
Last week, following a report by TARP’s inspector general suggesting asset managers might be subject to pay caps, Treasury was forced to qualify what parties would be affected.
Compensation limits will apply only to those managers that have a “controlling” interest in the securities, Treasury said in an update to frequently asked questions on its Web site. (Controlling will be defined at a later date.)
Which brings me to my final example. The other day a friend asked me what I was reading. I drew a blank.
“I’m plowing through a host of FAQs on government Web sites,” I said.
If it takes that much time for the government to explain its businesses, it ought to get out of some of them.
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