Our esteemed Congress seems determined to make rapacious bankers look good.
The latest spectacle involves Federal Reserve chairman Ben Bernanke explaining how he reacted when he learned last December that Bank of America might back out of its deal to buy Merrill Lynch, which would have unraveled some of the bailing wire holding the financial system together. We still don’t have a good, factual account of what exactly happened, but it appears that Merrill’s losses turned out to be a lot bigger than BofA realized when it agreed to buy the investment bank last September. As the extent of losses became clear, it dawned on BofA boss Ken Lewis that Merrill could sink his company if the deal went through. He considered backing out. There were tense talks with the Federal Reserve, which desperately wanted to see the deal go through. It finally did. As a little incentive, the government invested an extra $20 billion in BofA, on top of $25 billion in TARP funds the bank got in October.
Ken Lewis is perhaps the most endangered CEO in America, with shareholders steamed over vainglorious management, a depressed stock price and a Merrill deal that stinks with or without the $20 billion spiff. Bank of America is effectively a ward of the state, with more federal funding than any firm except AIG and General Motors. And the men who led those two firms to the government feed bin are long gone.
Last December, when the Merrill deal was about to be consummated, Fed officials circulated an email quoting Bernanke saying that “management is gone” if BofA backed out of the deal. Bernanke may have meant that the Fed would use its powers as BofA’s chief regulator and out-bailer to get Lewis fired if he reneged and left Merrill on the verge of collapse. Or, he may have been suggesting that BofA’s board would dump Lewis if he bungled the Merrill deal.
The House Committee on Oversight and Government Reform is appalled. Republican Rep. Jason Chaffetz of Utah criticized Bernanke for threatening Lewis’s job. Rep. Dan Burton of Indiana, also a Republican, suggested Bernanke might be guilty of perjury for saying he can’t remember all the details of his negotiations with Lewis. Rep. Darrel Issa of California, a third Republican, accused Bernanke of making a power grab. He’s also accused the Fed of a coverup with regard to the entire BofA bailout.
So just to clarify the storyline: Ken Lewis, benevolent banker, is a hapless victim of federal Gestapo tactics meant to enrich the taxpayers at the expense of innocent financial titans like Bank of America. Bernanke, meanwhile, was getting all hysterical about saving the economy when he should have just let the CEOs handle it. Maybe Congress will pass a law ordering Bernanke to call Lewis up and apologize for ever questioning his management, which has been stellar except for a few horrible acquisitions that nearly made his bank insolvent. Bernanke could throw in a government gift card good for another $5 billion or so.
It goes without saying that these hearings aren’t really about Ken Lewis, the new poster child for abused CEOs everywhere. The Bernanke critics are staking out turf for the coming battle over proposed new rules that would give the Fed “superregulator” powers allowing it to rein in the nation’s biggest financial firms if the Fed felt they were taking too much risk. Endowing the Fed with such powers is genuinely controversial, since the Fed chairman in theory is answerable to nobody, and not subject to Congressional oversight the way other agencies are.
[See how the TARP paybacks expose the weakest banks.]
But if the Congressional critics really cared about the financial crisis and the best reforms, they wouldn’t need Ken Lewis as a stalking horse. There are plenty of more important questions that still haven’t been answered by Bernanke or anybody else in the executive branch. At the top of my list:
How much of the government’s $180 billion or so in aid to AIG has actually ended up at profitable trading partners like Goldman Sachs? How much has gone to foreign firms like Deutsche Bank and Barclay’s? Did the government know this was going to happen, or did the money just slip away?
What are the prospects for AIG, anyway? Is there any chance the U.S. government will get any of its money back, or will this end up as the biggest giveaway in American history? The AIG bailout was the Fed’s baby back in September. So if Bernanke’s going to stay up late preparing testimony, it should be on how the government is ever going to extract itself from this colossal pileup.
And if we must talk about Bank of America, it would be nice to know when the government will stop insuring more than $100 billion worth of toxic assets the bank holds, and when the taxpayers will get their $45 billion back. Maybe those feisty Congressional inquisitors will invite their pal Ken Lewis to have a friendly chat and explain.