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June 11th, 2009

Update1 TARP’s Not-So-Dirty-Little Secrets Confirmed

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UPDATE1: The investigation into whether or not the government strong-armed the original nine TARP banks continues. Bank of America (BofA) head Ken Lewis is scheduled to testify today in front of a Federal committee that his firm was pressured into accepting a merger with Merrill Lynch, despite the knowledge that Merrill’s fourth-quarter numbers were abysmal:

According to emails released Wednesday that pull back the curtain on heated negotiations, Federal Reserve Chairman Ben Bernanke had suggested to another Fed official that “management is gone,” if BofA managers tried to flee the deal and later on needed further government assistance.

The revelations come thanks to Congressional subpoenas demanding that the Fed disclose emails related to Bank of America’s purchase of Merrill. CNNMoney.com acquired copies of some of the emails circulated among House Republicans late Wednesday.

Why not just let sleeping dogs lie?

Why, because this acquisition triggered a massive financial bailout. BofA lost so much money on this deal that the government “had” to give the bank $20 billion in fresh capital and another $118 billion in asset guarantees.

Mr. Lewis has gone on the record with investigators expressing that he felt his job was on the line if his company did not comply with Treasury and Fed officials. Lewis’ claims were bolstered when former Treasury Secretary Henry Paulson claimed he did threaten the chairman’s job at the request of the Federal Reserve chief:

Paulson said that Lewis and the BofA board would be replaced if they sought to end the merger, which Paulson viewed as integral to the health of the U.S. financial system. Paulson told New York investigators that he threatened Lewis’ job at the behest of Fed chief Ben Bernanke.

Who knew economics was such a dirty business? With so much discussion circling around Washington these days of increased regulation of the private financial industry, it scares us all to think how influential Federal regulators are in shaping, or in this case crippling, private industry.

Original post published on 5/15/09:

Suspicions that former Treasury Secretary Henry Paulson and Federal Reserve Chief Ben Bernanke strong-armed the original nine banks into participating in the TARP program have been around since the program began. Now according to a watchdog group, the suspicions have been confirmed by a Treasury document obtained by Judicial Watch via a Freedom of Information Act (FOIA) request:

The document is unambiguous: “We plan to announce the program tomorrow–and–that your nine firms will be the initial participants. … This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both. We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed. If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.” So the regulators’ independence had already been compromised.

Note that these “talking points” also document Treasury’s willingness to misrepresent the condition of some of the financial institutions to the American people: “We will state clearly that you are healthy institutions, participating in order to support the U.S. economy.” That was certainly not true as to Merrill Lynch. But shortly thereafter, when Bank of America realized that Merrill Lynch’s condition was deteriorating rapidly and tried to back out of its purchase of that company, Treasury bullied BoA into going through with the deal by threatening to fire the bank’s entire Board of Directors–a move that transferred tens of billions of dollars of wealth from BoA shareholders to Merrill Lynch shareholders.

Click here to view the document.

(Hat Tip: PowerLineBlog)

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2 Responses to “Update1 TARP’s Not-So-Dirty-Little Secrets Confirmed”

  1. Esko Kiuru Says: May 18th, 2009 at 12:24 am

    Tim,

    This incident is probably just the tip of the iceberg. Would be fun to know why the government declined to bail out Lehman Brothers last fall when it helped so many others before and after its demise? Obviously certain officials were doing favors for their “friends” and disfavors for others.

  2. Tim Manni Says: May 18th, 2009 at 1:37 pm

    Esko,

    I know I’m going to sound naive, but you really hate to hear this kind of stuff. You don’t want to believe that your gov. is strong-arming or showing favorites (as you pointed out). It’s only the tip of the iceberg indeed.

    Good to hear from you,
    Tim

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