bank run blog

It appears from testimony being leaked by New York Attorney General Andrew Cuomo’s office that former Treasury Secretary Henry Paulson told Bank of America CEO Ken Lewis that he would be fired if he did not go through with the Merrill Lynch deal after Lewis discovered huge losses at the once-esteemed investment bank. Lewis also alleges that he was instructed by federal regulators to remain silent about the deal.

In an irony that anyone following the three-year (and counting) financial fiasco can appreciate, the New York Times reports that it looks like Bernanke told Lewis to keep quiet, while Paulson told him to play dumb :

“The head of Bank of America changed his mind about trying to pull out of its deal to buy Merrill Lynch after Henry M. Paulson Jr., the Treasury secretary at the time, suggested that the bank’s management and board could be removed if that happened, Attorney General Andrew M. Cuomo of New York said in a letter to Congress made public on Thursday.

Kenneth D. Lewis, the bank’s chief executive, also testified in that he was told by Mr. Paulson to keep quiet about the deal’s new developments, even after it was clear that the bank was going to absorb much bigger-than-expected losses in buying Merrill, according to a transcript that Mr. Cuomo released Thursday.

In his letter, Mr. Cuomo said his investigation into the Bank of America-Merrill merger had raised questions about the government’s financial bailout program, ‘as well as about corporate governance and disclosure practices at Bank of America.’”

The Wall Street Journal notes that the release of this testimony will only fuel criticism of the government’s secretive handling of the crisis :

“Mr. Lewis’s statements highlight a lack of public disclosure that has accompanied the financial crisis since its inception. The crisis has roots in the fact that Wall Street banks didn’t adequately disclose the true prices of the toxic mortgage-related assets they held. The government has also been criticized for offering limited disclosure of the details or rationale of some of its bailout strategies, from the forced sale of Bear Stearns Cos., to the $173 billion injection into American International Group Inc.”

New York Times : Treasury Pushed BofA to Close Merrill Deal, Cuomo Says

Wall Street Journal : Lewis Testifies U.S. Urged Silence on Deal

The failure of the Obama administration to engage any of the serious, respected economists who have proposed directly confronting the insolvency of the nation’s four largest banks, instead endlessly of coddling them along with their faceless bondholders, ensures that the narrow views that predominate within the White House economic policy team will remain unopposed.

It might be too much to hope for consultations with Nouriel Roubini, Joseph Stiglitz, or James Galbraith, even though all of them are basically centrists with eminently appropriate resumes, but now it seems that Summers and his minion, Geithner, have succeeded in totally marginalizing veteran economic policy advisor Paul Volcker. The Wall Street Journal reports :

“As an early supporter of Barack Obama, Paul Volcker gave the young presidential candidate gravitas and advice. He frequently sat by Mr. Obama’s side at key economic events, and started carrying a cellphone for the first time, just to be able to brainstorm with the candidate from the campaign trail.

In the Obama White House, the role of the 81-year-old former chairman of the Federal Reserve has been more limited.

The one-time central banker has been put in charge of a presidential advisory board that hasn’t yet had a formal meeting. It has been nearly a month since he has seen Mr. Obama. Mr. Volcker hasn’t been a main player in key decisions handling the global financial crisis.

Treasury Secretary Timothy Geithner unveiled the administration’s plans for handling troubled financial institutions and the housing crisis without seeking input from Mr. Volcker, associates say. ‘Paul was surprised’ at the failure to consult him, particularly on issues of financial rescue after his dominant role in resolving financial crises in the 1980s, says one person who has spoken to Mr. Volcker recently.”

The deliberate isolation of Volcker has been underway since before the inauguration. Bloomberg covered the petty feud in this February 5 story Volcker Chafes at Panel Delay, Clashes With Summers :

Wall Street Journal : Volcker Assumes Smaller-Than-Expected Role With Obama

Bloomberg News : Volcker Chafes at Panel Delay, Clashes With Summers

Sources have confirmed reports that the economy has been hijacked by an aggressive and particularly audacious band of pirates, operating in uncharted waters near the East Coast of the United States.

Unlike their relatively primitive Somali counterparts, the US bandits typically reside in comfortable “sleeper cells” in places like Westchester, New York and Potomac, Maryland, preparing for their missions through frequent “board meetings” and “conference calls.”

Another distinguishing characteristic of the US pirates is the sheer enormity of the ransoms they demand.

An unconfirmed report claims that friendly skipper Barack Obama has been taken hostage, but remains unaware of it at this time.

Glenn Greenwald : Larry Summers, Tim Geithner and Wall Street’s ownership of government

CBS News : Summers Banked Fees From TARP Recipients

CBS News : White House Economist: Bonus Tax Could Have Chilling Effect

One serious economist with regulatory experience who was ignored by the Barack Obama administration when it was putting together its economic policy and free lunch team is William Black of the University of Missouri at Kansas City. In the accompanying video from Yahoo Finance, Black derides the fraudulent programs of Summers and Geithner, elaborating on comments he recently made to Yves Smith of Naked Capitalism :

“The bank stress tests currently underway are ‘a complete sham,’ says William Black, a former senior bank regulator and S&L prosecutor, and currently an Associate Professor of Economics and Law at the University of Missouri – Kansas City. ‘It’s a Potemkin model. Built to fool people.’ Like many others, Black believes the ‘worst case scenarios’ used in the stress test don’t go far enough.

He detailed these and related concerns in a recent interview with Naked Capitalism. But Black, who was counsel to the Federal Home Loan Bank Board during the S&L Crisis, says the program’s failings go way beyond such technical issues. ‘There is no real purpose [of the stress test] other than to fool us. To make us chumps,’ Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: ‘”If we lie and they believe us, all will be well.” It’s Orwellian.’”

Yahoo Finance Tech Ticker : Geithner’s Stress Test “A Complete Sham,” Former Federal Bank Regulator Says

Every day is financial fools’ day in America, but today in London they are marking the occasion with large, angry protests.

The obvious public outrage provides a welcome opportunity for nations tired of the lack of leadership from the US to begin to forge new alliances. It seems very possible now that our inability to confront our own mistakes will eventually leave our country alone in a squalid room, muttering to itself. According to the Independent :

“In saying as baldly as he did yesterday that ‘the Washington consensus is over’, Gordon Brown effectively rejected, on behalf of the whole G20, the ultra free-market dogmatism that the US and Britain liked to preach after the collapse of communism. The IMF and World Bank had already started to distance themselves from the idea that countries seeking their assistance should be encouraged, or required, to adopt free-market mechanisms on the US model. But the outcome of the London summit is the clearest signal yet that the US model inherited from the Clinton and Bush years will be regarded as one way of doing things, alongside others. In the new world order, economic transparency, accountability and effectiveness will also be considered virtues.”

As if to emphasize its status as the G1, the US has officially relaxed accounting standards at the behest of the financial sector, just as the rest of the world was agreeing to increase regulation and transparency. Reuters reports :

“World leaders agreed on Thursday to tighten financial regulations and increase funding for poor nations, while a U.S. accounting body moved to ease rules for banks that forced billions of dollars of writedowns.

Optimism that G20 leaders meeting in London will find ways to temper the economic crisis drove stocks higher, overshadowing disappointment over a smaller-than-expected interest rate cut by the European Central Bank and data showing a sharp jump in U.S. jobless claims.

As world leaders were meeting to find solutions to the financial crisis, the U.S. Financial Accounting Standards Board moved to give banks more flexibility in valuing troubled assets. The changes, to take effect in the second quarter, could reduce writedowns and soften blows to bank earnings.”

An article in the Guardian examines the controversial crowd control tactics that were on display in London, where some protesters were allegedly beaten by the police :

“When the main body of protesters arrived on Wednesday from four different directions at their planned destination of the Bank of England, they soon found themselves hemmed in from all sides by ranks of police. Requests to leave the area were refused. This is, in police terms, the “kettle”. It is best known for having been used in the May Day protests at Oxford Circus in 2001, after which it became the subject of a civil action, brought by one of those contained and only finally resolved by the law lords (in the police’s favour) in January this year.”

The Independent : A summit that shows the new balance of power

Reuters : U.S. eases accounting rules as G20 acts

The Guardian : Did the handling of the G20 protests reveal the future of policing?