The Feds think we can't handle the truth

Bank of America CEO testifies befoe Congress in February (Chip Somodevilla/Getty)

Bank of America CEO testifies befoe Congress in February (Chip Somodevilla/Getty)

In a blockbuster story, the Wall Street Journal reports that Bank of America CEO Ken Lewis said that he believed Federal Reserve Chairman Ben Bernanke and then US Treasury Secretary Henry Paulson wanted him to keep silent about big losses at Merrill Lynch. BoA had agreed to buy Merrill in September and later discovered that Merrill was harboring huge losses which hurt BoA shareholders:

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

What makes this story even more interesting is a point the WSJ makes deep in the piece: lack of disclosure, known on Wall Street as transparency, has been a key element both in the destruction of wealth and the regulatory efforts to bail out ailing companies. I can understand in the heat of the moment why regulators were afraid that Merrill Lynch might go under — Lehman Brothers had just failed. AIG was on the brink. Fear was the emotion of the day. But that is no longer the case, or at least to the same degree.

Regulators continue to be masterly at avoiding the Obama call for greater transparency in the system.  Congress and the public for some time have been trying to find out how TARP firms are spending taxpayer dollars. We still don’t have answers. AIG got another $30 billion last month after arguing vaguely yet persuasively that the financial system would collapse if it didn’t get more funds. It’s still not clear why the insurance monster got the dough.

By now, the regulators should have gotten the message: Protecting the public and lack of transparency are not one in the same. In the heat of the moment, I can’t second guess the Fed and Treasury. But the intense fear has passed. Now is the time for full disclosure. Back in the Vietnam era, government suffered what was known as a credibility gap: the public didn’t believe the statements coming from top officials. If a credibility gap yawns any further now, policymakers will likely have a hard time taking the steps they deem necessary to bolster the economy.

5 thoughts on “The Feds think we can't handle the truth

  1. I can only surmise that the lack of transparency is the only thing holding back real, inflamed populist rage. Sure the anger may have died down, but the truth has a greater than likely chance of changing that.

    • James — I think that if the truth comes out in dribs and drabs and only because the public has had to work very hard to get the truth, then the rage is well deserved. But if the government simply discloses what it is doing as it does it, the anger will be cooler from opponents. The Bank of America/Merrill deal is interesting because I can understand the impulse to hide the truth. The regulators probably thought the financial system was at risk if Merrill went under. But now there is no excuse to hide from the public the details on how the bailout is working.

      • Nancy, I think you’re right.

        But I also think that there is a small chance that if the drapes were pulled wide, and the breadth and depth of what happened were truly exposed, the enormity, complexity, and complicity of the those involved would deal shattering blow to our confidence in our system.

        It would make the nuttiest rantings of every Trotskyite for the last 90 years seem subtle and understated by comparison.

        Which is why I think it is that fear, that suspicion of “what if it was worse than we ever imagined” which is motivating so many to clamp a lid down tight wherever possible.

      • Then I would like to see how you would vote on the poll I just put out — should the regulators have come clean but with a plan on the Bank of America/Merrill deal!

  2. Then I would like to see how you would vote on the poll I just put out — should the regulators have come clean but with a plan on the Bank of America/Merrill deal!

    I’d say that’s probably a no.

    Some sins are better left buried and forgotten.

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