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.