Tuesday, May 5, 2009

Ken Lewis, Whistleblower?

"[Fed] Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co.--a deal that later triggered a government bailout of BofA--according to testimony by Kenneth Lewis, the bank's chief executive. Mr. Lewis, testifying under oath before New York's attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening difficulties at Merrill, the struggling brokerage giant. ... Under normal circumstances, banks must alert shareholders of any materially signifcant financial hits. ... Disclosing losses at Merrill--which eventually totaled $15.84 billion for the fourth quarter--could have given the BofA's shareholders an opportunity to stop the deal and let Merrill collapse instead. ... '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 US as a whole. ... A person in government familiar with Mr. Bernanke's conversations with Mr. Lewis said Wednesday that the Fed chairman didn't offer Mr. Lewis advice on the question of disclosure. Instead, Mr. Bernanke suggested Mr. Lewis consult his own counsel. Mr. Paulson repeatedly told Mr. Lewis that 'the US government was committted to ensuring that no systematically important financial institution would fail.' ... In the transcript reviewed by the Journal, Mr. Lewis didn't say he was explicitly instructed to keep silent about the losses at Merrill. But his testimony indicates that he believed the govenment wanted him to remain silent. ... By keeping mum, the CEO of one of the biggest US banks appeared to set aside a basic tenet of American-style finance--that, above all, companies must disclose marterial informantion to shareholders and potential investors. 'Regulators are supposed to tell you to obey the law, not to disobey the law,' said Jonathan R. Macey, deputy dean of Yale Law School, 'If you're the CEO, your first obligation is not to your regulator, it's to your institution and shareholders", my emphasis, Liz Rappaport at the WSJ, 23 April 2009.

"The cavalier use of brute government force has become routine, but the emerging story of how Hank Paulson, and Ben Bernanke forced CEO Ken Lewis to blow up Bank of America is still shocking. It's a case study in the ways that panicky regulators have so often botched the bailout and made the financial crisis worse. ... In order to keep Mr. Lewis quiet, they all but ordered him to deceive his own shareholders. And in the name of restoring financial confidence, they have so mistreated [BofA] that bank executives everywhere have concluded that neither the Treasury nor the [Fed] can be trusted. ... But Washington decided that America's financial system couldn't withstand a Merrill failure, and that BofA hasd to risk its own solvency to save it. So then-Treasury Secretary Paulson, who says he was acting at the dcirection of [Fed] Chairman Bernanke, told Mr. Lewis that the feds would fire him and his board if they didn't complete the deal. ... But since the government didn't want to reveal this new federal investment [TARP] until after the merger closed, Messrs. Paulson and Bernanke rejected Mr. Lewis request to get their commitmnent in writing. 'We do not want a disclosable event,' Mr. Lewis says Mr. Paulson told him. 'We do not want a public disclosure.' Imagine what would happen to a CEO who said that. ... The merger closed on January 1. But investors and taxpayers had to wait weeks to learn that the government had invested another $20 billion plus loan insurance in BofA, and that Merrill had lost a staggering $15 billion in the last three months of 2008. ... But it is the Merrill deal that raises the most troubling questions. Evaluating the policy of Messrs. Bernanke and Paulson on their own terms, this transaction fundamentally increased systemic risk. In order to save a Wall Street brokerage, the feds spread the risk to one of the country's largest deposit-taking banks. ... Instead they transplanted the Merrill risk to BofA shareholders, the bank's depositors and the taxpayers who ensure those deposits. And then they had to bail out BofA too. ... Mr. Paulson told Mr. Cuomo's investigators that he also kept former SEC Chairman Christopher Cox out of the loop while forcing BofA to rescue Merrill. ... At the next meeting on January 8, a week after the merger had closed, the minutes again make no mention of either regulator telling their colleauges that they had committed tens of billions of dollars. Yet the minutes helpfully note that among the topics discussed were 'coordination, transparency and oversight'," my emphasis, Editorial at the WSJ, 27 April 2009.

Repeatedly? Hmm. Not "explicitly", so? How did Macey get the idea "regulators are supposed to tell you to obey the law"? "Hahahaha" the Mogambu Guru would say. Have America's courts ever seen anything like this before? Yes!

"Defendants, Sentry Insurance (Sentry), Frank Singer (Singer) and Caroline Fribance (Fribance) appealed from a judgment entered on a jury verdict of $1.34 million in favor of plaintiff, Vincent A. Gantt (hereafter plaintiff or Gantt) in his action for tortious discharge in violation of the covenant of good faith and fair dealing and in contravention of public policy, ... defamation, and intentional infliction of emotional distress", Gantt v. Sentry Insurance, 4 CR 2d 874, 875 (1992). "For the reasons set forth below, we conclude that a termination in retaliation for testifying truthfully concerning a coworker's sexual harassment claim in the context of an administrative investigation is actionable under Tameny", 875-6. "Joyce ... Bruno, meanwhile, filed a complaint with the Department of Fair Employment and Housing (DFEH). She alleged harassment by Dresser and failure by Sengtry's higher management to act on her complaints. Caroline Fribance, Sentry's house counsel in charge of labor-related matters, undertook to investigate the matter. Gantt informed Frinbance that he had reported Bruno's complaints to personnel in Scottsdale. However, Ganttt gained the impression that he was being pressured by Fribance to retract his claim that he informed Scottsdale of the complaints", 876. "Gantt met with Fribance the day before his formal DFEH interview. She repeatedly reminded him that he was the only management employee supporting Ms. Bruno's claim that she had notified management about the harassment. Plaintiff felt that Fribance was unhappy with his testimony and that her unstated intent was to induce him to change his story", my emphasis, 877. Imagine: a jury was permitted to infer Fribance wanted Gantt to change his testimony. Fribance repeating a fact was held against her. Hmmm. Fribance is a director of Planned Parenthood of Wisconsin, having retired as a Sentry vice-president. Why wasn't she disbarred for this stunt?

Not reducing the agreement to writing is a "badge of fraud" in bankruptcy paralance. Where is the SEC and DOJ on this? I have news for Paulson and Bernanke, the 1934 Securities Exchange Act is not optional. This is so much fun. I see Paulson's failure to inform Cox as res gestae showing "consciousness of guilt". He was obviously afraid, as useless as Cox was at the SEC, even Cox could have seen the 1934 Act violation. Well Eric Holder, how about it? Not only do I conclude Zimbabwe Ben and Hank "Goldman Sachs Boy" Paulson are criminals, I also conclude neither understands finance. Their spreading Merrill's risk to the BofA should have been obvious to this dynamic duo. Consider the implications of GSG's former chairman's actions for GSG's current financial statements.

"The lease and contract in this case--which involve, inter alia, the letting of a Naval Petroleum Rserve for exploitation by means of a private corporation and a scheme for obtaining fuel oil and elaborate storage facilities for the Navy by means of the royalties of crude oil provided for the [US] in the lease--were without authority of law, and the [US] is entitled on that ground to have them cancelled", Mammoth Oil v. US, 275 US 13, 13 (1927). "This suit was brought by the [US] against the petitioners in the District Court of Wyoming to secure the cancellation of an oil and gas lease made by the [US] to Mammoth Oil Company [MOC] April 7, 1922, and to set aside a supplemental agreement made by the same parties February 9, 1923", 30. "The lease and agreement were signed for by the [US] by Fall as Secretary of the Interior and Denby as Secretary of the Navy", 31. "The complaint states that the lease and agreement were made as the result of a conspiracy by Fall and H.F. Sinclair to defraud the [US]; that Fall acted for the [US] and Sinclair acted for the [MOC]; that the negotiations were secret, and the lease was made without competition; that responsible persons and corporations desiring to obtain leases were by Fall, in collusion with Sinclair, denied opportunity to become competitors of the [MOC] ... in general terms, the complaint charges that Fall and Sinclair conspired to defraud the government by making the lease without authority and in violation of the law, and to favor and prefer the [MOC] over others", 35-36. "But [Fall] refused to submit the question to the Attorney General, and, as a reason for not taking such legal advice, said that 'the chances were at least even, or at least there was some chance' that an adverse opinion would be given, 'and if the Attorney General signed such an opinion ... he [Fall] would be estopped from going anything'," 46. "Under the circumstance, his failure to submit the lease to the Attorney General or to any lawyer in his own Department indicates that he knew the transaction was liable to be condemned as illegal, and that without regard to the law, he intended to put it through", my emphasis, 47. Interesting; Paulson never told Cox of the BofA-Merrill issue. Hmm. Albert Fall ultimately went to prison for his part in the Teapot Dome scandal, Fall v. US, 49 F2d 506 (DC Cir., 1931). Well Eric Holder, where are you?


Anonymous said...

Sure was lots of smoke when BofA swallowed Merrill...

This would explain the fire...

Former Secretary Paulson says that he was acting at the direction of Chairman Bernanke... poo... what stupid men... and sounds like they might have broken the law too...

Teapot Dome... yup redux...

Jr Deputy Accountant said...

I saw this when you'd first written it but in light of the $33 million SEC charges and having spent all day yesterday teaching Regulation (i.e. Securities Act of 1933 and 1934!) yesterday, I should point out that this is some of your best work, Pop. :)

Sadly, as I have said before, it comes down to indictments or it didn't happen.

Also, where is Cox anyway? I'd love to see him dragged back into this. I hope he has a passport and an offshore account by now otherwise... never know how dangerous this might become for him on the off chance that justice *is* actually served.

Oh who am I kidding?

Justice! hahaha