Holding Paulson Accountable For This Mess

(CBS)  John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute. Coleman Drake,a CEI summer fellow, assisted with this article.

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As much as conservatives criticize President Obama, legitimately in my view, for federal meddling in business and dictating who should serve on the auto industry boards, we must never forget that it was Bush administration Treasury Secretary Henry Paulson who made the federal government go where it had never gone before in its dealings with private corporations. That is why the House Oversight and Government Reform Committee performed a valuable service in its hearing Thursday that got to the truth about Paulson's threats to remove the CEO and board members of a private corporation if it didn't do what Paulson arbitrarily deemed best for the "financial system."

Paulson exceeded his authority as Treasury Secretary on numerous occasions. When the government took over AIG in September, longtime company leader Hank Greenberg was locked out of negotiations, and Paulson replaced AIG's CEO with Edward Liddy, whom Paulson served with on the board of Goldman Sachs when Paulson was CEO.

Reports also indicate that Paulson strongly pressured healthy banks to take government money and give the government ownership stakes in the institutions, implicitly threatening negative regulatory actions if they didn't take the deal. A set of Paulson's "talking points"from a meeting with bankers, obtained through a Freedom of Information request by the group Judicial Watch, has him emphasizing to bank CEOs that "if a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance."

But the most disturbing allegation is the one that Paulson largely confirmed at the hearing that he, and possibly others including Federal Reserve Chairman Ben Bernanke, pressured Bank of America CEO to deceive BofA shareholders and not report the extent of losses at Merrill Lynch at the time BofA was attempting to acquire it. According to testimony before New York state Attorney General Andrew Cuomo, Lewis was seriously considering backing out of the deal, under a "Material Adverse Change"clause in the merger agreement, because of bigger losses than predicted on Merrill's balance sheet. According to Lewis, Paulson said, "we would remove the board and management"if BofA did so. So Lewis and the BofA board backed down.

On Thursday, although he refused to call it a "threat,"Paulson admitted that he applied pressure and said that Lewis and the board could be removed. He recalled to the committee that he told Lewis that backing out of the deal, even with the new facts about the losses, would show "a colossal lack of judgment."He then told Lewis that "under such circumstances,"the Federal Reserve would be justified in removing the bank's management.

"By referring to the Federal Reserve's supervisory powers, I intended to deliver a strong message reinforcing the view that had been consistently expressed by the Federal Reserve, as Bank of America's regulator, and shared by the Treasury, that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis and which would show a lack of judgment," Paulson said.

Lewis obviously failed his shareholders by not standing up to Paulson, but Paulson's actions were the most outrageous. Paulson had no authority to remove a board and CEO of a private company - that's for shareholders to decide.

And he can't excuse his by saying he was merely reminding Lewis that the Fed had these powers over bank holding companies. This is a rarely invoked power, and according to the Federal Reserve's own manual on "Supervision and Regulation,"the Fed may "remove an office or director"if "an institution has significant deficiencies or fails to comply"with the law. In this case, Paulson was arguable pressuring Lewis to break federal and state securities law by withholding material from shareholders, and to compromise BofA's own solvency in the name of saving "the system."

Paulson's action also cannot be excused by any counterfactual of what would have happened if the merger had not gone through. The financial crisis was largely caused by breakdown in trust, and fostering mistrust at the government level will only prolong the lack of confidence. In fact, John Taylor of Stanford University and the Hoover Institution presents empirical evidence that Paulson's screaming Armageddon about the economy in order to get the bailout last September actually worsened the financial crisis.

Paulson and others need to be held accountable, and the rule of law must be honored. Paulson probably violated many of BofA shareholders's constitutional rights, including the 14th Amendment's guarantees of due process and equal protection under the law. A Bivens lawsuit, which is filed against government employees who abuse their authority and violate constitutional rights, may be appropriate for BofA shareholders to file against Paulson and others who allegedly threatened Lewis and the Board with removal they acted in shareholders' best interests.




By John Berlau

[John_Merritt]

I am surprised that no one has mentioned our man, Greenspan. From what I can remember he took the interest rates down to 1%, and said "Come and get it". And that is what the American people did. Borrowed and spent, and borrowed some more.

Meanwhile, Wall Street and high finance all over the world were chuckling saying "What fools. We will just take their money, wait for them to fold, and buy it back at next to nothing". And that is what they all did.

Clinton, Bush and Greenspan started this fiasco many years ago. Paulson was just trying to 'buff the crud', and couldn't swing it. I have to laugh at times when he speaks, not because he gets into stammering fits; but he reminds me of Sanford. Everytime he opens his mouth, it only gets worse.

When you finally get down to it, all of us are to blame because we tried to lay claim to a pipe dream, and it turned into a pipebomb. I guess that is what hope, trust and greed does when combined together does. It gives us a sense of ownership of nothin in the end, except our dignity and hopefully our own things.

Sign me: "What did you learn?"

[sjc_1]

Paulson waited too long and wanted everything right away at the last minute. Bush used the word "proactive" when it came to invading Iraq, but he did not seem to understand that word when it came to the economy.

[darthcheney345]

I'm still not convinced that there ever was a crisis.

I believe Paulson concocted the whole thing and created an artificial crisis to benefit his ultra wealthy buddies.

It's a little too convenient that suddenly all those houses got foreclosed and sold to wealthy real estate speculators who paid cash, while the rest of us couldn't borrow money to buy any of those bargain priced houses to live in.

Next we will see another real estate bubble so these wealthy speculators can make a huge profit when the sell.

Most of the subprime loans that failed were issued to wealthy land speculators who bought too high and decided to bail out.

This whole crisis was carefully planned and orchestrated, by our bought and paid for government, and for the benefit of the ultra wealthy power elite who hold the leash on our trained poodle leaders.

[noloyalisti]

This is a country by, for and of the corporations, let's face it. We need to tax the crap out of these rich people who made all the money from us and our society. Get rid of all lobbyists for profit and publicly finance future elections. Break up the media monopoly and take back the air waves for radio and TV.

[darthcheney345]

This is one thing I have changed my thinking of.

The wealthy really are all Kennedys and Madoffs.

We should tax the s&@t out of them and make them pay for what the did to us.

[cbsantispin]

Billions from the $700 Billion G.W. Bush bailout before he left office is still unaccounted for, there is no audit trail, no one seems to know where the lost Billions went, billions just fell through the cracks! The beginning of the end for the U.S. Treasury was when the G.W. Bush administration ran out of money for the Iraq War and should have ended the Iraq War for financial reasons, the U.S. could not afford it! But Bush and Cheney lied to the American people claiming that oil profits from Iraqi oil would fund the war and American taxpayers would not have to foot the bill. Of course when Iraqi oil failed to pay for the Iraq war, Bush emptied the U.S. Treasury and starting borrowing billions from China to continue to pay for the Iraq war against better sound financial judgment. George W. Bush is probably the first U.S. President in American History who did not seem to care how things would be paid for, Bush was focused on his goals and too hell with the bills, the bills got figured out later, that's why Bush was a fiscal disaster. Money matters, how much things cost matters, who pays matters. The Iraq war should have ended a long time ago based strictly on financial considerations! Bush and Cheney did this to America now in debt trillions to China!

[cydygitt1]

Hey, as long as the bushevik cronies in the military/industrial complex made their billions on the backs of the American taxpayers, those 'lost' billions certainly didn't "fall through the cracks," but wound-up in offshore Cayman Island accounts for the well-connected!

[noloyalisti]

This guy should be in jail in the Hague for financial terrorist. Him and his terrorist buddies at Goldman Sachs. He extorted $700 billion dollars from American by threatening to let the whole system crash. We need justice for the American people. Send him to the Hague with his buddies from the Bushoccio Crime Family.

I would pay big to see the sentence carried out.

[Buttonja]

The gov't had no alternatives, they had to do anything possible to avert an implosion of the financial system. As seen with Lehman, bankruptcy of a large financial institutions can wreck havoc by sending tremors through the system. It's easy to be a 'monday morning quarterback.' The public does not understand the intracies of the markets and cannot appreciate actions taken by the Bush administration. Officials should not be held personally accountable for this. If our lawmakers had been scared of the personal risk, they would not have made the tough but necessary decisions, and our systems would have failed. By how much, it may not be seen, fortunately.

[ubrew12]

True dat. You have to wonder if the 'too big to fail' CEO's somehow 'knew' this, and that they had the insurance all along to engage in their record-setting gambling spree. It's much easier to do if you know 'dad' will pay for the wreckage. And if you can even get the CEI to shout at 'dad' for being angry with you for having to bail you out, so much the better.

[creeper00]

By the time these thieves are done the government will own everything. Sound familiar?

[darthcheney345]

We're back in the USSR
You don't know how lucky you are, boys
Back in the USSR!

We'll all be driving Trabants.

[ubrew12]

Tomorrow, CIT will go bankrupt, the largest bankruptcy in American history. Today, the Competitive Enterprise Institute is angry at 'big government' Paulson for acting dictatorial towards several companies that the government deemed 'too big to fail' and have bailed out with hundreds of billions of taxpayer dollars.

"Paulson and others need to be held accountable, and the rule of law must be honored. " What do Wall Street banksters know, or respect, about the rule of law? Paulson should have let BofA go bankrupt, taken it over, fired its management and its stock/bond holders, and reprivatized it as a smaller company. I'm amazed at the CEI: that they would have little to say about the idea of 'big government' rescuing companies as 'too big to fail', companies that were deservedly bankrupt, but complain that Paulson influenced those companies to make needed changes.

To the CEI, corporations can do no wrong, and government can do no right. Just keep shoveling tax money at the Wall Street banksters, and shut up, says CEI.

[darthcheney345]

Tomorrow, CIT will go bankrupt, the largest bankruptcy in American history
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Up to then, the largest bankruptcy is GM, the bankruptcy orchestrated by Pelosi and continued by Obama.

[darthcheney345]

Paulson should be scrubbing the floor of Madoff's prison cell.

He alone was the sparkplug of this totally artificial "crisis."

Nobody noticed any problem before he started crying wolf.

How do we know there was ever really a crisis in the first place?

But Bush and Paulson CREATED the crisis by suddenly transforming our government into socialism for the ultra wealthy power elite.

I will never forgive Bush for being the turncoat who started this wave of insanity of bailouts and nationalizing companies.

And with no oversight, for reasons that have never been explained to my satisfaction.