The Back Alley Archives

That thought process has worked so well for the NFL.

WASHINGTON, Feb 5 (Reuters) - Watchdogs monitoring the U.S. government's bank bailout called for a major overhaul on Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed.

Under the $700 billion program meant to stabilize the teetering financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and U.S. automakers in exchange for preferred shares and warrants.

But in buying those securities, the Treasury under then-Secretary Henry Paulson misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP.

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another," Warren said at a hearing before the Senate Banking Committee. Many members of the panel condemned management of the program, which is barely four months old.

"Implementation ... proceeded in a chaotic, unorganized and ad hoc manner," said Democrat Daniel Akaka of Hawaii.

Neil Barofsky, another watchdog for the program, told the Senate committee his office is turning to criminal investigations. "That's going to be a large focus of my office," he said.

Barofsky, the inspector general for TARP, told the Los Angeles Times in an interview Wednesday that misrepresentations in applications for TARP funds would be grounds for criminal prosecution.

“Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street.

The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill’s losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse.

Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say.

“I need you to know how bad the picture looks,” Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank’s earlier cooperation — but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.

Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital.

And rad, I don't know if you saw the story in the WSJ today about Bank of America trying to back out of the deal to buy Merrill back in December when they started to realize how bad things were at Merrill. Bernanke and Paulson basically twisted their arm and forced BoA to buy Merrill, telling them that if they didn't the government would force BoA's officers out. Sounds to me like the previous administration already de facto nationalized the banks.

Here's an excerpt as printed by The Big Picture (since I don't currently have a sub to the WSJ):

“Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street.

The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill’s losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse.

Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say.

“I need you to know how bad the picture looks,” Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.

Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank’s earlier cooperation — but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.

Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital.

http://www.ritholtz.com/blog/2009/02/ken-lewis-learns-theres-a-new-sheriff-in-town/

Paulson and his crew better lawyer up and fast!

WASHINGTON, Feb 5 (Reuters) - Watchdogs monitoring the U.S. government's bank bailout called for a major overhaul on Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed.

Under the $700 billion program meant to stabilize the teetering financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and U.S. automakers in exchange for preferred shares and warrants.

But in buying those securities, the Treasury under then-Secretary Henry Paulson misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP.

"Treasury simply did not do what it said it was doing ... They described the program one way, and they priced it another," Warren said at a hearing before the Senate Banking Committee. Many members of the panel condemned management of the program, which is barely four months old.

"Implementation ... proceeded in a chaotic, unorganized and ad hoc manner," said Democrat Daniel Akaka of Hawaii.

Neil Barofsky, another watchdog for the program, told the Senate committee his office is turning to criminal investigations. "That's going to be a large focus of my office," he said.

Barofsky, the inspector general for TARP, told the Los Angeles Times in an interview Wednesday that misrepresentations in applications for TARP funds would be grounds for criminal prosecution.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0535801720090205

N.C. Attorney General Roy Cooper has requested documents from Bank of America Corp. about 11th-hour bonuses for Merrill Lynch & Co. employees, adding to government scrutiny of payouts made before the Charlotte bank bought the firm on Jan. 1.
The N.C. Department of Justice on Monday issued an "investigative demand" to the bank that asks for a wide range of records, including a list of Merrill employees who received bonuses, communications between Merrill and Bank of America executives and details on the bank's receipt of federal assistance.

Bank of America is required to respond by March 4, and executives and employees could be required to provide further information, according to the 11-page demand, essentially a subpoena. Bank of America spokeswoman Shirley Norton declined comment.

Former Merrill Lynch chief executive John Thain rushed out bonuses to Merrill employees in December before the purchase became official, even as losses were mounting within the Wall Street firm. The deal closed Jan. 1, but Bank of America later needed a second dose of government capital to help absorb Merrill's toxic assets. Thain resigned from the combined company in late January, and Bank of America chief executive Ken Lewis is under intense pressure to salvage the deal.

North Carolina joins probes already launched by New York Attorney General Andrew Cuomo and the inspector general of the government bailout program, Neil Barofsky. Cuomo last month issued subpoenas to Thain and Bank of America chief administrative officer Steele Alphin, a close Lewis confidant.

"Public money is at stake, and we're examining the legality of these last-minute Merrill Lynch bonuses," Cooper said Thursday.

Under N.C. General Statutes, the state Justice Department has the power to investigate the affairs of all corporations and persons doing business in the state. Typically, this authority is used to probe businesses accused of defrauding consumers. In this case, the attorney general has multiple avenues to pursue, depending on what the documents show, a person familiar with the matter said.

The payment of the bonuses could violate the uniform fraudulent transfer act, which restricts the transfer of assets outside of normal business practices, the person said. Typically, this act is applied to debtors in bankruptcy cases who owe creditors, but it could be extended to aggrieved shareholders. Cuomo has used this law in his investigation of insurer AIG, which agreed to freeze more than $600 million it planned to pay out in bonuses.

North Carolina also has a civil racketeering law, which requires proof of criminal activity. The penalty under that law can be the return of assets involved in the criminal enterprise, the person said.