U.S. Lawmakers Smell Something Fishy in Bank of America / Merrill Deal

bo21U.S. lawmakers seek BofA-Merrill probe

R E U T E R S

Fri Apr 24, 2009
By Kim Dixon and Rachelle Younglai

WASHINGTON (Reuters) – Momentum is building among U.S. lawmakers to investigate Bank of America’s (BAC.N: Quote, Profile, Research, Stock Buzz) purchase of Merrill Lynch, amid allegations that federal officials gave the bank’s chief executive an ultimatum to complete the deal with the troubled investment house.

A senior Republican Senator joined House Democrats on Friday in seeking more details after New York’s attorney general said CEO Kenneth Lewis had testified he was pressured by former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to do the merger, or lose his job.

“That was very disturbing,” Senator Richard Shelby, the ranking Republican on the Banking Committee, told the Reuters Global Financial Regulation Summit in Washington on Friday.

“I don’t know if there is securities fraud in there or what,” said Shelby, from Alabama.

Meanwhile, lawmakers in the House of Representatives expanded their probe by demanding all internal communications from the Federal Reserve and the U.S. Treasury Department touching on the deal.

New York Attorney General Andrew Cuomo said on Thursday that Lewis testified that Paulson and Bernanke also pressured him to keep quiet about losses at the troubled Merrill Lynch, which rose to $12 billion from $9 billion in a matter of days.

This account has been disputed by representatives for Bernanke and Paulson but raises questions about whether federal officials encouraged Lewis to keep important information from investors.

Bank of America ultimately got additional federal bailout money to absorb Merrill.

Shelby said he wants the Senate Banking Committee to hold a hearing on the merger.

A spokeswoman for Senate Banking Committee Chairman Christopher Dodd said he was deeply concerned about the allegations and had talked on Friday with Cuomo. “He will decide on next steps soon,” she said.

Representative Ed Towns, chairman of the House Oversight and Government Reform Committee, and domestic policy subcommittee chairman Dennis Kucinich, sent letters dated April 23 to the Fed and Treasury demanding the internal documents, with a request for responses by May 4.

“The implications of Mr. Lewis’ testimony, if accurate, are extremely serious,” said Towns and Kucinich.

The Securities and Exchange Commission has already said it is reviewing the disclosures surrounding the merger.

Publicly-traded companies are supposed to widely publicize so-called material information — information an investor needs to decide whether to buy or sell a stock.

“Bank of America and Ken Lewis are, in my mind, in deep trouble,” said James Cox, a securities professor at Duke Law School. “Both under state law and federal law disclosure standards there was clear duty to correct earlier statements regarding the viability and wisdom of the acquisition of Merrill Lynch.”

The potential liability of Paulson and Bernanke is a more murky area, according to former SEC chairman Harvey Pitt, who served under former President George W. Bush.

Securities law absolves government officials from liability in acts performed as part of official duties, he said.

“If Paulson and Bernanke coerced B of A to violate the securities laws out of concern for the economy, they can’t be liable and I think it would be hard to hold B of A liable,” Pitt said in an email.

“Nevertheless, you can’t violate the duties you owe shareholders merely because someone in the government asks you to do so,” said Pitt.

(For summit blog: blogs.reuters.com/summits/)

(Reporting by Kim Dixon and Rachelle Younglai; Editing by Tim Dobbyn)

Bill Black With Bill Moyers

Part Two

Part Three

[http://www.youtube.com/watch?v=jJ38T-VgmSY]

The Quiet Coup :: Simon Johnson

The Quiet Coup

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The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

SIMON JOHNSON

ATLANTIC MAGAZINE

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption. [Read more…]

Ben Bernanke on A.I.G. March 15, 2009 [video]

Madoff Records Are “Utterly Unreliable”

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Dec. 17 (Bloomberg)Bernard Madoff’s ability to avoid scrutiny from U.S. regulators for years shows that the monitoring system is “broken and has to be fixed,” former Securities and Exchange Commission Chairman Arthur Levitt said.

Levitt, a senior adviser to Carlyle Group, said today in a Bloomberg Radio interview that the SEC must respond to allegations that it failed to act on tips of wrongdoing by Madoff that it had received since the 1990s.

“The system is obviously flawed and it’s got to be rethought in terms of how investors can be protected,” Levitt said. SEC Chairman Christopher Cox “is doing the right thing” by calling for a probe of the agency’s role, Levitt said.

Madoff was arrested Dec. 11 after telling his two sons and federal investigators that he’d been using money from new investors to pay off old ones in a Ponzi scheme. He said clients of his New York-based investment-advisory firm lost $50 billion.

Levitt said Madoff may have run a conventional business for a while and “shifted gears,” when the market turned against him. Madoff “clearly lied” to avoid registering with the SEC, which has shrunk as the financial industry has grown, Levitt said.

In 2004, the agency had 477 people in its inspection office, overseeing about 8,000 investment advisers, Levitt said. Today, 430 people regulate 11,300 advisers, along with about 16,000 mutual funds, he said.

Cox said yesterday the SEC failed to act for almost a decade on “credible and specific allegations” against Madoff. He announced an internal probe to review the “deeply troubling” revelations.

Levitt is a board member of Bloomberg LP, the parent company of Bloomberg News.

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