Enron-like Fraud by Government in Bailouts

The federal government is perpetrating Enron-style fraud against investors in its bailouts of Merrill Lynch and Freddie Mac.

The Treasury Secretary and Chairman of the Federal Reserve forced the CEO of Bank of America to merge his bank with failing Wall Street investment bank Merrill Lynch — and pressured him to keep the resulting losses secret, violating investors’ rights under the securities laws.

“Federal Reserve Chairman Ben S. Bernanke and former Treasury secretary Henry M. Paulson Jr. threatened to remove the management and board of Bank of America if it backed out of its deal to acquire ailing investment house Merrill Lynch late last year, according to documents released yesterday by New York Attorney General Andrew M. Cuomo. Kenneth Lewis, Bank of America’s chief executive, told investigators he wanted to stop the merger because “devastating losses” at Merrill would be detrimental to his company, the documents show. But the threat from Paulson changed his mind. . .The documents highlight the lengths to which government and industry officials have gone to prop up the global financial system — even at the expense of not disclosing the severity of troubles to shareholders. In another instance, Freddie Mac resisted its federal regulator in reporting to shareholders that the government’s management of the company was undermining its profitability, according to sources.”

On Wednesday, the CFO of mortgage giant Freddie Mac committed suicide. The Obama Administration forced Freddie Mac to run up billions of dollars in losses to bail out mortgage borrowers, including irresponsible high-income households.

Ironically, although the government took over direct control of Freddie Mac in the name of reducing its risky mortgage practices, it ended up doing just the opposite. The government made Freddie run up even bigger losses buying risky loans in an effort to artificially stimulate lending. In conduct reminiscent of Enron, federal regulators tried to prevent Freddie from disclosing to the public and the SEC how Obama’s mortgage bailout was forcing it to lose even more money.

The Government’s politically-motivated mismanagement of Freddie Mac shows why recent proposals to effectively nationalize the banks are a bad idea. Why should we trust the Administration to turn around failing companies, when the Congressional Budget Office says that the Administration’s $800 billion stimulus package will actually shrink the economy in the long run?