Paulson Must Be Held Accountable for Alleged Bank of America Threats
Statement by CEI John Berlau
Washington, D.C., July 15, 2009—Former Treasury Secretary Henry Paulson is set to testify July 16 before the House Oversight and Government Reform Committee on whether he pressured Bank of America about the bank’s deal to buy Merrill Lynch. Bank of America (“BofA”) CEO Ken Lewis has testified that he felt pressured to do the deal by Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson.
Statement of John Berlau on testimony tomorrow of former Treasury Secretary Henry Paulson before the House Oversight and Government Reform Committee.
As much as President Obama is criticized, legitimately, for federal meddling in business and dictating who should serve on the auto industry boards, conservatives and others must never forget that it was Bush administration Treasury Secretary Henry Paulson that made the federal government go where it had never gone before in its dealing with private corporations. It is heartening that the House Oversight and Government Reform Committee is having a bipartisan hearing tomorrow in which Paulson will testify on these actions
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, who 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 the committee will be exploring that Paulson and others including Federal Reserve Chairman Ben Bernanke pressured Bank of America CEO to deceive his 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.
Lewis obviously failed his shareholders by not standing up to Paulson, but Paulson’s alleged 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.
According to Cuomo’s report, “Paulson largely corroborated Lewis’s account.” Paulson will have a chance to give his side tomorrow, but his actions, if true, 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 crisis in confidence.
Paulson and others need to be held accountable, and the rule of law must be honored. If the allegations are true, 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 with removal if he didn’t deceive investors.