Thoughts:
- I'm sure that Paulson and Bernanke made this threat. I also think they thought they were acting in the best interest of everyone, possibly even including Bank of America shareholders. Further, I think they may have been right. Lehmann's demise was catastrophic enough; a second investment bank failure immediately on its heels might have made the disaster ten times worse.
- But of course, there's no way to run the counterfactual. This is deeply troubling, both because of the lack of transparency, and because a CEO was forced to screw his own shareholders. But I'm not sure what would make it better. If you have regulators, they have the ability to threaten their regulated companies outside of the public limelight. Many of the things they make CEOs do will be against the interests of shareholders--witness the games the regulator has been playing with Fannie Mae and Freddie Mac's accounting.
- The political fallout will be limited unless Geithner is somehow involved in this mess. But since Geithner was then the president of the New York Fed, that's not entirely out of the question.
- Bernanke can probably count on not having a second term. That's no criticism of Bernanke--what has been done, what may well have had to be done, has been unpopular. I don't see Obama displaying that kind of loyalty to someone he didn't appoint.
One wonders what Jeff Skilling is thinking as he reads about this, given that he is sitting in jail for making overly rosy pronouncements in the teeth of a liquidity crisis. One could similarly argue that his shareholders, and his employees, were indeed best served by exactly the actions he took (Skilling was actually not convicted, or even really tried, for shenanigans with special entities and such. He and Lay were both convicted of not revealing the full depth of their financial problems to shareholders).
"I don't see Obama displaying that kind of loyalty to someone he didn't appoint."
Um, Robert Gates?
Has Gates been in trouble or created some sort of controversy? Because taking a popular Defense Secretary, and allowing him to continue serving (especially since there are no Democratic candidates that really stand out), doesn't really strike me as loyalty. It strikes me as smart politics, especially since it sets up a fall guy if things take a turn for the worse in Iraq or Afghanistan. Loyalty isn't sticking with your friends in good times, it's sticking with them when times get rough. Joe Klein in his column today quotes an Obama staffer as saying:
"Um, Robert Gates?"
That was probably less about loyalty than about Obama A) not having a better candidate and, B) not wanting to switch out a competent SecDef during two huge war-time transitions: the gradual draw down in Iraq and the escalation in Afghanistan.
Re Bernanke not getting reappointed, it will be interesting what the bond market's reaction would be to a (non-Volcker) Democrat being appointed as Fed chairman. Let's say inflation comes roaring back by 2011 or 2012 -- would a Democratic Fed Chairman, one recently appointed by Obama, raise rates aggressively and risk a double-dip recession that might jeopardize Obama's reelection?
I don't see why this is all that explosive, it is pretty obvious this is what happened for awhile.
1) Ken Lewis thought he had a sweet deal, and then when problems arose wanted to back out of it (as he should) using a MAC.
2) The government wanted to keep a further market meltdown, and there was no other institution with the balance sheet to absorb MER (with JPM buying BSC and WFC buying Wachovia).
3) The government induced BAC to do the deal with a sweet backstop offer (protection on the vast majority of $118 billion in dodgy assets), and by threatening them.
Short-term, good for MER and bad for BAC shareholders.
Long-term, probably good for BAC shareholders, as they get some good businesses as well as lots of asset protection on the downside.
Long-term, real bad for capitalism as it is obvious that the government will meddle in markets to get their desired outcome.
If it hasn't, Paulson would have sacked him and his board.
Eh? Does he have the power to do that?
Wagoner would say the government does -- even when its not a majority shareholder.
Road to Serfdom: truth will necessairly be a victim of the new government dominated economy.
You see the government has to lie to you for your own good.
after 8 years of bush/cheney, we should be used to it by now.
comment on the "Bernanke not having a second term" - he CAN'T.
Statute law is that the president of the fed is president for ONE TERM ONLY. Their term is much longer than any others in government (I think around 14 years) so as not to beholden them to one particular individual or party. After which he can still be a member, but never again president. Fact is, most of them retire from the fed long before their stay as president is up. Bernanke and Greenspan seem to be exceptions.
There are some real legal issues here. Basically, Paulson and Bernanke arguably ordered Lewis to violate SEC disclosure requirements and Delaware company law requirements.