Thursday, June 25, 2009


In the heat of battle
It seems that everyone has forgotten how weak and troubled the economy was at the time Bernanke was active in this BofA-Merrill Lynch deal. Concerns by the Fed that you can't wind the clock back and that invoking MAC ( Material Adverse Clause) to kill the ML deal are prescient points that the Fed clearly understood even in the heat of the crisis.

Conditional 'threats'
A conditional threat from the Fed that if Lewis invoked MAC and got in trouble he would be dispatched along with his board does not seem very controversial to me. If invoking the MAC destabilized BofA after the Fed warned it not to do that, the Fed would be remiss to do anything less than to remove Lewis and his board. Lewis may not have thought the 'conditional part' of that 'threat' was important and may have been threatened by that statement, thinking it meant more than it did.

Speculation about truth and motive
That, of course, is speculation. But we can spend time asking 'who is lying' or in trying to understand if the things that were said were misunderstood or taken out of context. Congress is not trying to understand but it is trying to use any inconsistency or seeming inconsistency that it can find to justify the belief of a cover up or of malfeasance. This is largely because much of the public is angry over the money spent and Congress approved TARP whose funds were disbursed by treasury, not by the Fed. One way for Congress to protect itself is to show that THE FED or someone else hid its actions or helped TARP funds to be used in a manner that seems inappropriate.

Shoo-bee-do diligence
It was CLEAR to outsiders at the time that BofA did not have time for any thorough due diligence ahead of its offer for ML Without knowing any details it is clear that given the complexity of ML and its assets there was not time for any appropriate detailed due diligence by BoA in the time it took to say 'yes' to ML. In short Lewis jumped the gun on his ML offer and then had buyer's remorse. That remorse would have had clear severe market consequences had it invoked MAC. Moreover, there is a lot of controversy about whether the grounds to invoke MAC were really in existence.

Witch hunt meets selective recall
While Congressmen are hopped up about this I don't see the issue other than their being on witch hunt to find that someone is lying. It is possible that no one is lying but that the issues were so complex and tempers so high at points that people distorted the important details of the things that they heard and did not like.

Be careful what you EMAIL!!!
If it was never clear to you before it should be clear to you (and Jeff Lacker) that you should be very careful about what you put in an email. Lacker's recounting of a conversation he had with Bernanke (which may not be perfect recall) has become allowable information even though, in law, hearsay is not allowed. Lacker's recollection is now an email and has its own standing.

Bernanke never has been a Chairman who has ruled with ego. He is not Allan Greenspan. He is not Larry Summers. We could NOT have had a better chairman for these times. He has been collegial and inclusive. The sorts of actions Congressmen are grilling him about refer to the kinds of characteristics we have never seen from him.

Japanese lunch box regulation
It is clear in listening closely to Bernanke that one of the issues is that different regulators had different issues. The FDIC did not like the ML/BoA combination because it did not want to be on the hook for any of Merrill's assets that might yet go bad after the combination. There also are some questions about the Fed and its timing in providing information to the SEC. It is not surprising that the Fed did want the SEC any more inside the loop than it had to be since it would be one more complication in an already tangled situation. For its part Bernanke says it did obey the law in terms of releasing information in the timely manner the statures require.

The beat goes on...and on...and on
As I post this, the beat (or beating) goes on. If ever there was a reason to see why a new master regulator is required it is the revelation of all this internecine fighting or positioning in the midst of a real crisis. It does not seem that it was fighting by dueling egos but by regulators protecting and pursuing their different mandates. At one point a Congresswoman said to Bernanke you are all one government... But the FBI and CIA and local law enforcement do not always cooperate. Why should bank regulators? We need to change the laws and make someone responsible.

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