Just One More Thing, Mr. Paulson . . .

Just One More Thing, Mr. Paulson . . .
By William D. Cohan
Copyright by The Washington Post
Sunday, July 12, 2009
http://www.washingtonpost.com/wp-dyn/content/article/2009/07/10/AR2009071002388.html


When Henry Paulson, the former Treasury secretary, sits down in front of the microphones in Room 2154 of the Rayburn House Office Building on Thursday to testify before the House Committee on Oversight and Government Reform, he would do the American people a great service by taking a deep breath and, for the first time, answering the simple question: Why?

Why, between March 2008, when he and Federal Reserve Chairman Ben Bernanke pushed Bear Stearns into the arms of J.P. Morgan Chase, and January 2009, when he and Bernanke helped orchestrate a new $20 billion cash infusion into Bank of America after forcing the bank to complete its acquisition of Merrill Lynch, did he make one decision after another that left us scratching our heads?

Why did he decide to save Bear Stearns, Fannie Mae, Freddie Mac and AIG but not Lehman Brothers? Why did he decide that the only way to solve the problem was to throw money at it?

Why did he not replace -- or hold accountable -- any of the chief executives of the nine Wall Street firms to which he force-fed $125 billion in TARP money last fall?

Why did he play such an enormous role in the unprecedented efforts to rescue Wall Street when he was not the government regulator charged with overseeing the securities industry?

And why are people still so confused about who said and did what to whom in the four months after the Sept. 15 announcement of the Bank of America-Merrill Lynch merger, even though both Bernanke and Bank of America's chief executive, Ken Lewis, have already testified before Congress? As Rep. Edolphus Towns, the chairman of the oversight committee, remarked to Bernanke on June 25: "Much of what the Fed, the Treasury and other agencies did in these transactions remains shrouded in secrecy."

It's time to lift the shroud from those historic decisions. After all, since the summer of 2007, not only have we witnessed the collapse of Wall Street, we have also watched the Fed's balance sheet balloon from $847 billion to $2.2 trillion, not including the more than $12 trillion in new financing that the government has committed to the beleaguered financial sector. In case anyone has forgotten, this is our money, and we should have some answers.

Towns and his committee have been working hard to get those answers, particularly concerning the merger of Bank of America and Merrill Lynch. Now it's Paulson's turn to testify. Towns has also pledged to call on the other regulators involved, including those at the Securities and Exchange Commission (once Wall Street's principal regulator), the Office of the Comptroller of the Currency (the main bank regulator) and the FDIC (the insurer of bank deposits).

Not everything Paulson did during his final 10 months in office flows from the fact that, before becoming Treasury secretary in July 2006, he had been the chairman and chief executive of Goldman Sachs and thus the alpha male of the Wall Street cartel that he was busily trying to prop up. He no doubt was walking a fine line between showing decisiveness in the midst of the crisis and saving the shirts of the members of his former club.

But mysteries remain. Still unexplained after the testimony -- and the rare release of breathtaking e-mails and documents by Towns's committee -- is why Bernanke and Paulson apparently chose to exclude SEC and OCC regulators from discussions about saving the Bank of America-Merrill Lynch merger. What justification could they possibly have had for going around the two institutions directly responsible for banks and investment banks?

And why did Timothy Geithner, then the lame-duck president of the New York Fed and President Obama's nominee to replace Paulson, write in an e-mail on Dec. 20 that Bank of America should be prevented from pulling out of the deal despite Lewis's concerns that Merrill's losses were too big? Hadn't Geithner recused himself from the debate to prepare for his confirmation hearing?

Why did they ignore the concerns of Sheila Bair, the FDIC chairman, about the deal? "My board does not want to do this, and I don't think I can convince them to take losses beyond the proportion of assets coming out of the depository institutions," she wrote to Bernanke on Jan. 14. Bair was the insurer of bank deposits for individual investors; her opposition to the magnitude of the new bailout for Bank of America should have carried more weight with Paulson and Bernanke than it apparently did.

Also, why did Bernanke and Paulson ignore the suggestion of Eric Rosengren, president of the Federal Reserve Bank of Boston, that Bernanke consider replacing Lewis? The British government had just done something similar with the leadership of the Royal Bank of Scotland, Rosengren noted. When Rep. Dennis Kucinich asked Bernanke about Rosengren's e-mail, his response was essentially gibberish.

The backdrop for Towns's hearings is Obama's proposal to endow the Federal Reserve Board with the lion's share of new authority to regulate what remains of Wall Street. The problem is that the 1978 Federal Banking Agency Audit Act exempts the Fed's monetary function -- its interest-rate-setting responsibilities -- from audit or oversight by the General Accountability Office. Given the Fed's extraordinary new lending during this crisis, Kucinich has proposed an amendment -- unanimously approved by the oversight committee -- that would allow the GAO to audit the new Fed programs.

When asked during his June 25 testimony about the Kucinich proposal, Bernanke went ballistic. Passage of that legislation "would be highly disruptive to the stability of the financial system, the dollar and our national economic situation," he said. How so, Ben?

In the response to the current crisis, Paulson and Bernanke were calling most of the shots. But Bernanke's testimony before Towns's committee only added to the confusion about what happened and why. Let's hope that Paulson will use his return to center stage to finally give some serious answers. We deserve nothing less. It's our money.

wdcohan@yahoo.com

William D. Cohan, a contributing editor at Fortune magazine, is the author of "House of Cards: A Tale of Hubris and Wretched Excess on Wall Street."