Merrill Lynch

Enron-like Fraud by Government in Bailouts

by Hans Bader on April 24, 2009 · 1 comment

in Bailout Watch, Economy, Politics as Usual, Precaution & Risk, Stimulus to Nowhere

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?

Losing talent in these perilous times

by Fran Smith on March 26, 2009

in Bailout Watch, Economy, International, Nanny State

We’re beginning to see the talent exodus from TARP-funded financial institutions.  Yesterday in an op-ed Jake DeSantis of AIG-Financial Products wrote his “resignation letter” saying why he was leaving AIG.  One major reason was the raging mob calling for the heads of those who received retention payments, now called bonuses, and the tepid defense that AIG’s $1-per-year chairman gave before Rep. Barney Frank’s rabid committee.

Today we learned from the Wall Street Journal that several top managers at Banque AIG in France are leaving, which experts say could cause defaults in $234 billion of derivative transactions.  That’s because Banque AIG has to get French banking regulators to approve their replacements.  If the regulators instead put in their own manager that could lead to defaults, since under the derivative contracts, such an appointment would mean a change in control and could null the contracts.

On top of that, two top Merrill Lynch strategists are leaving Banc of America Securities-Merrill Lynch research unit.

Retention payments to try to keep good managers in these trying times — to help resusitate ailing and failing financial firms — seem like a good idea, but not in the face of mob frenzy whipped up by policymakers and so-called community groups like ACORN, which has been leading protests and bus tours to point out “bonus” recipients’ homes.

An earlier post had speculated that London’s financial center could grow in power with U.S. financial talent being driven out.  But that was before vandals attacked the Edinburgh home of the former head of the Royal Bank of Scotland, where they broke windows in his house and his car.  Is London still safe from the anti-capitalist mobs that have threatened chaos at the G-20 meetings next week?  Don’t bet on it.  They too have been stoked up by policymakers’ — and world leaders’ — anti-capitalist rhetoric.