Hold Paulson Accountable
by John Berlau
Issue 137 - August 5, 2009

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 was heartening that the House Oversight and Government Reform Committee has now held a bipartisan hearing in which Paulson was at last held to some account.

The fact is, 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 explored regarding Paulson and others including Federal Reserve Chairman Ben Bernanke pressuring the Bank of America CEO to deceive his shareholders and not report the extent of losses at Merrill Lynch at the time BofA was considering acquiring 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, 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’ 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 refused to deceive investors.

John Berlau is Director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

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