So Now We Learn....

.... what "really happened" when Merrill was swallowed by Bank America.

"Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank's earlier cooperation -- but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.

Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.

Hmmmm.

I thought Treasury was authorized to administer the TARP?

Now we have The Fed effectively committing blackmail (or was it extortion?  Does it matter?) of financial firms at the behest of Treasury?  Where is the legal authority for them to get involved in this?

Lacking, that's where.

The OTS, OCC and FDIC clearly have authority (and in fact an obligation) to seize an institution that falls below regulatory capital minimums.  But to effectively blackmail a firm by threatening to remove management if that firm doesn't intentionally damage its balance sheet and capitalization?

These folks are cowboys off the reservation, shooting whoever and whatever they'd like.  We saw this with Bear Stearns and now we find out that the same sort of game was played with Bank America and Merrill Lynch.

Were the shareholders kept apprised of these shenanigans before the deal closed?  Of course not!  Never mind that until the deal closed they were the legal owners of that company and had every right - both ethically and legally - to know what was going on.

Nor does it end there:

"A month later, Mr. Lewis was at the Treasury Department along with eight other chief executives of large U.S. financial institutions, summoned there by Mr. Paulson. The Treasury secretary wanted the executives to accept a round of government capital totaling $125 billion as a way of shoring up confidence in the banking system.

Mr. Paulson explained that saying no wasn't an option, according to a person who attended the meeting."

So even if these firms didn't want the TARP money, they had no choice?  They couldn't turn it down?

What sort of country do we live in here?  Is this a capitalist system or is it a communist one?  Do we have a rule of law?  Are regulations transparent, clean, and above-board, or have we become a command economy worse than the former USSR in which private property is literally destroyed and seized by individual decree without one scintilla of legislative support?

We already know from Mr. Sherman of California that Paulson and Bernanke threatened Congress with the imposition of martial law if they did not pass the TARP.  Now we find out that this "who gives a damn what the law provides, you will do as we say damnit!" approach extended to forcing private corporations to take money they didn't want - along with its oversight and restrictions - as well?

Yes, I understand that banking is a regulated industry, as it should be.  But since when does that regulation extend to making decisions in secret, screwing shareholders by concealing material information on the firm's (and an acquiree firm's) health and then forcing an apparently-healthy firm (at the time anyway) to acquire one that, it appears, had undisclosed losses at the time the merger was contemplated?

I've got another question - where did the conduits go that the banks all had?  Citibank had over a trillion in these things.  Where are they?  What are they worth?  They were off-balance-sheet - remember?  That was a big deal in 2007 then they just "disappeared"!  I don't recall them all being consolidated - a few were, but nowhere near all.  Is there yet another ticking financial weapon of mass destruction we're not being told about?

If I own stock in a company, do I really have a vote at the annual meeting?  Do I have a right to know what's going on?  Do I have a right to expect SEC filings to be made on a contemporary basis, where the truth is told?  Under the law, I'm supposed to have all those rights.  Do we have a right to banking regulation that is transparent, consistent, and operates according to the rule of law (including the strict limits placed on our Central Bank in its enabling legislation), or do we live in a banana republic where the rules are literally made up as they go along?

Is this all a charade?  Is it all a scam - a fraud - a phony?

It sure looks that way.

If there was a capital adequacy problem in these institutions we have a lawful method to resolve that.  Its called the OCC (or OTS); they come in, do their examination, and if the firm is broke the FDIC takes it over or it is ordered closed.  There are clear rules as to how the FDIC must act in such a circumstance to resolve the failed institution that protect (to the extent possible) the capital structure, depositors and taxpayers.

All of this was ignored in the guise of "exigent circumstances".

Exactly what has gone on since the summer of 2007?  Are we ever going to find out?  Yesterday, in testimony before the Congress, Mr. Markopolos tore the SEC to pieces, effectively accusing them of being both incompetent and "bought off" at the same time.  These are the people who are supposed to look out for the rules - for the investor and the common man - so that swindles and frauds don't go on without detection and punishment.  One of the best quotes from that testimony was:

Asked by a committee member to compare the two agencies failings, Markopolos said, "I never thought the SEC was corrupt... FINRA is definitely in bed with the industry." Asked later by Rep. Kanjorski about those comments as well as which one Markopolos thought was better, "a corrupt regulator or an incompetent one," Markopolos answered, "I'd give the SEC an A+ for incompetence and FINRA an A+ for corruption."

That's special.  Let's not forget that Ms. Shapiro, who ran FINRA, is President Obama's nominee for head of the SEC. We are thus, from Markopolos' point of view, replacing an incompetent regulatory chief with a corrupt one.  That's JUST what we need.

For more than ten years, these clowns ignored a skilled professional who gave them plenty of hard evidence that was trivially-easy to verify.  All they had to do is head over to the OEX options contracts and have a look - were there enough traded to make Madoff's strategy possible or not?  The answer was "not" but nobody looked.

Nobody cared.

Was their blindness purchased?

We'll never know, will we?  But what we do apparently know is that The Fed has overstepped its lawful boundaries on multiple occasions, and has effectively joined itself to Treasury as an unaccountable "strongarm" mechanism - a "Guido" if you will that is unchecked by Congress or anyone else.

This is the sort of thing that in a just society - a nation of laws - would lead to indictments and imprisonment for extortion or blackmail.  In fact, that quoted Wall Street Journal article should lead to immediate Grand Jury subpoenas for Bernanke, Paulson and everyone else involved.  NOWHERE is The Fed authorized under The Federal Reserve Act's limited authority to twist arms like this; this certainly is not enactment of "monetary policy!"

I bet we'll never get answers in a court of law to these questions, but if you're wondering where investor confidence went, there's your answer.  Bernanke and Paulson destroyed it by their own hand, on purpose, and our current administration has done exactly nothing to address that problem.  In fact, it appears they've done their damndest to cover it up!

President Obama is clearly tone-deaf on this matter.  He nominated Geithner who not only was a chief architect of what was arguably an illegal acquisition and intentional destruction of Bear Stearns, our President is dissembling just as much as TurboTax Timmy!

"In a string of interviews Tuesday, Obama said he only belatedly appreciated the disconnect between his rhetoric about a "new era of responsibility" and the fact that his nominees were adding to the resentment building in the country. "I take responsibility for this mistake," he told Fox News. "We can't send a message to the American people that we have two sets of rules: one for prominent people and one for ordinary people."

Oh but you have and you are!  Any ordinary American would have been hit with severe penalties and interest on TurboTax Timmy's "mistake", and furthermore, even after being caught he continued to dodge payment on the other two years of obligation!  If you really meant what you said you'd have withdrawn his nomination - or you would have fired him by now.  Indeed, the shady method by which the NY Fed has operated throughout this entire mess should have been sufficient to disqualify Geithner all on its own.  His tax issues are mere icing on the cake.

This same article says:

Livid about their own vanished jobs and decimated retirement accounts, people across the country are being subjected to story after story about the excesses of the wealthy: the $18 billion paid out in Wall Street bonuses last year, the $35,000 chest of drawers for the Merrill Lynch chief executive's office, the planned Wells Fargo retreat in Las Vegas. This week, they got a new target: an Obama Cabinet nominee who had earned millions and failed to pay all of his taxes.

Never mind that Geithner was central to the Bear Stearns deal in which The Fed (as recently as December) said "would not cost taxpayers any money."  Not so, says this article:

Feb. 4 (Bloomberg) -- U.S. taxpayers may be stuck with losses on $30 billion of Bear Stearns Cos. assets owned by the Federal Reserve even though the central bank has said otherwise, according to Robert A. Eisenbeis, Cumberland Associates Inc.’s chief monetary economist.

“There is no prospect for a profit on the assets,” Eisenbeis wrote in a report yesterday. “Losses are mounting.”

That alone is enough reason to fire Geithner; his failure of judgement in that he failed to protect the taxpayer or, if such was not possible, to inform both the public and Congress that this was the case.

What Americans need to understand is that the reason their retirement accounts have been decimated and their jobs are gone is that our financial system was turned into a gigantic Ponzi Scheme where kleptocracy and fraud were not only ignored they were actively encouraged by Congress and so-called "regulators" who were either inept, corrupt or both.  These individuals are still in office and in fact some of them, like TurboTax Timmy, have been elevated to positions of even more power than they held during the Bush Administration!  President Obama has done exactly nothing to bring any accountability whatsoever to those who have committed these acts, many of which are, in my opinion, felonious, and there is no reason to believe from his speechifying that he will.

There is no reason for anyone to invest in the United States.  Not here as a US resident, nor from abroad.  There is no reason for the Saudis, the Chinese or Japanese to buy any of our paper - not Treasuries, not Agencies and certainly not corporate bonds or common stocks.  In fact nobody can make an argument for ownership over more than a single trading day for any financial instrument because you never know when our government is going to come in and literally trample all over your legal and ethical rights, destroying the value you thought you had purchased and owned.

Not so long as we have a kleptocracy in the United States where a private bank can conspire with a government agency, behind closed doors and with no accountability of any sort, to force private firms to do their bidding as they wish, destroying the interests of both the investor and common man alike, will there be an argument for owning United States financial assets.

I would not be surprised if there is no meaningful and lasting recovery in the equity or credit markets until the people responsible for this outrage are behind bars and transparency is restored, and if investors come to the conclusion that they'd be better off investing in a communist nation like China than the United States (at least there you expect interference with contract rights and the capital structure of corporations!) we in The United States are truly and completely screwed.

PS: Good luck with your Treasury Auctions TurboTax Timmy.  You might want to think about stomping your feet for that Grand Jury to convene and indict your predecessor and Sir BenDover if you actually want to sell all of that $2 trillion in debt this year.  I can't imagine why anyone in their right mind would buy it, especially the longer-duration stuff, with folks like Bernanke out on the town.