Lies, Threats, Deal: Paulson, Bernanke, Lewis

From Forbes.com

The ramifications of the startling revelations about Bank of America’s controversial acquisition of a failing Merrill Lynch are explosive, and they will have a major impact on the tragic drama’s main actors, from BofA chairman Ken Lewis to Federal Reserve Chairman Ben Bernanke, and especially former Treasury Secretary Hank Paulson and whatever legacy he hopes to leave.

The events of December 2008 were absolutely crucial to understanding the financial crisis that threatened global markets. That they have become public four months afterward should trigger congressional hearings and raise once again the specter of machinations worked up by Wall Street and Washington out of public view and quite arguably out of the public interest.

“We have uncovered facts that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure policies at Bank of America,” reads a letter from New York Attorney General Andrew Cuomo to Sen. Christopher Dodd, D-Conn., Rep. Barney Frank, D-Mass., and Securities and Exchange Commission Chairman Mary Schapiro.

Lewis may well be ousted at the Bank of America annual meeting in May, as many large institutional shareholders have organized a campaign to get a vote for his ouster. Since the Bank of America-Merrill Lynch deal was approved, Bank of America shares have fallen from $14.11 in mid-December to $3.75 a share at the low on March 9, and recovered to a still depressed $8.50 today.

None of the details revealed by Lewis’ testimony to Cuomo’s office–all substantive matters that would have been of keen importance to shareholders of Merrill Lynch and Bank of America–were ever made public before the deal went through on Dec. 31. That is a shocking violation of the requirement to inform shareholders of any material matters that could impact their vote or holding of shares in either company. This nondisclosure of market sensitive information means all the trading between Dec. 15 and April 22–tens of millions of shares of the largest U.S. bank–was executed on the basis of withheld information. This is a shocking violation of 75 years of securities regulation.

Incredibly, the SEC was never informed of any of this: that Merrill was about to report a huge $15 billion loss, that Lewis wanted to kill the deal, that Paulson told Lewis that Bernanke had instructed him to fire Lewis and dismantle his entire board if he refused to go through with the merger. It’s not exactly clear what authority Paulson and Bernanke were going to use to replace Lewis and his board–powers they might assume in a pending systemic breakdown?

“Notably, during Bank of America’s important communications with federal banking officials in late December 2008, the lone federal agency charged with protecting investor interests, the Securities and Exchange Commission, appears to have been kept in the dark,” states Cuomo’s letter to congressional leaders. “Indeed, Secretary Paulson informed this office that he did not keep the SEC chairman in the loop during the discussions and negotiations with Bank of America in December 2008.” In other words, Paulson’s disdain for SEC Chairman Christopher Cox meant that the Treasury was operating in an autonomous, somewhat high-handed fashion.

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A former SEC commissioner tells Croesus today that Lewis certainly violated securities laws by submitting a vote to BofA shareholders in December of 2008 and willfully failing to disclose highly material facts to them and the investing public.

A huge black mark for Lewis is that he never discussed with his board the problem of disclosure to shareholders. As incredible as it may seem, Lewis, at the very least, did not even file an amendment to the merger agreement after it closed on Jan. 1, disclosing all the recent material developments concerning Merrill Lynch and Bank of America. This would have included deterioration of earnings, asset write-downs, his attempt to scuttle the deal and his negotiations with the Bush administration about top-level governance of the bank.

Lewis should be legally liable for not reporting all these machinations to the public and to financial market regulators. Apparently, he has testified that both Paulson and Bernanke urged him to remain silent about the threats to the transaction, using threats of replacing him. If this is true, then it could be argued that these two senior officials suborned information that was crucial to market decisions.

Another major problem that will be aired in hearings is the evidence that the chairman of the Federal Reserve, supposedly an independent institution, apparently dictated to the Treasury secretary an order to replace Lewis if he wouldn’t go along with the deal. Paulson told Cuomo’s office that the government “either could or would remove the board and management.”

This opinion, Paulson explained to Cuomo’s office, “was entirely based on what he was told by Federal Reserve officials.” Late Thursday, however, a Paulson spokesman took a slightly different tack, explaining that “Bernanke did not instruct him [Paulson] to indicate any specific action the Fed might take.” Will the real story please stand up?

If Paulson and Bernanke induced Lewis to violate the securities laws, then they are possibly party to a civil crime. Some investment bankers say that current Treasury Secretary Timothy Geithner is a party to these dealings as well. That would be logical and messy as hell. In all, it’s another black eye to the Wall Street rescue plan and another blow to the small shareholder who had no idea of all this backroom infighting. It’s also a real threat to the whole concept of transparency regarding the decisions that decide the fate of tens of billions of dollars and hundreds of millions of people.

Obama team reverses union transparency

From the Washington Times:

The Obama administration, which has boasted about its efforts to make government more transparent, is rolling back rules requiring labor unions and their leaders to report information about their finances and compensation.

The Labor Department noted in a recent disclosure that “it would not be a good use of resources” to bring enforcement actions against union officials who do not comply with conflict of interest reporting rules passed in 2007. Instead, union officials will now be allowed to file older, less detailed conflict reports.

The regulation, known as the LM-30 rule, was at the heart of a lawsuit that the AFL-CIO filed against the department last year. One of the union attorneys in the case, Deborah Greenfield, is now a high-ranking deputy at Labor, who also worked on the Obama transition team on labor issues.

Labor officials declined to say whether she played a role in the new policy, noting that Ms. Greenfield is abiding by all government ethics rules. In court filings, she and other union attorneys called the 2007 rules “onerous.”

The Labor Department also is rescinding another key labor financial disclosure regulation. The expansion of the so-called LM-2 rule, approved during the last days of the Bush administration, requires unions to report more information about finances and labor leaders’ compensation on annual reports.

Critics worry that the rollback of union reporting requirements will keep hidden potentially corrupt financial arrangements aimed at rooting out corruption, but unions say the Bush administration reporting rules were unfair and burdensome.

“Strong financial disclosure requirements are necessary to root out and combat union-related corruption,” Rep. Howard P. “Buck” McKeon, California Republican, and Rep. John Kline, Minnesota Republican, wrote in a recent letter to the department.

Sen. John Cornyn of Texas sent the department a similar letter signed by more than two dozen other Republicans.

But Labor Department spokeswoman Gloria Della said Secretary Hilda L. Solis “is committed to strong, fair and balanced enforcement of labor-management reporting laws.” She said the department’s move to rescind the expanded LM-2 financial reporting requirements gives the department “the opportunity to evaluate whether we are taking the best actions toward that goal.”

The department declined to comment on the potential for more changes in the financial reporting rules for unions. But officials referred to a lengthy statement the department recently published in the Federal Register.

The statement, by Shelby Hallmark, acting assistant secretary for employment standards, and Andrew D. Auerbach, deputy director for the Office of Labor-Management Standards, deemed it “a mistake” for the Bush administration to propose further changes to LM-2 disclosure regulations. The officials said not enough time had passed since previous reporting rule changes were passed in 2003.

“The department agrees with the contention that financial transparency is necessary to protect against union fraud and corruption and to enhance accountability among union officials, and that it is necessary for members to effectively engage in union-self governance,” the labor regulators wrote.

However, Mark Mix, president of the pro-business National Right to Work Legal Defense Foundation, which provides legal services to workers who say unions have violated their rights, called the rollback of union financial disclosures troubling.

“The department’s decision not to protect simple union disclosure protections creates increased vulnerability for American workers and should serve notice to legislators that now is not the time to grant union bosses more unchecked power over workers and our economy,” he wrote in a recent letter to the department.

He said the AFL-CIO would “benefit greatly” from the delay or rollback of expanded reporting rules. “It immediately allows the AFL-CIO to avoid financial disclosure that is beneficial and necessary to rank-and-file workers who are forced to pay union dues and fees to keep a job,” he said.

Jim Coppess, associate general counsel for the AFL-CIO, discounted the criticism. He said the Labor Department’s recent moves did nothing to affect the transparency of union financial reports or the ability of federal regulators to monitor expenditures.

“All the department has done is propose the withdrawal of a rule hastily adopted on the very last day of the Bush administration and an examination of the actual costs and benefits of extensive reporting requirements imposed on unions in 2003 as the basis for possible future changes,” he wrote in an e-mail to The Washington Times.

Ms. Greenberg’s new role at Labor has prompted Mr. Mix and his group to file a Freedom of Information Act request seeking details about whether she or any other union leaders played a role in the union’s financial disclosure policies.

Ms. Greenfield declined an interview request, although Labor Department spokeswoman Amy Louviere said she is “complying with the president’s ethical guidelines.”

Last year, Ms. Greenfield and AFL-CIO attorneys sued Labor, saying the new conflict of interest forms would force thousands of unpaid union shop stewards to report detailed information about their finances to the department each year.

“Treating individuals, such as shop stewards, who are not on their union’s payroll as ‘employees of a labor organization’ sweeps tens of thousands of rank and file union members” into the new reporting requirements, Ms. Greenfield and other union attorneys argued in a 51-page court filing.

Under the Bush administration, the department defended the rules in court. In court filings, government attorneys argued that the new rules were needed to “bring to light a wide variety of financial transactions and arrangements – whether proper or improper – that pose conflicts of interest arising from the relationships between unions, their officers and employees, employers and businesses.”

Ms. Greenfield’s job transfer is one of several appointments that suggest organized labor will hold much greater sway in the Obama administration than during the Bush years. Organized labor, which spent tens of millions of dollars helping to elect Barack Obama as president, has other likely allies, including:

• Patrick Gaspard, White House political affairs director, who worked at the Service Employees International Union.

• T. Michael Kerr, who served as assistant to the secretary-treasurer at SEIU in charge of finance and administration before he was picked to serve as assistant secretary for administration and management at Labor.

In her new job, Ms. Greenfield is in charge of the department’s executive secretariat office, which handles incoming correspondence to Ms. Solis, as well as memoranda and other documents from throughout the department.