Coercion and the use of force have been part of the American character since settlers started moving West at the end of the 18th Century. Gentility is not usually an acceptable approach to settling differences in the United States. That may account for the large amount of violent crime here compared with other developed countries. In some states pick-ups still sport bumper stickers supporting capital punishment.
A case in point is the conversation that Ken Lewis, CEO of Bank of America , says that he had with former Treasury Secretary Henry Paulson. According to information released by NY State Attorney General and governor-in-waiting Andrew Cuomo, Lewis was threatened by Paulson who told him that the entire B of A board would be dumped if the bank backed out of a deal to buy Merrill Lynch. Passing the blame, Paulson claimed he was merely doing the dirty work of Fed chief Ben Bernanke. Bernanke has tried to distance himself from the event. The press has used the story to paint a picture of Bernanke as a ferociously determined leader. He has instantly earned a new respect in the financial community where he had been considered an egg head and milquetoast.
Bernanke and Paulson were doing what they thought was necessary to prevent what they viewed as a possible catastrophic failure of the national and perhaps global banking system. If Merrill Lynch had been left on its own to suffer huge fourth quarter losses, it might have faced a fate like that of the departed Lehman. Morgan Stanley nearly had the same set of problems until the Japanese financial house Mitsubishi UFJ agreed to honor a commitment to put $9 billion into the U.S. investment firm. Whether their presumption was right or not, it appears that Paulson and Bernanke believed that a failure at Merrill could have been an event worse than the banking catastrophes of the 1930s. This will remain an unanswered question. Would the common equity value of America’s largest financial firms have gone to zero in a matter of days if Merrill had gone bankrupt Would bondholders have suffered huge losses Would the trouble have spread to even the healthiest financial firms
What has been left out of the news reports about the strong-arming of Lewis is whether it was ethical. It may have been the only approach to take in Paulson and Bernanke’s views. The SEC may claim that the action was not legal because Lewis had an obligation to disclose the conversation to both his board and to his shareholders. He was being asked to act against the interests of the bank he runs in the name of the national interest.
Unfortunately for the country and it is the country that is watching all of this that action was almost certainly not ethical. It was a case of two men with the power to determine the fate of another man and the company he led by taking all of his responsibilities out of his hands. By the action, Bernanke and Paulson pushed Lewis to betray a trust to his shareholders, his customers, and his employees. Bank of America has been on many of the lists of mortally ill banks which may have to be broken up or nationalized since the Merrill buyout. This, in and of itself, has cost the firm’s shareholders billions of dollars. If B of A had walked away from Merrill and its problems, the bank would almost certainly have been considered a relatively safe operation which would not require government intervention to survive.
Saving the banking system was not Lewis’s job. Bernanke and Paulson had no right to ask him to abandon what were his very clear duties and press him into service doing something contrary to the obligations of his office.
Since there will never be answers to what would have happened if B of A had abandoned Merrill it is useless to speculate about whether Paulson and Bernanke did the right thing. What happened when Lewis was asked to take a role which was not reasonably his is that the ethical obligation of refraining from force to pervert another person’s duty to his obligations was breached. Lewis may have been the obvious victim but the relationship between the government and private enterprise, which is based on law and not on force, was morally damaged. And that sets an ethical precedent, a deeply flawed precedent that puts ethical behavior in jeopardy of being undermined by convenience.
Douglas A. McIntyre
See TIME’s two-minute bio of Bernanke.
For constant business updates, go to 24/7wallst.com.