Government Bullying of Private Industry More Serious than Imagined

Three cheers for Andrew Cuomo! No, honestly. He's taken a break from extorting AIG execs to give up their bonuses to expose a far more frightening extortion plot: the effort by former Treasury Secretary Hank Paulson and current Fed Chairman Ben Bernanke to force Bank of America to go through with the Merrill Lynch deal -- and conceal the mammoth losses from the shareholders. The Washington Post reports

Legal experts say the SEC could go after federal officials for aiding and abetting if they did in fact tell [Bank of America CEO Ken] Lewis to keep mum on Merrill's mounting losses, but that it is the bank's obligation to inform shareholders of decisions that could materially affect the firm's fortunes.

Lewis said he was instructed to not make a public disclosure about potential government financing. When asked where that instruction came from, Lewis responded: "Paulson."

Paulson and Bernanke are denying that they told Lewis to conceal the impact of the deal from shareholders. Cuomo has 100 pages of documentary evidence and quite a bit of testimony on the subject. We'll find out who said what to whom soon enough.

But this sordid little deal gives us some insight into the entire modus operandi of government which took hold at the end of the Bush presidency and has ramped up during the Obama administration. How is the Bank of America maneuver any different than "Take the TARP money or else"? Or "No, you can't give back the TARP funds"? Or "Fire Rick Wagoner or else"? The Bank of America deal has the added element of deceiving the shareholders, but the pattern of conduct, the bullying of private industry (without regard to legal and ethical obligations to shareholders) by the federal government is the same.

In the absence of legislative authority or published regulatory guidelines, we now have government-by-strong-arm. The most unseemly example may have been the AIG bonus frenzy in which  Congress, egged on by the president, decided that employment contracts don't matter if the mob howls loudly enough. The notion that we are a nation of laws that apply in all situations and without regard to the whims of individual government functionaries is coming under fire like never before in our nation's history. In the guise of tending to an economic emergency, the Treasury secretary, fed chairman, and president roam the economic landscape making up rules, reneging on deals (are we including toxic asset buying firms in the TARP compensation rules or not this week?), and encroaching further and further on the day-to-day management of what used to be private firms.

There is no excuse legally or otherwise for private industry executives to give into such tactics when they think their companies may suffer as a result. Nevertheless, one can understand why they do it. It is not easy to stand up to bullies who are threatening to pull the plug on financing or who have the power to stress-test you into bankruptcy. But it is unseemly behavior and something I suspect the public won't like one bit once they understand the magnitude of the bullying.