Henry Paulson

What To Make Of Hank Paulson's "Texan" Threats On Ken Lewis's Job?

Moe Tkacik | April 24, 2009, 4:11PM

It's clear New York Attorney General Andrew Cuomo's probe into the taxpayer-supported Bank of America-Merrill Lynch merger has widened considerably since he began digging into Merrill's accelerated payout of $3.6 billion in bonuses before the disclosure of a devastating fourth quarter loss. But where is it all headed?

Yesterday Cuomo wrote a letter to Congress, the SEC and TARP Oversight chair Elizabeth Warren disclosing a few findings "that raise questions about the transparency of the TARP program, as well as about corporate governance and disclosure practices at Bank of America." But as former Treasury Secretary Hank Paulson once said about such disclosures, the carefully-worded, heavily redacted documents "create more questions than they answer." The most headline-grabbing detail was Paulson's threat to fire Bank of America CEO Ken Lewis if he backed out of the bank's agreement to buy Merrill Lynch at the agreed upon $10 a share; the second was the revelation that the Fed and Treasury had left the SEC "in the dark" throughout the entire process.

The immediate question at hand is whether Lewis broke securities laws or violated his fiduciary duty to protect his shareholders when he went along with Paulson. Certainly many Bank of America shareholders believe so; the news was met with a statement from CtW, the shareholder group campaigning to oust Lewis in a proxy battle declaring that Lewis "violated their legal duties to shareholders in order to protect their own employment interests" when he decided not to invoke the deal's Material Adverse Change clause, which allows companies to get out of merger agreements under some circumstances. Bank of America shares have lost about two-thirds their value since the Lewis announced it was buying the investment bank.

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Centra Bank

Do Banks Really Get Charged "Fees" For Repaying TARP Funds Early? (Hint: No)

Moe Tkacik | April 23, 2009, 3:51PM

It has been a big month for West Virginia's Centra Bank, whose executives have been interviewed in the New York Times, USA Today, the Wall Street Journal and on Fox News. On March 31, Centra became one of the first five banks to repay a TARP loan -- and it's mad as hell about the terms. The way Centra sees it, the bank was stuck with what it terms an "early repayment penalty" of $750,000 for paying back its $15 million injection just ten weeks after it had received it.

"What they did is wrong and fundamentally un-American," Centra CEO Douglas Leech told the Times, comparing the payout to being charged a 60% interest rate. Today John Fahey, a vice president at the bank, likened the transaction to being forced to pay a 999% premium Fortune.

Behind those bits of somewhat wild analogizing is a major campaign by big banks to get out of paying the government in full if they choose to return their TARP money early. Jamie Dimon and Lloyd Blankfein respective CEOs of JP Morgan and Goldman Sachs, took up the issue with Obama himself at their April 10 meeting, and the American Bankers Association is lobbying Congress to relax the "penalties."

Here's their argument: TARP funds came with options to buy stock in the bailed out banks. The idea was that if the banks profited from the Treasury's injection of capital, taxpayers could share in the profits. The strike prices on the options were calculated on the basis of the average of the bank stocks during the 20 trading days prior to the TARP injections, and the warrants on all but fifteen of the 321 publicly-held banks are currently "out of the money" -- or considerably higher than it would cost to buy the shares today. But the warrants don't expire until 2018, so presuming bank stocks rise over the next decade, they are quite valuable. One analysis estimates that the government's warrants to buy Goldman Sachs and JP Morgan stock alone are worth $2.7 billion. If Goldman returned its TARP money this month, that would effectively mean they had paid a 19% annualized interest rate on the TARP funds, or nearly 10% of the entire injection -- a stiffer "penalty" than even Centra's 5%.

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Timothy Geithner

Only A Taxpayer Would Mistake Tim Geithner For A "Banker"

Moe Tkacik | April 21, 2009, 3:11PM

Too often a tedious standoff between the somnolent/dry and the grandstanding/gratuitous, Congressional hearings about the financial crisis have nevertheless produced a few moments of existential clarity. (We refer, obviously, to the time in December when Maryland Rep. Elijah Cummings asked Neel Kashkari if he was a "chump", which was surely a question on the lips of anyone who had glimpsed the then-TARP overseer's high school yearbook photos.)

But Treasury Secretary Tim Geithner's appearance before a the TARP oversight panel this morning yielded a similarly exchange when AFL-CIO Associate General Counsel Damon Silvers dared to accuse Geithner of being a "banker":

Partial transcript after the jump.

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Neil Barofsky

TARP Watchdog: Bailout Basically A Disaster

Moe Tkacik | April 21, 2009, 1:57PM

TARP watchdog Neil Barofksy appeared on CNBC today to discuss the 250-page report card on the bailout the SIGTARP office (that's Special Inspector General of the Toxic Assets Relief Program, but you knew that) submitted today to Congress. The tenor of his appearance was a great deal milder than that of his report. Asked if he worried that his prosecutorial zeal would dissuade financial institutions from participating in federal programs to restore the system to health, he emphasized that those who "play by the rules" had nothing to worry about. "Those institutions -- those banks, those creditors, those those hedge funds -- that are seeking to steal from the system, to game this program -- I hope we do scare them off," he told the program Squawk Box.

The scary thing, of course, is that from the sound of his report there still aren't many rules governing the bailout -- and in part as a result, it's in danger of destroying the government's credibility. Video and excerpts after the jump.

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Steve Rattner

If Steve Rattner's Scandal Sounds A Lot Like Bill Richardson's, There's A Reason For That

Moe Tkacik | April 21, 2009, 11:24AM

It may not be sexy like Kwame's sexting, or Larry's bathroom stall rendezvous, or Foggo's prostitutes in hot tubs, but for sheer scale of conspicuous muck, the state pension fund scandals bubbling up around the country are in a league of their own. And while it may be hard for you to get your head around as fundamentally dry a subject as state pension funds, the underlying alleged wrongdoing is same as it ever was: billions of dollars in state business steered to politically connected firms, kickbacks, and taxpayers left holding the bill.

You don't have to scratch too far beneath the surface to find the same patterns--and sometimes the same players--emerging from state to state.

Let's start with Obama car czar and billionaire money manager Steve Rattner. Last Friday the Wall Street Journal reported that Rattner was the money manager referenced in an SEC indictment in a pay-for-play scheme run by the top adviser to the former New York State Comptroller that allegedly siphoned more than $30 million off asset managers seeking investments from the state pension fund.

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