TARP Looking More Criminal by the Minute
The issue of TARP corruption may now extend from corporate CEOs and federal regulators to New York's attorney general.


Donald L. Luskin

Or is it the matter of the Treasury’s role in Bank of America’s acquisition of Merrill Lynch? Barofsky says he’s “auditing” that “decision making process” too. For months now that acquisition has been shrouded in controversy. It was completed at year-end, even though BofA discovered that Merrill had suffered horrible losses in the fourth quarter, far worse than anything expected when the acquisition was first announced in September. Andrew Cuomo, the attorney general of the state of New York, has been investigating why large bonuses were paid to Merrill employees before the deal closed, and why the large Merrill losses weren’t revealed to the public until January.

The bonus matter is populist drivel. The substantive issue is the failure to promptly disclose to investors Merrill’s losses — losses so great that Bank of America came near to walking away from closing the acquisition deal. According to a letter to Congress from Cuomo yesterday, that failure — which surely raises the most troubling issues of securities fraud — was instigated by government coercion. Cuomo writes that according to a deposition by CEO Lewis, “Bank of America did not disclose Merrill Lynch’s devastating losses . . . and would have done so but for the intervention of the Treasury Department and the Federal Reserve.”

In Lewis’s own words from the deposition, he “was instructed that ‘We do not want a public disclosure.’” Cuomo’s office asked, “Who said that to you?” And Lewis responded, “Paulson.” On the face of it, that would seem like a smoking gun — placed in Lewis’s innocent hand by the secretary of the Treasury of the United States of America.

Is that the “public corruption” Barofsky is talking about?

Maybe. But then again, maybe not. In his letter, Cuomo goes on to say that “Secretary Paulson . . . informed this Office that his discussions with Lewis regarding disclosure concerned the Treasury Department’s own disclosure obligations” with respect to the commitment of future TARP aid — not the matter of Merrill’s loss.

Indeed, this very distinction is made by Lewis himself in the same deposition. Lewis was asked, “A public disclosure of what?” He responded, “Of what they were going to be doing for us until it was completed” — that is, the TARP commitment. Lewis was then asked specifically, “How about of Merrill fourth-quarter losses?” His response: “That wasn’t an issue that was being exchanged.”

It would appear that Cuomo may have significantly misrepresented Lewis’s testimony by claiming that he “would have” disclosed the Merrill loss “but for the intervention of the Treasury Department,” since by Lewis’s own testimony the Treasury’s intervention wasn’t even on this subject. And Cuomo appears to mislead Congress when he says that Paulson “informed this office” — as though by way of clearing himself of culpability — of the very thing that Lewis himself already said.

If true, this is serious prosecutorial misconduct, very much in the mold of Cuomo’s predecessor Eliot Spitzer. The strategy seems to be to try the case in the media — which can be relied upon to uncritically carry the prosecutor’s message, as indeed the Wall Street Journal already has done  – and to avoid the rigors of an actual courtroom, in which the accused will have the opportunity to defend himself.

Is that the “public corruption” Barofsky is talking about?

TARP may indeed have been necessary to save the banking system from implosion last year. But its cost will exceed its $700 billion budget. And its true cost includes the corruption of private rent-seekers and public power-seekers, drawn by that astronomically large pot of other people’s money like fleas to a dog.

A $700 billion budget buys one heck of a big dog — apparently a dog that attracts some pretty big fleas.


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