Cover Story

Split decision

"Split decision" Continued...

Issue: "Playing with capitalism," May 23, 2009

Back in the shareholders meeting, Koenick from Maryland couldn't conceal her surprise and anger toward Lewis over the Merrill Lynch deal, telling him: "I find it incredible that you would not stand up to the federal government."

But if some shareholders think Lewis' role is incredible, the role of Bernanke and Paulson is worth examining as well. Mark Calabria is the director of financial regulation studies at the Cato Institute and a former senior staffer on the U.S. Senate Committee on Banking, Housing, and Urban Affairs. Calabria says the power that Bernanke and Paulson exerted is sobering: "To think that any man can spend a trillion dollars in public money is frightening."

Calabria thinks Lewis should have disclosed Merrill Lynch's losses, but he says Bernanke and Paulson shouldn't have asked him to keep quiet, if they did. The officials' combined pressure was likely tremendous, he said: "The only way you could kick it up a notch is if the president were coming to you personally."

As the government's role in banking increases, Calabria says political pressure will build to satisfy taxpayers who feel invested in companies: "If you're having trouble paying your mortgage, you may think: 'I'm bailing them out, so they should bail me out.'" Politicians could feel pressure to lean on banks to deliver cut-rate services to disgruntled constituents. "But these banks aren't going to get back to being healthy again by making bad loans," says Calabria.

Meanwhile, another possibility for increased government control of banks looms: Treasury Secretary Timothy Geithner says the president's economic team may encourage TARP-funded banks that need to raise more capital to convert the government's preferred shares to common stocks. That would make the government's investment in banks immediately available as capital.

But since common stocks carry voting rights, the move could also make the government the majority shareholder in several banks, including BofA. Lewis told shareholders he didn't have enough information to comment on the possibility, but he didn't rule it out. Financial experts said regulators would likely tell BofA officials they needed to raise billions of dollars in additional capital based on results of government stress tests of banking institutions.

Calabria warns that if the government ends up with voting rights in banks, "they're going to get lobbied from every special interest group in Washington." That pressure could be hard to resist, he says: "There are some powerful constituencies that I think the government isn't going to want to irk."

Those constituencies were already lining up at the Bank of America meeting: Stephen Lerner of the Services Employees International Union stood outside near a media tent wearing a sticker that read: "I'm a taxpayer-owner of Bank of America and all I got was this lousy sticker."

Lerner-whose group led efforts to split the chairman and CEO roles at BofA-said all taxpayers are now shareholders in banks taking government funds. Lerner sped through a list of demands he wants the government to impose on banks like BofA: raising wages, expanding health-care coverage, and allowing workers to form unions. Lerner acknowledges those are demands his group has wanted for years: "Now that we're the biggest owners of Bank of America, we [taxpayers] should have a say in the policy."

A few feet away, Dennis Meyer munched on a granola bar and waited for a cab. The BofA shareholder traveled to Charlotte from Kansas City and said he's upset over the money he's losing as he nears retirement-money he had hoped to use to help pay for college for his six grandchildren. But despite his losses, Meyer said he hopes government will soon be out of banking: "You can't have politics involved in running a bank."

Out of tune

By Timothy Lamer

Last week's controversy over the government's plan to restructure Chrysler could be a textbook example of the truism that "he who pays the piper calls the tune." A look at some flows of money makes it easy to understand why the major groups involved-the Obama administration, the United Auto Workers (UAW) union, such big banks as Citigroup and Morgan Stanley, and a group calling itself a committee of "non-TARP lenders" to Chrysler-acted the way they did.

The plan, engineered by the White House, sought to keep Chrysler out of bankruptcy by transferring the company's assets to the UAW, Fiat of Italy, and the U.S. and Canadian governments. In return, senior lenders to the company would receive $2.25 billion for the $6.9 billion they had loaned the automaker-meaning they would lose about 67 cents for each dollar loaned.

The UAW would be a big winner under the plan. The union gave $5 million to the Obama presidential campaign, and during the Chrysler negotiations enjoyed what The New York Times called a "rare front seat" for a labor group. The UAW would receive 55 percent of the company's assets under the plan. The big banks, which were negotiating with the same government that has given them billions under TARP, agreed to make themselves big losers, recovering only about 33 cents for each dollar invested in Chrysler.

But the non-TARP lenders, a group of smaller funds that owe financial allegiance to the people who invest with them, refused to go along with such a low figure and sent Chrysler to bankruptcy court. This earned the wrath of powerful Democrats, who blasted them as "speculators" (President Obama) and "vultures" (Michigan Congressman John Dingell). Thomas E. Lauria, a lawyer for non-TARP lenders, claimed the administration threatened to damage the reputations of his clients if the clients didn't go along with the plan.

The White House denies that claim. But even if outright intimidation didn't happen, it's clear that political concerns were at the heart of the plan. The danger is that in this era of bailouts, banks and businesses will make decisions based on the political needs of government leaders instead of on market realities. If that leads to more and more bailouts, then taxpayers may decide they don't like the sound of the tune they're funding.

Jamie Dean
Jamie Dean

Jamie lives and works in North Carolina, where she covers the national political beat and other topics as news editor for WORLD. Follow Jamie on Twitter @deanworldmag.

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