Thursday, February 5, 2009

The Great Man Theory & Its Obverse

The history of the Crash of '08 has yet to play out, but one thing is clear: the 4 month performance of Hank Paulson was absolutely disastrous. A lot happened behind closed doors about which we are only now learning. The latest revelation: The Bank of America-Merrill "Deal", was forced on B of A, which wanted to walk away from the merger when it learned that Merrill had been less than forthcoming about the true state of its business.

Paulson, the former Goldman Sachs man, never wavered from one goal throughout the crisis months: save the Manhattan investment banks, Goldman included. The B of A merger with Merrill was a piece of that, and for Paulson it must have had an undeniable appeal. Rather than saddle the gov't with Merrill's mess, he could force a private company outside of the Manhattan club to take on all of Merrill's obligations. When B of A learned that Merrill - like Lehman and Bear before it - had been lying about its books, it was too late. For B of A.

Spare me the complaints about Kenneth Lewis' fiduciary duties. What, pray tell, was he supposed to do? Under normal conditions, he would have walked away from the deal. In fact, he fully intended to do that. Instead, he was forced to consummate the "deal" by the government which regulated him, taxed him, and held his bank's charter. What would have happened if he had gone "off the reservation" and started talking down the Merrill deal? Nothing good - for B of A, its employees, its customers, and shareholders.

I suspect the average person doesn't think this is a problem, except as it might relate to their tax bill. That's because they can't quite grasp why their economic freedom might be related to the troubles of some overcompensated bankers in NY and NC. But, if the police tried to do this, the ACLU would fill the air with legal briefs. If the Pentagon tried this, the streets would be filled chanting crowds. But, a businessman essentially forced to do a deal at the government's bidding? A deal that only benefits the government and really has no economically rational basis for the business? Not a word. Well, that stinks, and it speaks to the profound ignorance many people - from the Man on the Street to many in the corridors of power - have regarding their economic freedom and how easily it can be lost.

The problem is not what happened to B of A; it's the precedent this sort of behavior by the regulators has set. Our freedom of contract was greatly curtailed in the Thirties. Congress has virtually unlimited power to regulate commerce under a very expansive (read "progressive") reading of the Commerce Clause. Our Fifth Amendment property rights were greatly curtailed just a few years ago with the "Kelo" decision. Now, the ability for our biggest companies to determine the best manner in which to live or die has been repealed by a gov't that seems determined to preserve a failed regulatory-business model in amber.

No comments:

Post a Comment