The kangaroos are holding court on Capitol Hill, where a House committee suspects Federal Reserve Chairman Ben Bernanke of preventing another economic train wreck.
Bernanke was perp-walked last week in televised hearings that explored his role in the acquisition of Merrill Lynch by Bank of America. (In case you don’t know the term, a perp walk occurs when the authorities parade an arrested suspect, usually handcuffed, in front of news cameras. This lets potential jurors appreciate the arresting officers’ fine police work, while it humiliates the accused without the bother of first having to prove any sort of guilt. Most post-arrest scenes you see on television are perp walks.)
Let’s review. In one devastating week last September the investment bank Lehman Brothers failed, insurance giant AIG needed the first installment of what became a gigantic federal bailout, one of the world’s leading money market funds collapsed, and Bank of America announced with fanfare that it was buying Merrill, which otherwise looked ready to follow in Lehman’s footsteps.
The global financial system teetered on the edge of disaster. Because companies like Lehman and AIG owed tens of billions of dollars and no one knew exactly to whom this money was owed, it was impossible to tell which financial firms were solvent and which were broke. It took more than a month of frantic efforts by the Fed, the U.S. Treasury and their counterparts overseas to stabilize things. Much of the effort centered on getting Congress to pass the Troubled Asset Relief Program, or TARP, to restore confidence in the country’s major banks. The House, you may recall, triggered a stock market meltdown when it first voted down the TARP, only to reverse itself when disaster loomed.
By year-end the global economy was crippled, but at least the banking system was stabilizing. The extent of the losses from the credit market meltdown was becoming more clear as banks wrote off enormous sums. At Bank of America, CEO Ken Lewis was making noises about backing out of the Merrill deal because, he said, things at Merrill were much worse than had been apparent in September.
According to House investigators, Bernanke and then-Treasury Secretary Henry Paulson leaned hard on Lewis to complete the deal. They allegedly threatened that the bank’s management would be pushed out if it cancelled the deal and later needed federal financial support. Once the deal was approved, the feds came through with $20 billion in aid to Bank of America, along with guarantees to help backstop losses from Merrill. BA has since moved ahead with its integration of Merrill, and it has raised nearly $40 billion of new capital on its own.
All this sounds like a reasonably happy ending under the circumstances. It might have been impossible to save Merrill from collapse if BA had scotched the deal. We probably would have gone through a September-style crisis all over again, just as the Obama administration was preparing to take office. The U.S. economy, which now seems to be reaching the bottom of a long downward slide, would almost certainly be in a much deeper pit today.
This, however, did not deter the House Committee on Oversight and Government Reform from hauling in the Fed chairman for a public dissing. Committee Chairman Edolphus Towns, a New York Democrat whose long House career is distinguished by no known accomplishments, pressed Bernanke about whether he had threatened to fire Lewis. Bernanke said he had not, but who cares if he did? If BA had squelched the deal, trashed the global economy and then collapsed from Lewis’s own mismanagement, why should Bernanke not have replaced Lewis while sweeping up the mess?
Committee Republicans, who, like Towns, do most of their legislative punching in the lightweight division, also accused Bernanke of improper meddling in private companies’ affairs — as though the management of a crippled bank requiring massive infusions of government cash is none of the government’s business.
“Congress should be thanking him and not berating him,” economist Alan Blinder said of the committee’s treatment of Bernanke, as reported in The Wall Street Journal.
No way. Perp walks are to show how tough the cops are, and kangaroo courts are run for the sole benefit of kangaroos. Keep away from the marsupials. They bite.