BofA boss: Bernanke and Paulson told me to cover up losses

As Glenn Reynolds often says, the country’s in the best of hands.  Fed chief Ben Bernanke and former Treasury Secretary Henry Paulson told Bank of America’s CEO to keep his mouth shut about the massive losses Merrill Lynch was taking in order to get BofA’s purchase of ML.  Kenneth Lewis told New York AG Andrew Cuomo about the cover-up in a deposition:

Federal Reserve Chairman Ben Bernanke and then-Treasury Department chief Henry Paulson pressured Bank of America Corp. to not discuss its increasingly troubled plan to buy Merrill Lynch & Co. — a deal that later triggered a government bailout of BofA — according to testimony by Kenneth Lewis, the bank’s chief executive.

Mr. Lewis, testifying under oath before New York’s attorney general in February, told prosecutors that he believed Messrs. Paulson and Bernanke were instructing him to keep silent about deepening financial difficulties at Merrill, the struggling brokerage giant. As part of his testimony, a transcript of which was reviewed by The Wall Street Journal, Mr. Lewis said the government wanted him to keep quiet while the two sides negotiated government funding to help BofA absorb Merrill and its huge losses.

Under normal circumstances, banks must alert their shareholders of any materially significant financial hits. But these weren’t normal times: Late last year, Wall Street was crumbling and BofA faced intense government pressure to buy Merrill to keep the crisis from spreading. Disclosing losses at Merrill — which eventually totaled $15.84 billion for the fourth quarter — could have given BofA’s shareholders an opportunity to stop the deal and let Merrill collapse instead.

“Isn’t that something that any shareholder at Bank of America…would want to know?” Mr. Lewis was asked by a representative of New York’s attorney general, Andrew Cuomo, according to the transcript.

“It wasn’t up to me,” Mr. Lewis said. The BofA chief said he was told by Messrs. Bernanke and Paulson that the deal needed to be completed, otherwise it would “impose a big risk to the financial system” of the U.S. as a whole.

In other words, Paulson and Bernanke demanded that Lewis put BofA shareholders at risk without their knowledge in order to supposedly fix the financial system.  Regulators exist to ensure that publicly traded corporations obey the law, and to protect stockholders from fraud.  In this case, the very people who ran the regulatory regime pressured a corporation to commit fraud.

If that seems upside-down to readers, well, welcome to Bailout Land.  We have the government demanding that Chrysler merge with Fiat, that GM fire its CEO, and refusing to accept a payback of loans they made to banks because then they will have no way to control their management.  What’s a $15 billion corporate fraud on stockholders in comparison?

This parallels the lack of accountability that continues to plague the Treasury’s crisis management.  When the Treasury Secretary can’t even do enough math to know what he has left in the TARP account, accountability has officially been declared dead.  Congress still has no clue where the initial $700 billion went, and even though Obama has issued his public regrets over the cluelessness at Treasury, nothing’s changed, either.

How many other stockholder frauds have Treasury and the Fed committed?

Update: Forgot to hat tip HA reader Geoff A.  Sorry!