As we sort out the disaster that was Bank of America's TARP-funded purchase of Merrill Lynch, read this remarkable passage from the testimony that bank CEO Kenneth Lewis gave to New York's attorney general:
Q: Wasn't [Treasury Secretary Hank] Paulson, by his instruction, really asking Bank of America shareholders to take a good part of the hit of the Merrill losses?
Mr. Lewis: What he was doing was trying to stem financial disaster in the financial markets from his perspective.
Q: From your perspective, wasn't that one of the effects of what he was doing?
Mr. Lewis: Over the short term, yes, but we still thought we had an entity that filled two big strategic holes for us and over long term would still be an interest to the shareholders.
Q: So isn't that something that any shareholder at Bank of America who had less than a three-year time horizon would want to know?
Mr. Lewis: The situation was that everyone felt like the deal needed to be completed and to be able to say that, or that they would impose a big risk to the financial system if it would not.
Q: When you say "everyone," what do you mean?
Mr. Lewis: The people that I was talking to, [Fed Chairman Ben] Bernanke and Paulson.
Q: Had it been up to you would you made the disclosure?
Mr. Lewis: It wasn't up to me.
Q: Had it been up to you.
Mr. Lewis: It wasn't.
Q: Why do you say it wasn't up to you? Were you instructed not to tell your shareholders what the transaction was going to be?
Mr. Lewis: I was instructed that "We do not want a public disclosure."
Q: Who said that to you?
Mr. Lewis: Paulson.
If you believe one of the causes of the crisis is the principal agent problem—what happens when a company's representatives act more for themselves than for the organization's long-term interests—then this should be yet another alarming moment. The government pressured a corporation's chiefs to take a very risky move while keeping the company's nominal owners in the dark. The end result was a big bailout for Bank of America (and a big payday for Merrill Lynch executives).
Don't think for a second that this was an enormous aberration. At a time when many of us are looking for ways to make owners more responsible for a company's fortunes, public policy is pushing us in the opposite direction: The government has been shielding companies from the consequences of their actions, and it has been inserting itself into their internal policies. The effect is to shift both fiscal liability and decision-making authority into the hands of the state, leaving owners even further removed from the risks being taken in their name.