Respect the Market

I just read Jonathan Weill’s post on Bloomberg, One Nation, Under Banks where he chastises Paulson and Bernanke for suggesting that Ken Lewis not disclose pertininent information to the public regarding BAC’s acquisition of MER.  Weill writes,

Both Bernanke and Paulson in mid-December knew Bank of America was obliged by statute to publicly disclose the huge losses Merrill Lynch & Co. had racked up that month. You don’t get to be chairman of the Federal Reserve or, in Paulson’s case, secretary of the Treasury or head of Goldman Sachs Group Inc. without learning this basic tenet of U.S. securities laws. Instead of making sure the public was fully informed of the losses before Bank of America completed its purchase of Merrill on Jan. 1, they did all they could to keep the secret safe.

Neither Bernanke nor Paulson told the Securities and Exchange Commission, according to the letter Cuomo wrote to lawmakers and regulators. They didn’t tell Lewis or anyone else at Bank of America to do the right thing and obey the law. And while they promised Bank of America lots of money to keep it from calling off the deal, they were careful not to commit any of their agreements to writing for fear this would bind the government into disclosing them itself.

It didn’t matter that investors were buying and selling billions of the banks’ shares without a clue that Merrill had lost more than $12 billion during the fourth quarter. Bernanke and Paulson had a singular objective — to get the Merrill deal done, on time — even if that meant duping the stock market and threatening to fire Lewis as chief executive officer, along with the company’s board.

The best that can be said about Bernanke and Paulson is that they believed the ends justified the means, and that preventing system-wide harm to the world’s financial markets took priority over strict adherence to the law. And yet, if you think they didn’t breach the public’s trust, ask yourself this:

Knowing what we know now, how could you ever trust anything Bernanke says again?

Ever since this story broke, I’ve been bothered by the utter lack of disprespect for the market by those in charge of ensuring that the markets themself function properly.  This is not the first time these two showed such disregard for markets.  While the subprime crisis was unfolding, every measure they put into place was an attempt to “dupe” the market into not confronting the reality of its own existence – that it was wrong.   As parents of the market, the prudent thing is not to lie to it and shield it from the harsh reality but to work with it to embrace reality and come out better in the end.

At the end of the day it really boils down to respect and hubris.  Markets are simply people and if you don’t respect them they won’t respect you and if you think you are bigger than they are you will always be proven wrong in the long run.  When markets are not respected by those who should have the utmost respect for them, they become broken. Markets are one of the most beautiful inventions of mankind because they ARE mankind and as snippets like this break out you can see what years of disrespect has done to it.


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