Vol. 9, No. 6 621 N.W. 53 rd Street, Suite 400, Boca Raton, FL 33487, www.hegcap.com May 8, 2009
Available By Paid Subscription Only Copyright 2009 The HCM Market Letter, LLC All Rights Reserved The Well-Meaning
(Final Part)
The Abuse of Power Watch
Bank of America: It has been clear from the inception of the economic crisis that the government has been prepared to do whatever is necessary, including ignore the rule of law, in order to prevent the economic system from collapsing. The recent disclosure of testimony by Bank of America CEO Ken Lewis concerning how his institution was compelled to complete the purchase of Merrill Lynch is just another example of the fact that America remains a country where the government often does not comply with the rule of law. Coming in the middle of the debate about whether to prosecute former Bush Administration officials with respect to their role in torturing terror suspects (a very bad idea for too many reasons to list here), this revelation bears a special irony and importance. The United States purports to be a nation of laws, but in fact we are a nation whose servants are all-too-willing to ignore the law when it is expedient to do so.
After BofA discovered billions of dollars of undisclosed Merrill losses, Mr. Lewis flew to Washington, D.C. to discuss the possibility of BofA exercising the material adverse change clause in the merger agreement that would have killed the deal. Then Treasury Secretary Hank Paulson, saying he was acting at the direction of Federal Reserve Chairman Ben Bernanke (the former Princeton professor seems like such a pussy cat, doesn't he?), responded that the government would fire him and his entire board if they failed to complete the deal. Mr. Paulson then assured Mr. Lewis that the government would provide the necessary TARP funds to help BofA absorb the newly disclosed losses. Mssrs. Paulson and Bernanke refused to commit their promise to writing because they did not want public disclosure of what they were doing. Based on these statements, Mr. Lewis did not inform his shareholders of the newly discovered losses at Merrill and the deal closed on January 1. The public did not learn about the Merrill losses or the additional TARP investment until weeks later.
This story is troubling in too many ways to count. The fact that the financial system did not collapse should not serve as the measure of whether government officials acted correctly. As the editorial writers of The Wall Street Journal argue, "[d]isclosure is not a luxury to be enjoyed only when markets are rising. It is the foundation of the American regulatory system and a reason investors have long sought to keep their money within U.S. borders." In fact, the lack of disclosure of SIVs and the like was one of the primary causes of the crisis in the first place, so using the same methods that caused the problem to cure it is particularly offensive. Perhaps we should not be surprised that the same administration that was prepared to ignore the rule of law in its treatment of prisoners of war was prepared to duplicate that conduct in this context. But that does not excuse what was done. And only the most naïve among us would presume to believe that the government is telling us the truth about the bank "stress tests" or other key economic data. There is still much that isn't known about what our government and business leaders felt they had to do to save the system. When regulators and politicians speak about transparency, however, they should be laughed out of the room. If the financial crisis has demonstrated anything, it is that true transparency is the last thing those holding the levers of power desire. Rather, our system provides selective transparency which is in always highly politicized. What is particularly disturbing about this is that the public is relatively quiet about all the vital information that is being concealed from it (a few idiotic tea parties qualify as a circus side-show, not a political movement). Three decades ago Americans were up in arms over similar behavior. It was called Watergate.
As for Mr. Lewis, he received the same type of shoulder-tap that Jamie Dimon received early in 2008 with respect to Bear Stearns. In Mr. Lewis's case, however, he has been hung out to dry by the government officials that asked him to step in and save the system. It is no wonder he looked like his head was about to explode when he was testifying in front of Congress. Of course, the real people being hung out to dry in this whole mess are the American taxpayers, who will be paying for the malfeasance of their political and business leaders for decades to come.
The Ted Stevens Case: The recent decision by Attorney General Eric H. Holder Jr. to dismiss all charges against former Alaska Senator Ted Stevens was necessitated by the latest example of gross prosecutorial misconduct in the American justice system. Mr. Stevens' conviction last October was followed by a narrow defeat in his bid for re-election to the Senate; prior to this unfortunate incident, he was the longest-serving member of the U.S. Senate. Widely known for his ability to gain earmarks for his constituents, Mr. Stevens was a living example of the necessity of term limits. Nonetheless, the manner in which his prosecution was handled was a disgrace. Federal Judge Emmet G. Sullivan blasted the prosecutors when he granted the Attorney General's motion to dismiss, claiming he had "never seen mishandling and misconduct like what I have seen" in the Stevens case. He also delivered a broad warning against what he saw as a "troubling tendency" among prosecutors to breach ethical restrictions and conceal evidence in order to win cases. Judge Sullivan ordered a criminal investigation into prosecutorial misconduct.
Ironically, it was the Bush Justice Department that persecuted the Republican Senator and ultimately cost him and the Republican Party a valuable Senate seat (which has become that much more valuable with the defection from the Republican party of the opportunistic and unprincipled Senator Arlen Specter). But prosecutorial misconduct has become endemic to all levels of the American system of justice. It is particularly rampant in periods when political backlashes lead to calls for scapegoats to satisfy the community's demand for retribution in the wake of an economic or societal calamity. Politicians are ultimately responsible for allowing prosecutors to run wild, which makes the odor surrounding the Stevens case particularly pungent.
HCM has yet to meet one individual who has been involved in a criminal or civil court proceeding who does not emerge with the sense that the American legal system has little to do with justice or fairness and everything to do with creating a forum for one party to abuse the rights of another. By now, we have seen so many cases of prosecutorial misconduct as to question the very authority of the law itself. Whether it is selective prosecution, or the post hoc enforcement of laws that have been on the books for years (i.e. the IRS just now forcing Americans hiding their money overseas to pay taxes), or the countless number of innocent individuals being freed through DNA evidence, it is time for a radical rethinking of our system of justice. Instead of comparing our system to those of China and Russia and patting ourselves on the back, it is time that we seek a higher ideal and make changes to insure that our system stops moving closer to those of countries we mock as gulags.
The Well-Meaning - A Study in Complicity
In 2006, an American raised in France named Jonathan Littell published a near-1000 page novel in French entitled Les Bienveillantes . The novel tells the story of Dr. Maximilien Aue, a former Nazi officer who survived the horrors of World War II and reinvented himself as a lace manufacturer and family man in post-war France. Dr. Aue is a highly educated man, well-versed in literature, philosophy, music and the arts. He is also a serial killer, who before the end of the novel not only murders with his own hand but supervises and plays a role in the genocide of Jews, Gypsies, the mentally impaired and other groups deemed enemies of the Nazi regime. He is on the scene at many of the prime charnel houses of Europe, including Auschwitz. As you might imagine, Les Bienveillantes was highly controversial when it was published in France. It was awarded the prestigious Prix Goncourt but evoked both great praise and loud approbation for its depiction of a deeply twisted soul and a regime that engaged in acts so horrific that they remain fundamentally inexplicable to this day. HCM finds itself squarely in the camp of those who consider Mr. Littell's novel a morally complex and deeply disturbing work of literature that deserves a great deal of praise despite its abhorrent subject matter. Mr. Littell's novel forces readers to confront parts of the human soul that some may believe should best remain hidden, but concealing them is what allows evil to flourish unchecked in darkness until it bursts into the light and wreaks destruction.
The HCM Market Letter is not a literary journal. Les Bienveillantes, however, speaks to the current crisis in financial markets in ways that most reviewers of the book have completely ignored. While many critics have focused on the allusion to Greek mythology in the novel's title , HCM would read the title in a more colloquial manner. Dr. Aue was an order-follower, although he certainly exercised freedom of thought outside of his duties as a Nazi officer (he engages in virtually every sexual perversity known to man). Nazi Germany was filled with well-meaning people who were completely lacking in moral courage or were trained to obey their government's orders. The world is only different today in degree, not in kind; it is still filled with well-meaning people who follow orders but remain essentially oblivious to the consequences of their actions. It is a world of the complicit. In Nazi Germany, the consequences of such behavior were obviously horrific, and perhaps there was little opportunity to opt out without putting one's life in danger. In today's world, however, the consequences of such conduct are not as blatantly horrific; people are not being asked to murder fellow human beings. But that does not mean that what they are being asked to do is inconsequential.
Failure to speak truth to power, in whatever historical context, constitutes complicity with whatever form of evil lurks in a society. In modern Western societies, that evil most recently consisted of a form of economic capitalism that awarded speculation over production to an extent that rotted away the solid underpinnings of economic growth and opportunities for the disenfranchised. While this may not be as morally reprehensible as genocide, it remains morally reprehensible nonetheless. The consequences of the economic practices that caused the current crisis are real human pain and suffering in the present and long-term damage to society and the economy in the long run, which equates to genuine human suffering in the future. Shouldn't we consider those who kept their mouths shut and simply participated in the process are as culpable in the context of their time as Dr. Aue was guilty in his? This is why Walter Benjamin, who committed suicide at the Franco-Spanish border in September 1940 rather than be taken by the Nazis, wrote, "[o]nly that historian will have the gift of fanning the spark of hope in the past who is firmly convinced that even the dead will not be safe from the enemy if he wins. And the enemy has not ceased to be victorious." As we work to reform the financial system, Mr. Benjamin's cry from the depths of despair should drive us to make sure that we get the changes right. Had the world sunk into a real depression, we might have faced a conflagration that would have made the destruction of World War II look like a garden party in comparison. What each of us does every day as participants in the capitalist system makes a moral difference. Too many people forgot that and are already starting to forget that all over again.
One of the most searing features of Mr. Littell's book is the portrayal of the toll that the commission of genocide exacted on the Nazi soldiers who were charged with carrying out the actual acts of torture and murder. In one way or another, this behavior dehumanized them. To a lesser but still tragic extent, participation in a corrupt capitalism warped the values and beliefs of many of the individuals in positions of power - CEOs, regulators, politicians, money managers, etc. It is a rare individual who can resist being influenced and changed by the madness of the crowds that surround him, yet it is those few individuals crying out against the mob that are the voices that need to be heard the most. It is not that the road to hell is built with good intentions or bad intentions - that road is built with human intentions. Mr. Littell's masterpiece depicts those intentions in all of their terrible beauty and sounds a message for all men in all times.
Michael E. Lewitt
mlewitt@harchcapital.com
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