A16 Thursday, July 16, 2009

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The Washington Post

Paulson Makes No Apologies for Role in Merrill Lynch Sale

By Binyamin Appelbaum

Washington Post Staff Writer

Former Treasury secretary Henry M. Paulson Jr. plans to tell a House committee today that he was right to pressure Bank of America to complete its acquisi- tion of Merrill Lynch because al- lowing the deal to fall apart would have damaged the companies and the broader economy, according to a copy of his prepared remarks. The strongly worded testimony makes no apologies for the gov-

ernment’s actions, which have be- come the subject of considerable controversy. Paulson acknowledg- es, for example, that he warned Bank of America that its senior managers could be removed if the deal fell through. He says the warning was issued because “it would be unthinkable for Bank of America to take this destructive action for which there was no le- gal basis and which would show a lack of judgment.” Paulson also plans to deny that the government inappropriately

pressured Bank of America to withhold information from its shareholders about an agreement to provide the company with addi- tional financial aid. Bank of Amer- ica signed the deal to buy Merrill Lynch in September, without fed- eral support, but completed the transaction in January only after the Treasury Department agreed to invest an additional $20 billion in the company and to limit its losses on a portfolio of troubled loans.

The House Committee on

Oversight and Government Re- form already has heard testimony on the government’s role in the merger from Kenneth D. Lewis, Bank of America’s chief exec- utive, and from Ben S. Bernanke, chairman of the Federal Reserve. The hearings have become part of the broader debate about over- hauling financial regulation. Democrats argue that regula- tors allowed Bank of America to squeeze additional aid from the government, and that the secrecy surrounding the episode shows

the need for additional oversight of the Fed and other regulators. Republicans argue that the gov- ernment forced a private com- pany to complete a deal it no lon- ger wanted, and that the episode highlights the need for regulators to be restrained. Members of both parties are likely to press Paulson today to support their positions. “Much of the story remains un-

clear,” said Rep. Edolphus Towns (D-N.Y.), chairman of the over- sight committee. “I will ask Mr. Paulson the same questions that I

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have asked Mr. Lewis and Chair- man Bernanke — was Bank of America forced to go through with the deal, or was this just an old fashioned shakedown?” Paulson’s testimony fits neatly with that of Lewis and Bernanke in one key respect. Lewis testified that regulators pressured him to complete the deal, and Bernanke testified that the Fed did not ap- ply any pressure. Paulson, now working on a book about his role in the financial crisis, plans to tell the committee that he communi- cated to Bank of America his un- derstanding of the Fed’s position, but that he was never asked di- rectly by the Fed to do so. “My words in speaking to Mr. Lewis were my own,” Paulson’s prepared testimony says. “I also want to make clear, however, that I was expressing what I am confi- dent was the strong opinion of the Federal Reserve.” Paulson goes on to say that this understanding was based on “meetings and sev- eral phone calls.” Internal Fed e-mails obtained by the committee ahead of its ear- lier hearings show clearly that Paulson’s understanding was cor- rect — senior Fed officials held in- ternal discussions about issuing such a warning to the bank’s exec- utives.

While the story of that warning has dominated the hearings until now, investigators for the com- mittee increasingly are focused on the details of the government’s decision to give Bank of America a second round of financial assis- tance, on top of the Treasury’s ini- tial investment of $25 billion. In- vestors have charged that the company waited weeks to disclose this information, concealing the depth of its problems from public view.

Lewis, Paulson and Bernanke

all have testified that a final deci- sion on the aid package was not reached until January, and that it was disclosed soon thereafter. But investigators have found what they regard as discrepancies be- tween this account and state- ments Lewis has made in other fo- rums, including in testimony he provided to the New York Attor- ney General’s Office, according to a person familiar with the matter.

SEC Pushes For More Disclosure To Investors

By Zachary A. Goldfarb

Washington Post Staff Writer

The Securities and Exchange Commission yesterday proposed new rules to require local govern- ments issuing municipal bonds, which are used to fund hospitals, roads and schools, to give in- vestors new information about key risks and developments af- fecting their investments. The municipal bond market,

valued at more than $2 trillion, is a popular destination for inves- tors because the returns are often tax-free. More than 70 percent of municipal bonds are owned by in- dividual investors, either directly or through funds.

But these bonds are largely ex- empt from SEC oversight, which means issuers don’t have to pro- vide the same disclosure as with other types of fixed-income in- vestments, such as corporate bonds.

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brokers that sell municipal bonds meet certain disclosure require- ments, what is reported is often decided on a case-by-case basis. For example, it’s up to local gov- ernments to decide whether to tell investors if the tax-free status of a municipal bond is under re- view by the IRS. Also, investors need only be told in a “timely manner,” which is undefined. The SEC’s proposals seek to change both of these things. The proposals would require that an issuer of a municipal bond tell in- vestors about any potential changes to tax status and several measures that indicate the finan- cial health of the issuer and its ability to pay back investors. The proposals would require this disclosure within 10 days. In addition, a class of munici- pal bonds with varying interest rates would be subject to dis- closures. Until now, they haven’t been. These variable-rate bonds have been increasingly popular with governments and now ac- count for 38 percent of all munici- pal bonds.

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“These ongoing disclosures about municipal securities are in- tended to enable investors to bet- ter monitor their investments, avoid manipulation and detect potential frauds,” SEC Chairman Mary L. Schapiro said in a state- ment. Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66