A short note on National Interest

The list of things that can be done in national interest appears to grow longer every day.  While in India it can be used for anything from destroying working class housing to build stadiums to destroying tribal communities to build dams, to torturing, illegally detaining, and killing innocents under false pretences; in the US, officials and executives are coming to terms with how to deal with an “economic emergency”.

As information on Bank of America’s purchase of Merrill Lynch begins to trickle through the American financial press; news of Merrill’s larger than expected losses seems to have taken some of the sheen of BoA Chief Executive Kenneth Lewis’s knight in shining armour costume.

As reported by Reuters on Jan 16th, shareholders at BofA believe that, at $19.4 billion, Lewis not only overpaid for Merill Lynch; but Merrill’s staggering $15.3 billion dollar loss suggests that he did not do his homework on the deal.  As Dennis K. Berman notes in this morning’s Wall Street Journal, the murkiness surrounding the deal has meant that “in the past five trading days, Bank of America’s market capitalisation has dropped 45 %, wiping away a sum greater than the Merrill transaction itself.”

The behind the scenes power-broking on the deal throws up interesting questions of the essential functioning of markets in a post credit-crunch world. It now appears that the Treasury Secretary and the Chairman of the Fed might have either explicitly or implicitly asked prevented Lewis from disclosing the true extent of Merrill losses from BofA shareholders until the deal was closed.  Given the hole in Merrill’s balance sheet, it is possible that the shareholders might have voted against any attempt to acquire it.

The deal is under fire from all sides: Merrill’s board is furious that they werent keep in the loop about the extent of the company’s losses, while the BofA shareholders are wondering how the government could force the Bank to swallow such an evidently bitter pill.  One answer could be the $138 billion package that the Treasury has offered BofA to close out the deal.

In his defence, Lewis was quoted saying ” we spoke to and were in close coordination with officials from both the Treasury and the Federal Reserve. The government was firmly of the view that terminating or delaying the closing of the transaction could lead to significant concerns and could result in serious systemic harm.” (emphasis added).

Columnists, including Berman, have noted that Lewis statements suggest that “Uncle Sam appears to have gone from matchmaker to God-father”, forcing companies to merge, de-merge or simply fail in an attempt to ward off “serious systemic harm,” further pointing out that in this particular case “the government is complicit in non-disclosure”.    He goes on state that:

“Lawyers said that it is possible a new legal standard could eventually emerge from transactions like Merrill: that of a ‘national-interest’ doctrine, absolving companies of governance actions that may be potentially harmful, but are important to an economic or defense emergency.”

The credit-crisis is interesting for a whole host of reasons, but one of the most interesting ones has been how the US government has attempted to push money into the system.  Given the dogma against state intervention in the markets; the increasingly interventionist moves of Bernake and Paulson have created a profound discomfort among talking heads in the US.    To quote, just one particularly strident critic of regulation, intervention and bailouts,Kentucky Senator Jim Bunning, in his statement to the Senate Banking Committee in July 08.

“When I picked up my newspaper yesterday, I thought I woke up in France. But no, it turns out socialism is alive and well in America. The Treasury Secretary is asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed’s purchase of Bear Stearns’ assets was amateur socialism compared to this.”

In the event, August and September proved so torrid, that the likes of Bunning were unable to stop an $700 billion bailout – a bailout that France would probably have been more than happy to recieve.

The “national interest clause” thus seems to suggest that while “socialism” is indeed an ever threatening contaminant to the pure-as new york snow world of American capitalism, a “crisis” situation creates the neccesary conditions in which one is expected to shed dogma and be pragmatic.

A good crisis, I would have thought, would be ideal to stress-test any hypothesis – capitalism, socialism, et al; but it appears that people are least likely to let the experiment continue when things start getting interesting.

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