Where Are Our Medals? (Curt Bradbury Commentary)

Isn’t it true that if you take a bullet for your country, you get a medal? If so, every Bank of America shareholder deserves one.

In this space on Feb. 2, 2009, I speculated that when Ken Lewis, CEO of Bank of America, tried to back out of the Merrill Lynch deal last December, somebody squeezed him hard. Now we are treated to the sworn testimony of Mr. Lewis that such a squeezing did in fact take place and, at least in Mr. Paulson’s case, in no uncertain terms. Mr. Bernanke seemed a bit more circumspect, but was part of the same discussion.  

Mr. Lewis simply tried to back away from a collapsing Merrill by using his contractual rights under the “material adverse change” clause, a common feature of such purchase agreements. He was told by the Secretary of the Treasury that he would be fired if he pursued that course and that, further, he should tell no one that he tried to back away or why.  

At the moment that Mr. Paulson perpetrated this mischief on the Bank of America shareholders, our stock was in the mid-teens. Once the whole world became aware of what was really happening at Merrill, B of A stock went to less than $3.  

Mr. Paulson’s rationale for this injustice is that Merrill presented a “systemic risk” and would be less likely to cause system-wide upheaval inside the more adequately capitalized B of A. The Wall Street Journal calls this “the cavalier use of brute government force …” and further opines that “the men who nearly ruined Bank of America have some explaining to do.” Ya think?

Unfortunately, I don’t have to consult a lawyer to know that the concept of “sovereign immunity” prevents me, as a B of A shareholder, from suing the U.S. government for this outrage. So I will do the only thing I know to do and loudly advocate for the more considerate, fair and legal treatment of B of A shareholders in the future. However, the gang that has taken over for Mr. Paulson, if anything, shows an even more astounding tendency to abrogate contracts, push management around and pick the pockets of private enterprise than their predecessors.  

Specifically, given what these people have done to B of A already, they should not force the conversion of their Troubled Asset Relief Program preferred stock into common stock or, for that matter, require any capital infusion at this time whatsoever.

It is the consensus of analysts that B of A, over the next several years, will make between $35 billion and $50 billion of pre-loan loss cash flow per year! The total TARP preferred that the Treasury has forced on it is $45 billion. Thus, full conversion — and, therefore, the most extensive dilution of the common shareholder — can be offset by one year’s cash flow!

Over three to five years, at that rate, we can pay off the government’s preferred, absorb loan losses and, if need be, raise private capital, but at a higher, less dilutive price. “Leaked” reports of the “stress test” have Bank of America needing more capital. One is forced to wonder if there is a bit of retribution in that finding, given Mr. Lewis’ testimony.

We took the bullet for you, Mr. PaulsonGeithnerObama. Now leave us alone and we’ll earn our way out of this.  

But how silly of me to expect this new administration to leave any company alone. President Obama clearly loves to line up CEOs to do the perp walk into the West Wing and then lecture them on how much they pay their employees or how much interest they charge on credit cards. I think I get it: Let’s take a minority stake in 19 banks and then prevent them from paying market compensation to their employees and from charging market rates on their loans to risky borrowers and blame them for not making more loans in a severely depressed economy.  

I have been bemused by the discussion recently as to whether Obama is a socialist. By any definition I learned in getting a master’s degree in economics, there can be no doubt about it. He’s tried to tell us in many ways, both during the campaign and since the election. His “share the wealth” and coercive redistributionist philosophy is quickly turning into national policy. And when government becomes actively engaged in credit allocation, as it is now, the debate should be over.

To me, it’s not as shocking that Obama is showing his true socialist colors as it is how many people are so unconcerned or even supportive. Perhaps those are the ones whose hearts and minds he has captured by assuring them they will never pay federal income tax, now approaching a 50 percent voting majority of U.S. citizens.  

However, if you are still in doubt, watch closely the TARP preferreds. If there is a wholesale conversion of the government’s non-voting preferred position to common voting stock in the banks that have taken or had this money forced upon them, you will know that this administration has something more than fixing an economic crisis on its mind.                

(Curt Bradbury is chief operating officer of Stephens Inc. in Little Rock. He managed the turnaround of Worthen Banking Corp. in the mid-1980s and the sale of Worthen to Boatmen’s Bancshares of St. Louis in 1994. Boatmen’s was sold to NationsBank in 1996, and NationsBank was renamed Bank of America in 1998.)