Paulson Receives Bitter Reception from Lawmakers at Hearing

Sources: Washingtonpost.com: Lawmakers Blast Paulson for His Response to Crisis; Reuters.com: UPDATE 2-Lawmakers slam Paulson on BofA-Merrill deal

In a hearing before the House Committee on Oversight and Government Reform on Thursday, House Republicans and Democrats scolded Former Treasury secretary Henry M. Paulson Jr. for his response to the financial crisis. The hearing was convened as lawmakers investigate the government’s push for Bank of America’s acquisition of Merrill Lynch. Although the companies arranged in September to merge minus government aid, they did not settle the deal until January when the Treasury agreed to check Bank of America’s losses on a range of problem loans, and invest $20 billion.

Federal Reserve Chairman Ben S. Bernanke and Bank of America chief executive Kenneth D. Lewis had previously testified to the House Committee that the bank nearly backed out of the deal. Paulson’s version of events largely corroborated the accounts of Bernanke and Lewis. After conferring with Bernanke, Paulson had warned Lewis of the possible removal of senior management if the bank abandoned the deal. Paulson further assured Lewis that the bank would receive the aid needed to proceed with the acquisition.

Republicans on the committee have argued that the government compelled Bank of America to move ahead with the deal when the company decided to walk. Democrats, on the other hand, have suggested that Lewis worked one over on the government to obtain additional financial support in threatening to drop out of the deal.

Democrats and Republicans alike have questioned the lack of public disclosure by the bank and regulators of information pertaining to the negotiations. Internal Fed documents that seem to reveal that regulatory agencies were purposefully kept in the dark have captured the attention of the committee. These agencies include the Securities and Exchange Commission and the Financial Stability Oversight Board, an interagency team Congress created to manage the government’s handling of the financial crisis. The committee will next hear from these groups.

Discussion Questions:
1) Where should Congress draw the line of financial oversight by the government during times of crisis and times of economic strength?
2) What benefits does financial oversight during crises afford?