The Wall Street Journal has two troubling reports. The first is that Bank of America (BAC) operating under an agreement with the government which the paper describes as “a secret regulatory sanction.” Part of this sanction relates to how the firm will set up its board.

The other report is that Citigroup (C) and the FDIC are “entering into a so-called memorandum of understanding.” This deal would allow the FDIC some influence in how the firm restructures.

The trouble with these relationships is that Citi and B of A are public companies. Shareholders have never been made aware of these agreements between the firms and the government.
The Administration decided not to push for a nationalization of big banks when the credit crisis nearly took some of them under and the government could have traded aid for complete operating control. Instead, all parties involved decided that the weakest banks such as Wachovia and Washington Mutual would be merged into stronger banks, although that strength was relative given the size of the TARP funds that were needed to keep the credit system stable.

The government wanted the banks to be able to stand on their own at the end of the financial mess and allowing them to remain public companies made that easier than the Fed selling the banks back into the private sector a year or two from now as IPOs of companies which had once been listed on the stock exchanges.

Once the decisions had been made to allow common stockholders to still hold shares, the regulators had some obligation to give those investors the same kind disclosure rights that would be offered by any listed firm. That has obviously not been the case. A great many of the arrangements for running these banks are done out of the sight of stockholders which violates one of the core rules for public company transparency.

The government was able to avoid nationalizing the banks, but it has made certain that it has set up a process to nationalize key decisions.

Douglas A. McIntyre

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