Last week we were privy to something our top financial regulators hoped to keep secret. We learned, thanks to the investigation of New York Attorney General Andrew Cuomo, that financial regulators pressured Bank of America CEO Ken Lewis into completing the merger with Merrill Lynch even after it became apparent that the deal would be terrible for BofA shareholders. It was a frightening window into the likely future of financial regulation.
Underneath all the back and forth about whether it was Hank Paulson or Ben Bernanke who put the pressure on Lewis, what we discovered is that empowering financial regulators means subjecting shareholders and financial institutions to the subjective, discretionary decisions of the regulators. Lewis arguably could have resisted Paulson and Bernanke, although expecting him to do so is to expect unrealistic heroics. In the future, it is all but certain that financial regulations will take away even this small possibility of resistance.
It’s no defence of financial regulation to say that we think Paulson or Bernanke behaved badly. There’s no reason to expect better behaviour by future regulators. If history is any guide, regulators will be even less cautious about the use of their powers once they have become accustomed to it.
Which is to say, we’d better be very careful about exactly what and whom we are empowering when we reform financial regulations. Our experience so far has not been very reassuring. Our expectations for the future need to adjust to the reality of regulatory power being exercised in arbitrary and capricious ways.