Practical definition: Agency cost

Posted by Marc Hodak on April 23, 2009 under Politics, Revealed preference | 4 Comments to Read

Speak clearly directly into the mic, please. Now say again? At the moment you realized that your shareholders would be screwed by the ML transaction, and it was time to invoke ‘material adverse change’ to back out of it, why didn’t you do it?

I can’t recall if [Hank Paulson] said “we would remove the board and management if you [invoked the material adverse change clause to block the Merrill deal]” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.”

There it is. When the BAC board, including Lewis, came face-to-face with doing right by their shareholders or keeping their jobs, they chose to “deescalate.” Later they rationalized: getting fired = systemic risk.

So, Ken, you decided not to back out of the deal, what about at least telling your shareholders what you were getting them into?

Q: Were you instructed not to tell your shareholders what the transaction was going to be?

A: I was instructed that ‘We do not want a public disclosure.’

Q: Who said that to you?

A: Paulson…

Q: Had it been up to you would you [have] made the disclosure?

A: It wasn’t up to me.

So, the government ordered you to shoot your shareholders from behind a curtain, and you pulled the trigger.

Not corporate governance’s finest hour.

Craydon said,

Keeping mum may not have been in the best interests of BAC shareholders, but it was in the best interests of the nation. That’s all that Paulson cared about, or should have cared about.
Sarah Tesla said,

If Lewis didn’t do as Paulson told him, he and his board would have been fired, and their replacements would have done it. The shareholders were screwed either way.
Marc Hodak said,

“If I didn’t follow orders, someone else would have in my place,” is perhaps acceptable if your working in a concentration camp where your life is on the line. I don’t buy that for leading a company. I don’t know how I would act in such a situation, but I don’t think I would allow myself to be used as an instrument of betrayal for people who depended on me.

Regarding Craydon’s argument, I agree Paulson’s job was to watch out for the nation as a whole, not BAC’s shareholders. That is a separate issue. I’m blaming Lewis for how responded to Paulson’s bullying.
jd said,

Lewis had some cards to play. He should have told Paulson that if he wanted BAC to fall on its sword for the rest of the country, the rest of the country (i.e., taxpayers) should kick in some more dough, and not in the form of “bailout bonds.” BAC should be made whole for not backing out. “If you don’t want me (the CEO) to say anything, then make it so I don’t have anything to hide.” Did Lewis do that? The linked report doesn’t say.