Bloomberg News's Jonathan Weil raises some questions about Treasury Secretary Paulson's behavior as described in Mr. Paulson's book On The Brink, which was reviewed on this site last week. Mr. Weil says the memoir makes clear that Mr. Paulson knew that Lehman Brothers had overstated its assets. "It does leave you wondering, though, if it ever occurred to him to tell anyone at the Securities and Exchange Commission or the Justice Department that Lehman's accounting might need to be investigated. His book provides no indication that he did," Mr. Weil writes. Mr. Paulson and Ben Bernanke were in the same position with Merrill Lynch: "Neither Paulson nor Bernanke saw fit to tell the SEC. Nor did they press the companies' executives to come clean with the public." Says Mr. Weil: "The requirement that publicly owned corporations disclose complete and accurate financial reports is part of the bedrock of U.S. securities laws. Just as important is the promise that the government will enforce those laws when they've been broken. Undermine the public's faith in either of those functions, and confidence in the capital markets crumbles." He warns of "The danger that powerful companies won't follow the law when their executives believe the government won't hold them to it."
The last thing we want to do is criminalize investment errors or innocent accounting mistakes. And if the goal was restoring confidence in the financial system, hauling up bankers for show trials probably was not the best way to do it. But there are plenty of shareholders in Lehman Brothers and Merrill Lynch/Bank of America who feel burned by management. Perhaps they should feel burned by Mr. Paulson and Mr. Bernanke, too.