Stanford Economics profession John Taylor reports on a recent speech at Stanford at which the former chairman and CEO of Wells Fargo, Dick Kovacevich, recounted:
the full story of how he was forced to take TARP funds even though Wells Fargo did not need or want the funds. The forcing event took place in October 2008 at a now well-known meeting at the U.S. Treasury with Hank Paulson, Ben Bernanke, as well as several other heads of major financial institutions.
In his speech, Kovacevich first described how he and the other bankers were told at that meeting that they had to accept the funds. He then paused and said to the Stanford audience: "You might ask why didn't I just say no, and not accept TARP funds." He then explained: "As my comments were heading in that direction, Hank Paulson turned to Chairman Bernanke, who was sitting next to him and said 'Your primary regulator is sitting right here. If you refuse to accept these TARP funds, he will declare you capital deficient Monday morning.' This was being said when we were a triple A rated bank. 'Is this America?' I said to myself."
At that time Wells Fargo was in process of acquiring Wachovia and such a declaration would have killed the deal. According to Kovacevich: "It was truly a godfather moment. They made us an offer we couldn't refuse."
I'm familiar with the justification offered for this regulatory action, which is that the stronger banks had to take the money too because otherwise there would be a stigma attached to the money and the weaker banks would only weaken themselves further by taking it rather than strengthening themselves, which was the whole point. But as a rule of thumb, if a government action causes the person being acted upon to ask "Is this America?" it is usually a good clue that the government action may be worth reexamining.
