On What Authority

David Post echoes my question on what authority the Treasury has to force banks to accept the government bailout:

Did I miss it, or is nobody even paying lip service to the idea that only the Board of Directors can make decisions for (banking) corporations of the kind the banks have apparently made by "accepting" the Treasury's latest plan? As I understand things, Bernanke, Paulson, Geitner and the other gov't officials met with the CEOs of the 9 big banks and laid out their plan and sought the banks' "voluntary" acceptance — yes or no, all or nothing. The conversation presumably went something like this:

Paulson: "Here's the plan: We inject capital and we take equity back. You agree to certain conditions (on e.g. executive compensation), we'll extend the FDIC guarantees to all your deposits. Etc. We could force you to accept the deal (or at least we'd argue that we could, based on authorization contained in the bailout bill to re-capitalize the banks), but for various reasons we don't want to — we want you to accept the deal voluntarily. We have to get all of you on board at once — otherwise, if we went one bank at a time, it would look like the bank we're helping out is in particularly bad shape, and that would send the wrong message to investors."

And the CEOs agreed (and the market went up 900 points).

The CEOs, though, can't possibly have the power to agree, on behalf of their corporations, to a deal of this magnitude, can they? Surely the Boards of Directors, and only the Board of Directors, can commit the banks to a plan involving the issuance of billions of dollars of new equity. It's possible, I suppose, that each of the CEOs spoke to a specially-convened Board meeting and the Boards all voted to go along (and nobody mentioned anything about it because it's just too boring). Or maybe everybody is assuming that the respective Boards will just retroactively rubber-stamp the deal some time this week (though from what I hear from a source inside JP Morgan/Chase, there are a whole lot of people there who are very unhappy with this deal (and the dilutive effects on the value of current shareholders' shares).

Wednesday, October 15, 2008