(CNSNews.com)

Last October, then-Treasury Secretary Henry Paulson ordered nine banks that the Treasury Department described as “healthy” financial institutions to surrender ownership interests to the government or else face regulatory action that would force them to surrender ownership interests to the government, according to an internal Treasury Department document.

Paulson’s extraordinary threat culminated in one of the most sweeping government intrusions into the free-enterprise system in the history of the United States.

Judicial Watch, a nonpartisan watchdog organization, used the Freedom of Information Act to obtain a copy of the internal Treasury Department “talking points” that were prepared for Paulson to use at his Oct. 13, 2008 meeting with the chief executive officers (CEOs) of the nine banks.

At the meeting–to which the bankers were called at short notice–Paulson made a conspicuous display of potential government regulatory power.

Paulson was flanked by Federal Reserve Chairman Ben Bernanke; current Treasury Secretary Timothy Geithner (who was then president of the Federal Reserve Bank of New York); Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Bair and Comptroller of the Currency John C. Dugan.

While none of these regulators have responded to inquiries by CNSNews.com, the talking points mention each by first name.

The Fed, the FDIC and the Office of the Comptroller of the Currency all regulate various elements of the U.S. banking industry.

“Ben, Sheila, John, Tim and I have asked you here this afternoon because we are of the view that the United States needs to take strong and decisive action to arrest the stress in the financial system,” Paulson’s talking points directed him to tell the assembled bankers.

The talking points indicate that Paulson then told the nine bank CEOs that the government was going to use $250 billion of the $700 billion approved by Congress to shore up the financial industry through the “Troubled Asset Relief Program” (TARP) to buy stock in banks all across the country and that the nine banks these CEOs represented had no choice but to allow the government to buy their stock–or else.

Paulson assured the CEOs that the government would inform the public that the banks were “healthy institutions, participating in order to support the U.S. economy.”

In other words, according to the treasury secretary’s confidential talking points, the nine banks were not failing financial institutions that had come to the federal government in desperate need of a bailout from the taxpayers to stay in business.

Instead, they were healthy institutions that were being compelled to surrender ownership stakes to the government in order to help the government carry out a government policy.

“(T)hrough our new TARP authority, Treasury will purchase up to $250 billion in preferred stock of banks and thrifts prior to year-end,” said the talking points.

“To encourage wide participation, the program is designed to provide an attractive source of capital, on identical terms, to all qualifying financial institutions,” Paulson’s document said.

The document added, “We plan to announce the program tomorrow–and–that your nine firms will be the initial participants. We will state clearly that you are healthy institutions, participating in order to support the U.S. economy.

“This is a combined program (bank liability guarantee and capital purchase). Your firms need to agree to both,” said Paulson’s talking points.

Not ‘Tenable’ to ‘Opt Out’

Did the banks have a choice? Not according to Paulson’s talking points.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” Paulson told the bankers, according to his talking points. “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”

The nine CEOs present at the Oct. 13 meeting reportedly included Vikram Pandit of Citigroup, Jamie Dimon of JP Morgan, Richard Kovacevich of Wells Fargo, John Thain of Merrill Lynch, John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, Robert Kelly of Bank of New York, Kenneth Lewis of Bank of America and Ronald Logue of State Street Bank.

The Treasury Department’s announcement of the government’s action the next day described the capital injection as a “voluntary” program for healthy banks.

“I don’t think there was any banker in that room who was going to look us in the eye and say they had too much capital,” Paulson told The New York Times. “In a relatively short period of time, people came on board.”

Each of the nine CEOs present at the meeting received an application where they hand wrote the name of their qualifying financial institution “in support of the U.S. financial system and the broader U.S. economy.”

The banks then agreed to issue “Preferred Shares” in varying amounts, which they wrote by hand into the provided space.

State Street took $2 billion, Bank of New York Mellon took $3 billion, and Bank of America took $15 billion.

Merrill Lynch, Goldman Sachs, and Morgan Stanley all agreed to take $10 billion and JP Morgan, Wells Fargo, and Citigroup all took the maximum $25 billion in exchange for issuing preferred shares to the U.S. Treasury.

In return, the qualifying institutions under the “Capital Purchase Program” agreed to adopt standards dictated by the Treasury Department regarding executive compensation and corporate governance.

With the government now determining how banks should spend their money, benefits such as “golden parachute” payments to top executives were terminated, and banks were required to repay any bonus that was based on projected earnings that later proved to be inaccurate. A limit of $500,000 has also been set on the tax deductibility of salaries.

While some of the nine banks are still accepting money through TARP, Wells Fargo Chairman Richard Kovacevich has been more vocal about the government restrictions that have come with the TARP package.

“Is this America – when you do what your government asks you to do and then retroactively you also have additional conditions?” Kovacevich reportedly said, according to a March 2009 New York Post article.

In the same article, the Post reported on Kovacevich’s revolt against the required stress tests, saying that he believed that imposing these tests on healthier banks left then open to stock manipulation.

“We do stress tests all the time on all of our portfolios,” said Kovacevich. “It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

The stress tests were formulated by the U.S. Treasury in an attempt to ensure the countries’ most influential banks are well capitalized.

According to a USA Today article in May, after the release of the bank stress test results, Goldman Sachs, JP Morgan and Morgan Stanley all expressed a wish to repay capital injections.

Government supervision over compensation and benefits will last as long as the Treasury holds equity under the Capital Purchase Program.

A month after the meeting, during testimony at a hearing held by the House Financial Services Committee last November, Paulson reiterated: “(T)here are no banks, when the system is under pressure, unless they are ready to fail, that are going to raise their hand and say, ‘Please, I need capital, give me some capital.’”

Paulson did not return telephone calls and emails from CNSNews.com to comment on the issue. The nine banks that participated in the Oct. 13 meeting were also mum.

Morgan Stanley spokeswoman Jeanmarie McFadden declined to answer questions about her bank’s attendance.

Julia Bernard, a spokeswoman for Wells Fargo, told CNSNews.com, “Wells Fargo does not discuss conversations and interactions with their regulators and government officials.”

However, Wells Fargo’s CEO Richard Kovacevich was candid when speaking about TARP at a Stanford University event.

“If we were not forced to take the TARP money, we would have been able to raise private capital at the time,” remarked Kovacevich, according to the New York Post.

The New York Times reported in article on Oct. 15, 2008 that other bank executives besides Kovacevich objected to being brow-beaten by Paulson at the meeting in question.

The Times said that Kenneth D. Lewis, chairman of Bank of America, had “pushed back,” arguing that his bank had already raised $10 billion of its own.

In addition, the same article reported that, in an interview prior to the meeting, John J. Mack, the chairman of Morgan Stanley stated that his bank did not need aid from the Treasury. According to the Times, Morgan Stanley had just sealed a $9 billion deal with a prominent Japanese bank.

“Would the Treasury Department demand some control over management in return for the capital?” the wary CEOs asked, according to the New York Times article.

The Times source remained anonymous, the newspaper reported, because the discussions within the meeting were to remain private.

“It was a take it or leave it offer,” The Times quoted its source as saying. “Everyone knew there was only one answer.”

Paulson’s announcement introducing the Capital Purchase Program under TARP legislation came as a surprise to Congress, where members generally believed they had approved legislation to approve the Treasury’s purchase of mortgage-backed securities.

Paulson defended his decision to have the government buy ownership interests in teh banks before the House Financial Services Committee in November 2008.

“There is no playbook for responding to turmoil we have never faced,” Paulson explained before the committee. “We adjusted our strategy to reflect the facts of a severe market crises, always keeping focused on Congress’s goal and our goal.”

Paulson’s talking points for the meeting and related documents were obtained under a Freedom of Information Act request filed by Judicial Watch, which sued the government in order to force their release.

Judicial Watch President Tom Fitton–in announcing release of the document–said that “despite promises of transparency as part of TARP legislation, the Treasury Department has been evasive regarding the meeting on October 13, 2008.”

Fitton said that in January 2009, his group filed a FOIA lawsuit against Treasury seeking release of the documents. On Feb. 4, the government agency responded that “a search has been conducted by this office and no records responsive to your request have been located.”

The documents were not released until May 13. CNSNews.com obtained a copy of the Feb. 4 letter from the Treasury Department through Judicial Watch.