Uses for $700 Billion Bailout Money Ever Shifting
John Dunbar, The Associated Press
Washington - First, the $700 billion rescue for the economy was about buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.
Treasury Secretary Henry Merritt "Hank" Paulson Jr. (Illustration: Paul Giambarba / t r u t h o u t)
Then it was about using $250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.
But reports surfaced that bankers might instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it. Insurance companies now want a piece; maybe automakers, too, even though Congress has approved $25 billion in low-interest loans for them.
Also see below:
The New York Times | Loans? Did We Say We'd Do Loans? •
Three weeks after becoming law, and with the first dollar of the $700 billion yet to go out, officials are just beginning to talk about helping a few strapped homeowners keep the foreclosure wolf from the door.
As the crisis worsens, the government's reaction keeps changing. Lawmakers in both parties are starting to gripe that the bailout is turning out to be far different from what the Bush administration sold to Congress.
In buying equity stakes in banks, the Treasury has "deviated significantly from its original course," says Alabama Sen. Richard Shelby, the top Republican on the Senate Banking, Housing and Urban Affairs Committee. "We need to examine closely the reason for this change," said Shelby, who opposed the bailout.
The centerpiece of the Emergency Economic Stabilization Act is the "troubled asset relief program," or TARP for short. Critics note that tarps are used to cover things up. The money was to be devoted to buying "toxic" mortgage-backed securities whose value has fallen in lockstep with home prices.
But once European governments said they were going into the banking business, Treasury Secretary Henry Paulson followed suit and diverted $250 billion to buy stock in healthy banks to spur lending.
Bank executives hinted they might instead use it for acquisitions. Sen. Christopher Dodd, chairman of the Senate banking committee, said this development was "beyond troubling."
Sure enough, a day after Dodd, D-Conn., made the comment, the government confirmed that PNC Financial Services Group Inc. was approved to receive $7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp. for $5.58 billion.
"Although there will be some consolidation, that's not the driver behind this program," Paulson recently told PBS talk show host Charlie Rose. "The driver is to have our healthy banks be well-capitalized so that they can play the role they need to play for our country right now."
Other planned uses of the bailout money have lawmakers protesting, although it is only fair to note there is nothing in the law that they just wrote to prevent those uses.
Sen. Charles Schumer, D-N.Y. questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.
"There are far better uses of taxpayer dollars than continuing dividend payments to shareholders," he said.
Schumer, whose constituents include Wall Street bankers, said he also fears that they might stuff the money "under the proverbial mattress" rather than make loans.
Neel Kashkari, head of the Treasury's financial stability program, told Dodd's committee this past week that there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.
As the bank plan has become a priority, the effort to buy troubled assets has receded from the headlines. Potential conflicts of interest pose all kinds of problems in finding qualified companies to manage that program.
"Firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP or represent clients who hold troubled assets," Kashkari said.
The challenge was made plain when the Treasury hired the Bank of New York Mellon Corp. as "custodian" of the troubled assets purchase program. The bank will conduct "reverse auctions" to buy the toxic securities on behalf of the Treasury. The lower the price they set, the better chance sellers have of getting rid of the devalued securities.
On the same day it hired Mellon, the Treasury also picked the company to receive a $3 billion investment as part of the capital-infusion program. The same bank hired to help manage part of the economic rescue plan became a beneficiary of it.
With the Nov. 4 election nearing, lawmakers decided it was important to remind the government officials running the bailout program about parts of the law aimed at helping distressed homeowners by offering federal guarantees to mortgages renegotiated down to lower monthly payments.
"The key to our nation's economic recovery is the recovery of the housing market," Dodd said. "And the key to recovery of the housing market is reducing foreclosures."
Sheila Bair, who heads the Federal Deposit Insurance Corp., responded that her agency is working "closely and creatively" with Treasury officials to "realize the potential benefits of this authority."
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Loans? Did We Say We'd Do Loans?
Tuesday 28 October 2008
by: The New York Times | Editorial
According to Treasury Secretary Henry Paulson, the chief proponent of the big bank bailout, flooding the banks with taxpayers' money was supposed to get them to start lending freely again. And that, in turn, was supposed to stabilize the markets and prevent the downturn from being worse than it otherwise would be.
It was not entirely clear from the start exactly how Mr. Paulson would ensure that things would go that way. Indeed, earlier this month, shortly after the bailout was enacted, The Times's Mark Landler reported that Treasury officials also wanted to steer the bailout billions to banks that would use the money to buy up other banks.
Now, lo and behold, with $250 billion in bailout funds committed to dozens of large and regional banks, it turns out that many of the recipients of this investment from taxpayers are not all that interested in making loans. And it appears that Mr. Paulson is not so bothered by their reluctance.
Mr. Paulson and the bailout recipients have some explaining to do. Congress should plan hearings as soon as possible - and take action to set a clear strategy.
In his column on Saturday, The Times's Joe Nocera told about a conference call that he had listened in on recently between employees and executives of JPMorgan Chase. Asked how an infusion of $25 billion of bailout funds would change the bank's lending policy, an executive said the money would be used to buy other banks.
"I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way," the executive said. He added that the money could also be used as a backstop in case "recession turns into depression or what happens in the future."
There was not a word about lending - not to businesses or home buyers or car buyers or students or other consumers. Just the opposite. In response to another question, the executive said that the bank expected to continue to tighten credit.
JPMorgan Chase is not alone. The Wall Street Journal reported on Tuesday that some regional-bank recipients of the bailout money had acknowledged that only a small portion would be used for loans and the rest for acquisitions and other purposes.
It is prudent for government officials to encourage healthy banks to acquire weak banks. Doing so prevents bank failures and avoids the taxpayer costs and economic disruption that accompany such collapses.
The problem is that the Treasury has refused to put conditions on the banks' use of the bailout funds, allowing them, in effect, to make purchases of banks that are not on the verge of failure. That could help to maximize the banks' profits - a worthy goal when the capital they are using is from private investors.
However, when they're using taxpayer-provided capital, as they are now, Congress and the public have every right to require that the money be used to benefit the public directly, even if doing so crimps the banks' profits. If Treasury won't impose conditions, Congress must, including a requirement that banks accepting bailout money increase their loans to creditworthy borrowers and limit their acquisitions to failing banks, such as those listed as troubled by the Federal Deposit Insurance Corporation. The bailout should not be an occasion for banks to make a killing.
An even bigger problem is that the bailout was sold as a way to spur loans. If that never was - or no longer is - the primary aim, Congress and the public need to know that. Lawmakers should not release the second installment - $350 billion - until they have answers and guarantees that the bailout money will be spent in ways that put the public interest first.