Bankers see bailout as windfall with no strings attached
Published: Sunday, January 18, 2009 at 6:01 a.m.
Last Modified: Saturday, January 17, 2009 at 8:14 p.m.
At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.
"Make more loans?" Hope said. "We're not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans."
As the incoming Obama administration decides how to fix the economy, the troubles of the banking system have become particularly vexing.
Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates.
Indeed, as mounting losses at major banks like Citigroup and Bank of America in the last week have underscored, regulators are still searching for ways to stabilize the banking system. The Obama administration could be forced early on to come up with a systemic solution, getting bad loans off balance sheets as a way to encourage banks to begin lending, which most economists say is essential to get businesses and consumers spending again.
Individually, banks that received some of the first $350 billion from the Treasury's Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions.
Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future.
Speaking at the FBR Capital Markets conference in New York in December, Walter M. Pressey, president of Boston Private Wealth Management, a healthy bank with a mostly affluent clientele, said there were no immediate plans to do much with the $154 million it received from the Treasury. "With that capital in hand, not only do we feel comfortable that we can ride out the recession," he said, "but we also feel that we'll be in a position to take advantage of opportunities that present themselves once this recession is sorted out."
The bankers' comments, while representing only a random sampling of the more than 200 financial institutions that have received TARP money so far, underscore a growing gulf between public expectations for how the $700 billion should be used and the decisions being made by many of the institutions that have taken part. The program does not dictate what banks should do with the money.
That lack of specificity has led to calls for tighter restrictions on the next wave of disbursements, approved by the Senate last week as President-elect Barack Obama pledged to "change the way this plan is implemented and keep faith with the American taxpayer." The incoming administration promises to create a system to track how the money is spent and place stronger limitations on executive pay.
The loose requirements in the original plan have also contributed to confusion over what the Treasury intended when it abruptly shelved its first proposal - to buy up bad mortgages - in favor of making direct investments in individual banks in return for preferred shares of stock. The Treasury secretary, Henry M. Paulson Jr., said in October that banks should "deploy, not hoard" the money to build confidence and increase lending. He added: "We expect all participating banks to continue to strengthen their efforts to help struggling homeowners who can afford their homes avoid foreclosure."
But a congressional oversight panel reported on Jan. 9 that it found no evidence the bailout program had been used to prevent foreclosures, raising questions about whether the Treasury has complied with the law's requirement that it develop a "plan that seeks to maximize assistance for homeowners."
The report concluded that the Treasury's top priority seemed to be to "stabilize financial markets" by simply giving healthy banks more money and letting them decide how best to use it.
"It is not enough to say that the goal is the stabilization of the financial markets and the broader economy," the report said, adding that it was not clear how giving billions to banks "advances both the goal of financial stability and the well-being of taxpayers, including homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards."
For the banks, fearful that the economic downturn could deepen and wary of risking additional losses, the question of what to do with the bailout money comes down to self-preservation.
Mark Fitzgibbon, research director at Sandler O'Neill & Partners, which sponsored the Palm Beach conference, said banks seemed to be allocating the bailout money for four general purposes: increased lending, absorbing losses, bolstering capital and "opportunistic acquisitions." He said those approaches made sense from a business perspective, even though they might not conform to popular expectations that the money would be immediately lent to consumers.
"For the banking industry, this isn't a sprint, this is a marathon," Fitzgibbon said. "I think over time there will be pressure to lend that capital out and get a return for their shareholders. But they're not going to rush out and lend all that money tomorrow. If they did, they could lose it."
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