Wednesday, February 11, 2009

The Trillion Dollar Dog And Pony Show: Act II

Contrite executives of eight major banking institutions pledged thanks to a series of Congressional hearing panels Wednesday in what amounted to little more than a dog and pony show.

The bankers said they used $200 billion of the $35o billion Troubled Asset Relief Funds to increase consumer loans and said they are eager to help ease growing public rage over how they are using government aid.

The Congressmen in turn related horror stories from constituents how banks had screwed them and forced millions of homeowners into foreclosures.

"I urge you strongly to cooperate with us," Banking Services Committee Chairman Barney Frank said. "There is substantial public anger," and relieving that anger "is essential." Frank said that despite the public backlash against the financial-services industry he would like to work with bank executives to find ways to get credit flowing again and also to formulate new financial regulations that will prevent a repeat of the current crisis.

"Make no mistake: We are still lending, and we are lending far more because of the TARP," said Bank of America Corp. Chief Executive Kenneth Lewis. He said Bank of America was poised to pay a $400 million first quarterly dividend to Treasury and the entire amount in three years.

Banking inside observers believe Lewis's optimism is a pipe dream considering its stock value now in "junk bond" status.

Additionally, Citigroup Inc. Chief Executive Vikram Pandit told the committee that he will take a salary of $1 and forgo his bonus until the bank returns to profitability.

Morgan Stanley Chief Executive John Mack apologized, saying the firm made some bad decisions at times. "I think that from Morgan Stanley's point of view if you go back and play the clock over again, you'd definitely do it differently," he said, adding that he is "especially sorry" for what has happened to shareholders, and Americans in general.

The executives said all the billions of dollars they have received will be paid back before 2012.
"It will depend on the credit markets more than anything else," said John Stumpf, the chief executive of Wells Fargo & Co.

Still, lawmakers demanded an explanation for persistently tight credit conditions.
"You created this mess we're in and now you're saying, "sorry -- trust us and by the way we don't even want the money,'" said Rep. Michael Capuano (D-Mass.) "America doesn't trust you anymore. Get our money back on the street."

Recent reports show that banks are continuing to tighten their credit standards, despite the government having injected almost $200 billion in hundreds of banks across the country as part of the $700 billion TARP. Under the rescue plan, the government has purchased preferred stock in banking companies. But critics have slammed the Treasury Department for failing to require capital recipients to boost lending, something experts say is needed to help the ailing economy get back on track.

Additionally, the public has grown frustrated over reports of bank executives receiving big bonuses and large compensation packages, as most Americans grapple with layoffs and home foreclosures.

Goldman Sachs Group Inc. Chairman and Chief Executive Lloyd Blankfein, said the financial-services industry must restore public trust. "We have to regain the public's trust and do everything we can to help mend our financial system to restore stability and vitality. Goldman Sachs is committed to doing so," he said.

During the hearing, the executives also said the U.S. financial regulatory system needs to be dramatically streamlined. Morgan Stanley's Mack recommended there be a "superregulator" for the financial-services industry. "There needs to be a coming together of regulatory oversight. I would like to see a combination of some of our regulators," Mack said.

Several executives spoke in favor of Treasury Secretary Timothy Geithner's broad plans announced Tuesday for banks undergoing a "stress test" to determine if they are viable for continued government assistance.

Anticipating confrontations over their own compensation, several asserted that none of the government's money went to bonuses or dividends. "We are frugal," said Wells Fargo's Stumpf. "We're Americans first. We're bankers second."

They also generally agreed with lawmakers' calls for better cooperation and better public relations. They were contrite and conceded they face a bitter public. They had little choice but to acknowledge as much, given intense anger by both lawmakers and the public as the troubled financial system continues to spiral downward.

Yet, for all the words of contrition, the CEOs also sought to show they were being prudent.
Robert P. Kelly of Bank of New York Mellon Corp. promised "a very good return on the investment for taxpayers" and acknowledged "we still have a long way to go" to jump start the U.S. credit market.

While the bankers were being grilled by the House Finance Service panel, over in the Senate the Judiciary was hearing testimony from the FBI it was investigating 530 cases of corporate fraud amid the financial meltdown.

FBI Deputy Director John Pistole said 38 of them involve some of the biggest names in corporate finance in cases directly related to the current economic crisis.

There are so many mortgage fraud cases to investigate, he said, that the bureau is not focusing on individual purchasers, but industry professionals generating fraud schemes that could total as much as hundreds of millions of dollars. “It is a matter of lawyers, brokers or real estate professionals that are systematically trying to defraud the system,” Pistole said.

Agents have even seen some instances of organized crime getting involved in mortgage fraud, he said.

Senate Judiciary Chairman Patrick Leahy, D-Vt., urged the FBI and the Justice Department to put people who have committed mortgage fraud behind bars. “Most people are honest,” Leahy said. “The ones who are not honest in this field are creating economic havoc and I want to make sure that we’re able to go after them. “I want to see people prosecuted.... Frankly, I want to see them go to jail,” he said.

Neil Barofsky, who was appointed the inspector general of the ongoing financial bailout plan, suggested the best way to clean up mortgage fraud is to pursue licensed professionals in the industry, and make examples of them.

“They have the most to lose, they’re the most likely to flip, and they make the best examples,” said Barofsky, a former federal prosecutor in New York.

The plot thickens, meanwhile, in the corporate greed department.

New York Attorney General Andrew Cuomo laid out further details Wednesday about $3.6 billion in bonuses Merrill Lynch & Co. executives received. In a letter to House Financial Services chairman Barney Frank, Cuomo said:

“In a surprising fit of corporate irresponsibility, it appears that, instead of disclosing their bonus plans in a transparent way as requested by my office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives.” Cuomo said he requested information on Merrill’s expected bonuses as early as Oct. 29, but never received any details about the size of the bonus pool and criteria it planned to use to make the payments.

The Merrill bonuses were paid in late December, just days before Bank of America Corp. completed its purchase of New York-based Merrill. The payments also came as Merrill was on the brink of reporting a more than $15 billion fourth-quarter loss as it has been among the hardest hit by the ongoing credit crisis. Banks traditionally pay out year-end bonuses during the first quarter of the following year.

Cuomo said in the letter that Bank of America was apparently complicit in the move to award bonuses before Merrill’s fourth quarter loss was announced.

Both Merrill and Bank of America could face charges of securities fraud in New York as the attorney general’s office investigation unfolds.

No wonder the public is pissed. Never have so few besmirched the integrity of so many.

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