How Are Banks Spending Bailout Money? Anyone's Guess 14 comments
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After receiving hundreds of billions of dollars in taxpayer-funded federal bailout money, the biggest U.S. banks say they can’t track how that money is being spent. Some of the banks are outright refusing to discuss the matter, a new study has found.
"We have not disclosed that to the public. We’re declining to," Thomas Kelly, a spokesman for JP Morgan Chase & Co. (JPM) told The Associated Press, which surveyed 21 banks that received at least $1 billion in federal bailout money, and asked how that capital was being used. JP Morgan received a $25 billion infusion as part of the U.S. Treasury Department’s $700 billion Troubled Assets Relief Program (TARP).
As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide - instead of lending at home. Some of those buyouts deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.
Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended. More recently, The AP has joined the journalistic posse and published several investigative pieces, including one that looked at executive pay at financial institutions that received bailout money.
Some experts - such as investing icon Jim Rogers - say that bailouts in general are bad deals. They’re even worse if they’re funded by taxpayers who don’t know how their money is being spent [a related story on Rogers' views about the U.S. banking-bailout initiative appeared last week in Money Morning. To access that story, please click here].
The bottom line: Banks won’t say how they’re using the bailout money. That refusal - coupled with the almost non-existent disclosure and oversight of the TARP program - means the country may well never find out how hundreds of billions of taxpayer dollars were spent.
Anatomy of a Survey
In its latest investigative offering, The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings? And what’s the plan for the rest?
According to The AP, none of the banks provided specific answers.
For instance, when Kevin Heine, a spokesman for Bank of New York Mellon Corp. (BK) - which received about $3 billion in TARP money - was asked how his institution was using the emergency infusion, he declined to elaborate.
The words varied, but the basic message was the same from one bank to another. For instance, Barry Koling, a spokesman for SunTrust Banks Inc. (STI), the Atlanta, Ga.-based lender that received $3.5-billion in taxpayer cash, told the wire service that "we’re not providing dollar-in, dollar-out tracking."
Some banks actually admitted that they simply didn’t know where the money was going.
For instance, a spokesman for the Birmingham-based Regions Financial Corp. (RF) said the company is not tracking how it is spending the $3.5 billion in TARP money that it received. "We manage our capital in its aggregate," said Regions spokesman Tim Deighton.
These answers - or lack thereof - highlight both the secrecy surrounding the TARP program, as well as the lack of oversight by Congress. Given that the entire TARP program is worth at least $700 billion - roughly the equivalent of the economy of The Netherlands - those aren’t small issues.
About half of the $700 billion was earmarked for bailouts. But because the U.S. financial crisis was escalating so quickly - and because the Bush administration pushed Congress to approve the TARP plan quickly - Congress attached virtually no strings to the bailout funds. The Treasury Department has been using the money to buy stakes in key U.S. banks, allegedly hoping that the infusion of cash would enable them to heal themselves and start lending again.
As the deepening U.S. credit crisis has shown, that hasn’t happened.
No Oversight, No Accountability
There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill late last year and implored them to lend the money - instead of hoarding it, spending it on executive bonuses, or for buyouts to get bigger. But there’s no process in place to guide this. And there are no consequences for banks that fail to comply with what U.S. lawmakers are asking.
Even worse: There’s no vehicle that enables taxpayers to find out what banks are doing - at least, not yet.
"It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry," Elizabeth Warren, the top congressional watchdog overseeing the financial bailout, told The AP, stating that it takes "a lot of nerve not to give answers." Warren said her oversight panel will try to force the banks to say where they’ve spent the money. But she also noted that she was quite surprised to learn that she even has to ask for that information.
"If the appropriate restrictions were put on the money to begin with, if the appropriate transparency was in place, then we wouldn’t be in a position where you’re trying to call every recipient and get the basic information that should already be in public documents," Warren said.
In fact, the due diligence on the legislation that created TARP was so lax that lawmakers didn’t realize until much later that the bill they passed actually managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers were furious - but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.
"Those are legitimate questions that should have been asked on Day One," said U.S. Rep. Scott Garrett, R-N.J., a financial services committee member who opposed the bailout as it was being pushed through Congress. "Where is the money going to go to? How is it going to be spent? When are we going to get a record on it?"
Buyouts Not Bailouts
Nearly every bank questioned - including Citigroup Inc. (C) and Bank of America Corp. (BAC) - recipients of some of the largest TARP infusions - responded to AP inquiries with generic public relations statements explaining that the money was being used to strengthen balance sheets and to continue making loans to ease the credit crisis.
As a Money Morning story detailed Friday, BofA just finalized its buyout of Merrill Lynch & Co. Inc. (MER), creating the largest U.S. bank - as well as the biggest challenge yet for longtime BofA Chief Executive Officer Kenneth D. Lewis. And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) - outbidding Citigroup Inc. and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.
Those were just the latest in a long series of buyout deals being funded at least partly by TARP money, the ongoing Money Morning investigation has shown.
In response to The AP survey questions, a few banks detailed company-specific programs, such as a JP Morgan plan to lend $5 billion to nonprofit organizations and healthcare companies over the next year. Marshall & Ilsley Corp. (MI), said the $1.75 billion bailout infusion it received allowed the Wisconsin-based bank to temporarily stop foreclosing on homes, said Senior Vice President Richard Becker.
This "foreclosure moratorium" will run through the end of March, the bank announced in December.
No Real Answers
But no bank provided even the most basic accounting for the federal money. Some even said that the money couldn’t be tracked. The bailout money "doesn’t have its own bucket," said Bob Denham, a spokesman for North Carolina-based BB&T Corp. (BBT).
Denham said taxpayer money wasn’t used in BB&T’s recent purchase of a Florida insurance company. When asked how he could make such a statement - after stating that TARP money couldn’t be tracked - he said BB&T would have made that deal even without the infusion.
Interestingly, a spokesman for BB&T told the Charleston (W.V.) Daily Mail newspaper just before Christmas that the bank doesn’t like the federal government’s $700 billion financial rescue plan - and actually didn’t want to participate - but took the $3.1 billion because competitors are participating and because the Treasury Department urged it to.
According to the newspaper, BB&T - the largest bank in West Virginia - has been asked how it justifies participating in the federal government’s Troubled Asset Relief Program, or TARP, in light of BB&T Chairman John A. Allison IV’s promotion of the late author Ayn Rand’s philosophy of free market capitalism.
The reticence banks displayed when it came to discussing their use of TARP money bordered on the absurd. Most banks wouldn’t even say why they were keeping the details secret. "We’re not sharing any other details. We’re just not at this time," Wendy Walker, a spokeswoman for Dallas-based Comerica Inc. (CMA), which received $2.25-billion from the government, told The AP.
One didn’t even want to say they wouldn’t say, the wire service reported.
Heine, the New York Mellon spokesman who said he wouldn’t share spending specifics, added: "I just would prefer if you wouldn’t say that we’re not going to discuss those details." Morgan Stanley (MS) offered to discuss the matter with reporters on condition of anonymity. When The AP refused, Morgan Stanley spokeswoman Carissa Ramirez sent the wire service an e-mail saying: "We are going to decline to comment on your story."
Lawmakers say they want to tighten restrictions on the second half of the TARP money, the yet-to-be-released block worth $350 billion. U.S. Treasury Secretary Henry M. "Hank" Paulson Jr. said the federal department is trying to build up its monitoring of bank spending.
"What we’ve been doing here is moving, I think, with lightning speed to put necessary programs in place, to develop them, implement them, and then we need to monitor them while we’re doing this," Paulson said at a recent forum in New York. "So we’re building this organization as we’re going."
But that may all be too late, says Garrett, the New Jersey Republican congressman. Indeed, it’s entirely possible that U.S. taxpayers will never get a clear answer on where hundreds of billions of dollars went.
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Do you know anything about banking? If you did, you would know that capital (which is what TARP investments are) is not "spent."
Capital is a cushion against future expected and unexpected losses. It isn't spent, it is held.
The spread earned from investing deposits and borrowed funds in loans and other types of investments is what is "spent" on day-to-day operations.
TARP investments, per se, would never be lent out or used to pay salaries or other expenses.
All the TARP investments have done, so far, is replace capital that was burned-off due to unexpected write-downs of non-performing loans and investments.
1) Corrupt use of taxpayer money -- the total ripoff of these bailouts. The Congressional report recently issued scathing criticism of the oversight for TARP...yet there was no pullback in funding for it, and a 2nd "stimulus" package is being proposed!!
2) Gov. Blagojevich of IL soliciting bribes for Senate nomination
3) Richardson withdrawing as Commerce Sec. nominee due to being under investigation for questionable transactions.
4) Leon Panetta as nominee to head CIA -- even Diane Feinstein questioned his choice, saying that usually it is someone experienced in the intelligence community. Is the nomination a returned favor? The placement of a puppet? A fall-guy-to-be? Doesn't make sense.
5) Obama's "natural born citizen" status is looking highly questionable, with both the media and major political parties having failed to question and demand proof of it before the nomination process. Court cases now abound and Supreme Court conferences are scheduled.
Our system is rife with corruption, and is in the process of falling. We live in an oligarchical police state, whether we refuse to admit it or not. Not gonna be fun.
Also keep in mind the goverment did NOT "give" the money to the banks. Rather the goverment bought preffered stock in each bank that took the TARP funds and is earing a 5% return on the TARP funds. Think about that for a second, the goverment is now borrowing money at historicly low interest rates (10 yr treasury at 2.2-2.5%) and is loaning that money out at 5% with a possible upside with the conversion of the preffered stock.
On Jan 06 10:50 AM bungaloo wrote:
> I am sorry but do you really think any of the banks can provide dollar
> tracking for this? It goes to one big pot. They could not tell where
> the $10,000 they lend someone for a car came from. Can you tell whether
> the $4 you paid for your Starbucks this morning came from this weeks
> pay, last weeks pay, your wife's pay or the dividend you received
> last week? One of the first things we learn about banking is that
> the $5 bill grandma gave us that she wrote Happy Birthday on is not
> the same bill we will get back once we deposit it into a bank. Why
> should the TARp money be any different?
On Jan 06 11:52 AM The Curious Investor wrote:
> I have to agree with some of the other comments here. Dollar for
> dollar accounting is not the best way to keep track of the effectiveness
> of the money borrowed under the TARP. The money wasn't just given
> out to be spent. It is used to establish liquidity for the banks
> to propagate the functioning of our capital markets. I think the
> fact that we see 3-month LIBOR falling from 4.6% to 1.4% over the
> last few months is a very good sign that the TARP money is being
> put to use in a constructive manner. The real key is whether or not
> the banks, now that they have a capital cushion, are building stronger,
> less risky operations.
BAC just sold a 12% stake in China Construction Bank for 5.6B shares for $3B US and still have 38M shares
this mean the value of the reamaining shares of BAC=+/-$26B US Alone....and BAC market value is only $70B US...can you believe this....???
Just that $70-29B(CCB Bank holding value)=BAC is value only at $41B by Wall Street??? vs JPM at over 4100B and WFC at $95B???
Each Preffered H shares of BAC in CCB give $0.11 dividend on top of that...LOL
This is the shadow government that Dan Smoot, Robert Welch and others have been warning you about for decades. They run the show, not the gang in the District of Criminals, and certainly not the zombies who wander into the polling booths every first Tuesday of November.
Disclosure: I am SUPER* long BB&T!
*Unnecessary 'super'