There is suddenly no shortage of outrage—from everyone from Barney Frank and John Kerry on the left to Bill O’Reilly and Greta van Susteren toward the right—at the news that Northern Trust (NTRS), a recipient of a federal TARP capital investment, has gone out and sponsored a golf tournament.
For our nation’s leaders, already consumed by war, recession, and the collapse of the financial system, the existence of the Northern Trust Open appears to be the final straw. “I’m sick and tired of picking up the newspaper and reading about another idiotic abuse of taxpayer money while our country is on the brink,” thundered Kerry last week, if you can imagine John Kerry thundering. For his part, Frank shot off a letter to Northern CEO Rick Waddell directly. “We insist that you immediately return to the federal government,” he wrote, “the equivalent of what Northern Trust frittered away [emphasis added] on these lavish events.” Van Susteren declared the bank’s decision to be “tone deaf.”
On the merits, which I will get to in a moment, these objections are preposterous. But first, consider who exactly is making them. What exactly is John Kerry’s experience running a bank? Zero! Bill O’Reilly’s? Zero! Greta’s? Zero! They literally do not know what they are talking about. As to Barney Frank, from what I can tell the closest thing he’s had to actual, hands-on experience running a bank is that he recently intervened so that federal tax dollars could be used to prop up a failing one in his district.
So these people aren’t offering their views from the vantage point of any relevant experience. They do know how to huff and puff, though. In this case, they are all dead wrong. I’ll make three points.
1. Northern Trust didn’t even want or need the TARP money in the first place. The company participated in TARP money because it was asked to by the government, not because it had to. The U.S. Treasury’s involvement with Northern consists of a $1.5 billion investment, via a $1.5 billion preferred carrying a 5% annual dividend. It is not a subsidy. It is not a handout. And the government figures to earn an attractive return on that investment. Northern is extremely well-capitalized and does not possess anywhere close to the same credit risk as other large banks. (At year end, Northern’s nonperforming asset ratio was 0.33% vs. an average of 1.87% for the 20 largest banking companies. In addition, its net loan chargeoff ratio for all of 2008 was 0.22%, vs. 1.51% for its peers.)
Recall that the Treasury emphatically encouraged healthy banks like Northern Trust to participate in the TARP program so that the program would not be viewed as a stigma for the weaker banks that needed to participate. As part of the deal, the government put no conditions on recipients’ non-compensation expense practices. If the Treasury or Congress now has a different view, and wants to run these companies and dictate what expenses are “rational,” they should become the majority common shareholders of the institutions. Or bank regulators should determine that such expenditures are unsafe and unsound banking practice. Absent that, if Northern Trust’s management believes that a golf tournament sponsorship is a worthwhile business decision, then it should fund the sponsorship, and the government should stay out of the way.
Or else where does the meddling end? Should Northern Trust stop serving Starbucks coffee to its clients because a cheaper brand is available? That’s crazy! Thank goodness Barney Frank and John Kerry don’t actually run these institutions; based on their comments so far, the two would run taxpayers’ preferred investments straight into the ground. (Which, come to think if it, is exactly what happened to Fannie and Freddie under Frank’s oversight.)
2. Sponsorship deals like this are actually a worthwhile, lucrative use of the sponsoring company’s money. This will of course be obvious to anyone who hasn’t spent his entire career in the public sector. The event Northern Trust sponsored (the old Los Angeles Open) was an opportunity for it to splash its name and brand across the media for four straight days last month, including six hours of network TV exposure to what is presumably its target demographic. The tournament was also a chance for Northern Trust to entertain existing clients and woo new ones. The benefits of all this should be obvious—which is why corporate sponsorships of the type Northern Trust is now being criticized for are a staple of big-time consumer marketing.
Northern Trust originally signed its five-year deal with the PGA back in 2007, long before there was a TARP, so there’s no way anyone can argue this is some new, shady use of TARP money. It’s not; it had been budgeted for years ago. But that shouldn’t even matter. Northern Trust made the calculation that this is a worthwhile use of its resources. The company’s management runs a great bank, and the company itself is not in any financial difficulties (net income last year came to $795 million). The alternative would have been to pay a penalty to cancel the sponsorship. What sense would that have made?
You would think that someone like Bill O’Reilly, who knows a thing or two about self-promotion, would understand the marketing benefits of Northern Trust’s sponsorship. But neither he nor Greta van Susteren seem to comprehend how business or economics really works. They do know how to pontificate about whatever the hot story of the day is, however. Lucky us.
3. So why doesn’t Northern Trust just pay back its TARP investment? After all, when Barney Frank was told that Northern Trust only took the TARP money to be a good corporate citizen, he responded that “if they didn’t want the money, and didn’t need the money, then pay the money back.”
If only. Congressman Frank, there is nothing in the world Northern Trust’s management would rather do than give the money back, but the U.S. Treasury can’t even explain to the company, or other banks in a similar situation, how they can. Think I’m making this up? Go to the Treasury’s web site. To pay back their TARP investments, banks like Northern Trust must notify their primary regulator--and then wait for them to respond.
Congressman Frank, if you really want to help, and not just bluster, force the Treasury to issue simple guidelines on how banks can return their TARP funds. If you’re not going to do that, stop telling banks like Northern Trust to “pay the money back.”
To listen to the griping about Northern Trust and its tournament, you’d think the company’s critics want all business entertainment to cease! How exactly is that supposed to help the company grow or, for that matter, help an economy in recession?
John Kerry and his ilk say they're “sick and tired” of “idiotic abuse of taxpayer money.” Well, I am sick and tired of politicians and bloviators in the media being offended by issues they don’t know anything about.