Thursday, February 12, 2009

Summary of House Committee on Financial Services Hearing (Tian Weng, Debby Su)

1. Topic: TARP Accountability: Use of Federal Assistance by the First TARP Recipients
2. Date and Time: Feb 11, 2009, 10:00 am – 1:00 pm
3. Place: 2128 and 2172 Rayburn House Office Building
4. Chairman: Mr. Barney Frank, Chairman of the House Financial Services Committee
5. Witness List:
Mr. Lloyd C. Blankfein, Chief Executive Officer and Chairman, Goldman Sachs and Co.
Mr. James Dimon, Chief Executive Officer, JPMorgan Chase and Co.
Mr. Robert P. Kelly, Chairman and Chief Executive Officer, Bank of New York Mellon
Mr. Ken Lewis, Chairman and Chief Executive Officer, Bank of America
Mr. Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation
Mr. John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley
Mr. Vikram Pandit, Chief Executive Officer, Citigroup
Mr. John Stumpf, President and Chief Executive Officer, Wells Fargo and Co.

Eight bank CEOs from companies receiving the first TARP funds testified before the House Financial Services Committee. All testified that they distributed fund received in a manner that they thought would increase financial market liquidity, expand credits and lending in either residential or commercial loan markets, and generate enough revenues to allow them to return money to investors and US tax payers. All cited figures to confirm that they were distributing funds to the places they intended to. They denied TARP was used for dividend distributions or employee compensation.

Mr. Pandit, of Citigroup, pledged to cut his salary to $1 a year until the bank returned to profitability and took personal responsibility for the “mistake” of even thinking about buying a new $50 million private jet after getting government financing.

Mr. Lloyd C. Blankfein, Goldman’s chief executive, acknowledged “public anger at our industry.”

Mr. Lewis, CEO of Bank of America, who occasionally grew testy and red-faced at questions about lending, told lawmakers that his bank had “every incentive to lend.”

In the end, they all agreed to greater accountability on how they are spending money from the $700 billion fund.

Lawmakers struck hard on the lending issues, describing situations in which their constituents could not get loans and situations in which the rates for certain types of loans, such as credit card business and car loans, increased after the injection of the government funds intends to solve the liquidity problem. Several asked the bankers why there seemed to be a disconnect between their lending figures and the hundreds of ordinary people who continue to line up for loans. Some criticized bailout recipients like Bank of America and Merrill Lynch, who have continued to lobby--through trade associations--to block consumer protection measures, predatory lending regulations, and the Employee Free Choice Act, a measure that would ensure workers the freedom to form a union for a voice for improved wages, benefits, and working conditions.

Beyond the Troubled Asset Relief Program (TARP), some bailout recipients--who have failed to provide affordable healthcare or a living wage to their employees--are dipping into federal coffers through the backdoor, forcing thousands of employees to seek healthcare through taxpayer funded programs like Medicaid and forcing employees to apply for food stamps.

One lawmaker even suggested that banks paid fees to themselves for receiving TARP funds. Mr. Pandit denied such fee transaction. Another lawmaker pointed to the fact that top management at Bank of America received huge bonuses for the Merrill Lynch merger, when they were, in fact, actually responsible for losses that resulted from or were necessitated by the merger.

Tian Weng, Debby Su
George Washington University
Washington, DC

Tuesday, February 10, 2009

Plan to restore stability to "our" financial system

Today, Treasury Secretary Timothy Geithner introduced the Financial Stability Plan. Our comments below:

The main features are the creation of:

a. the Financial Stability Trust
b. the Public-Private Investment Fund
c. the Consumer Lending Initiative
d. the Foreclosure Prevention Plan
e. the Small Business Lending Initiative

The Financial Stability Trust is a "Capital Pool" designed to serve as a buffer to help absorb losses. (Funny, we proposed the same thing for community banks in an application we submitted to Treasury for New Markets Tax Credits. We were not, however, funded. Looks like we need to be, well, non-minority..and to have caused massive damage to the global economy in a thoroughly unethical way. But I digress..) This is a rebranding/repackaging of the current Capital Purchase Program (CPP). In fact, all bank investments made over the past few months will be held in the "Trust".

As part of this "Pool", banks over $100 billion will have to undergo a "Stress test". The good news: banking regulators will finally work together to carry out the "test". The bad news: the statistical models used to conduct these tests are biased and flawed. They did not, after all, prevent the crisis from occurring...

Public-Private Investment Fund. A fund to get private equity investors to take "bad" assets off the books of banks. Good news: well, none, really. Bad news: relies on the same broken private market mechanisms and entities (brokers and investment banks) that caused the problem. Public and private pension funds will be encouraged to participate...as if they haven't lost enough money already. Spreads the damage even wider. (Like opening the doors to Chernobyl.)

Consumer Lending Initiative. Repackaging/rebranding of a previously announced Fed initiative. Will now include Commercial Real Estate. Limits purchases to AAA securities. Good news: brings a previously announced initiative under this comprehensive umbrella. Bad news - relies on flawed and unethical rating agencies, extends into commercial real estate at exactly the wrong time.

All in all, we like this plan. Another reason to be hopeful.

We said in 2003, "Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." Unfortunately, we were right. And now, while the plan does not deal with the most critical issue, it is a very good first step: it builds on what was done recently and adds resources and rationality. The plan also restricts banks from paying dividends, repurchasing shares and buying other banks with the money. (Now, if we could only restrict entertainment expenses, we'd be all set...)

Friday, February 6, 2009

A People's Guide to the Economic Recovery Advisory Board

We note the Obama Administration named it's Economic Recovery Advisory Board today. While we are hopeful, we are not happy. This board will probably need to be modified before living up to it's potential. Here are it's members:

Chairman - Paul Volcker. Upside - Solid. The best there is. Should have remained Fed Chair. Downside - a little long in the tooth. (This is not age discrimination. Technology has much to do with this recession.)

Staff Director and Chief Economist. Austan Goolsbee - Probably not helpful. Chicago Economist...and they basically sank us into this mess. At least he is at the staff level.

Members - William H. Donaldson, Chairman, SEC (2003-2005). Solid. Called for market reform a long, long time ago. Ran a great firm, DLJ.

Roger W. Ferguson, Jr., President & CEO, TIAA-CREF. Solid. Next to Volcker, the best there is. The guy who saved the economy on September 11, 2001. (See "Bernanke's Fumbles Suggest Deeper Problems," originally posted on the Street Insight section of thestreet.com 5/5/2006 2:42 PM EST.)

Robert Wolf, Chairman & CEO, UBS Group Americas. Negative. (See Goolsbee - basically sank us into this mess.)

David F. Swensen, CIO, Yale University - Probably not helpful. Just some connected Yalie. Should be on staff.

Mark T. Gallogly, Founder & Managing Partner, Centerbridge Partners L.P. - Negative. Helped sink us into this mess...and made a fortune doing so.

Penny Pritzker, Chairman & Founder, Pritzker Realty Group. Neutral.

Jeffrey R. Immelt, CEO, GE - Positive. Has data and input from global sources.

John Doerr, Partner, Kleiner, Perkins, Caufield & Byers. Negative. Helped sink us into this mess...and made a fortune doing so.

Jim Owens, Chairman and CEO, Caterpillar Inc. - Positive. Actually makes something.

Monica C. Lozano, Publisher & Chief Executive Officer, La Opinion - Positive.

Charles E. Phillips, Jr., President, Oracle Corporation - Positive. Technology-centric.

Anna Burger, Chair, Change to Win - Unknown, but probably not helpful. Just some connected non profit. Another labor union, non-diverse at the executive level, whose base is made up of people of color. (See AFL-CIO, below.) Should be on staff.

Richard L. Trumka, Secretary-Treasurer, AFL-CIO - Negative. Non diverse organization at the executive level.

Laura D'Andrea Tyson, Dean, Haas School of Business at the University of California at Berkeley - Probably not helpful. Another connected academic. Should be on staff.

Martin Feldstein, George F. Baker Professor of Economics, Harvard University - Yikes! Former Chief Economist to Reagan (helped sink us into this mess before we knew we were sunk.) Highly negative and definitely not helpful. Another connected academic. Should be on staff.

All in all,

Solid - 3
Positive - 3
Negative - 5
Probably not helpful - 4
Neutral - 1

We are in trouble and this group probably will not help.

Tuesday, February 3, 2009

Minority Banks Recieving TARP Funding - Update

According to the US Treasury, "Among the most recent banks to receive Treasury funding was Legacy Bancorp of Milwaukee, Wisconsin, a CDFI founded by African-American women and one of the fastest growing community banks in the nation. CDFIs such as Legacy provide vital credit and financial services to low-income areas that are often unavailable from commercial banks." Our list of minority banks getting TARP Capital now includes:

Asian $936
Cathay General Bancorp $258
Center Financial Corp $55
East West Bancorp Inc $306
Pacific City Financial Corp. $16
Saigon National $2
UCBH Holdings Inc $299

Black $45
Broadway Financial Corp. $9
Carver Bancorp, Inc $19
OneUnited Bank $12
Legacy Bancorp, Inc. $5

Hispanic $1,551
First Bancorp $400
International Bancshares Corp $216
Popular Inc $935

Grand Total $2,532 billion
Funding to all banks $195,330 billion
as of 2/3/09

To date, no native American or Women-owned banks have received TARP Funding.