TARP, bonuses, dividends and Waxman’s letter

October 30, 2008

John Kemp –John Kemp is a Reuters columnist. The views expressed are his own–

By John Kemp

LONDON (Reuters) – The bitter political divisions between middle America and Wall Street on display when the House of Representatives first rejected the Emergency Economic Stabilization Act last month look set to be re-opened in even more dramatic form in the remaining months of the year.

Rep Henry Waxman, chairman of the powerful House Committee on Oversight and Government Reform, on Tuesday sent identical letters to the chief executives of nine major banks receiving $125 billion of capital injections under the Troubled Assets Relief Program (TARP) demanding details of total bonus payments for 2006, 2007 and 2008 (see http://oversight.house.gov/documents/20081028142314.pdf).

The issue of bonuses and dividend payouts from banks that accepted the TARP injection looks set to become highly charged.

It is going to be hard for the banks and Treasury to explain why so much taxpayer funding needs to go in through the front door, only for it to flow out again as staff bonuses and dividend payments to ordinary shareholders. Bonus and dividend payments could quickly absorb all the TARP capital funding.

The issue of responsibility for the credit crisis will intensify during the quarterly dividend and annual bonus payout period in Dec-Feb, just when a new administration will be taking office and Democrats are likely to extend their control over both houses of Congress.

The equation between bonus and dividend payments on the one hand and capitalization and TARP funding is a false one. But it will stoke fury in middle America about the cost of bailing out banks while homeowners continue to be foreclosed.

By heightening the political temperature at a key time, it will make a more radical solution to the crisis more likely. For example, buying off political hostility to the continued bonus and dividend payments will almost certainly force Congress and the incoming administration to consider widespread restructuring, loan guarantees and other financial support to homeowners and troubled companies (eg GM) which in turn will intensify the upward pressure on the budget deficit.

The toxic cocktail of TARP, compensation and dividends will complicate budget planning and makes it almost certain there will be significant slippage on the federal government’s budget deficit. Even before the crisis struck, the Congressional Budget Office (CBO) and White House Office of Management and Budget (OMB) were projecting deficits of around $450 billion in 2009.

TARP will add at least another $250 billion to the deficit — because CBO has already reportedly decided capital injections into banks will be counted as 100 pct spending (and 100% revenue when they are finally cashed in) rather than just counting the subsidy element of the credits and estimates of likely losses (which is what would have happened if the TARP had been utilized only to buy troubled assets, as the Treasury originally proposed).

OMB is likely to take a similar view. There is already speculation the Treasury could use TARP funds to help smooth a merger between General Motors and Chrysler. The more of TARP is used for equity injections rather than troubled asset purchases, the higher the deficit will be.

In addition, the worsening downturn may well cut income tax and corporation tax revenues, while boosting expenditure on unemployment insurance and aid to families with dependent children in the form of food stamps.

This is before Congress considers tax cuts, homeowner bailouts or extra spending to stem the tide of foreclosures and stimulate the economy. Using conservative estimates, the budget deficit for fiscal 2009 could easily hit a record $900 billion — $450 billion originally projected plus $250 billion of TARP equity capitalization plus $100 billion in underlying deterioration from the automatic stabilizers of lower tax receipts and higher welfare spending plus $100 billion of stimulus from extra tax cuts and spending.

The US government will therefore need to borrow about $900 billion to finance new deficits as well as around $2.3 trillion to roll over existing debt maturing within the next twelve months.

The cocktail of TARP, compensation, dividends and record debt issuance promises to be very bitter indeed.

(john.kemp@thomsonreuters.com)

10 comments

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Wait for good times.

The employees and executives with contracts to be paid bonuses are unsecured creditors, are they not? Why should they get paid before anyone else?

Bonuses are assets of the company and as such they are recoverable in a civil action. And so where is Justice Dept.???

Posted by J MITCHELL | Report as abusive

Most of us would like to see, many of the so called experts in jail, before we pay out any taxpayers monies.

Posted by Bill Attwood | Report as abusive

Let’s be clear. Banks were FORCED to take the capital injection from the Feds, it was NOT a choice. To argue that the government can now dictate compensation within a privately owned institution is ludicrous at a minimum, and socialistic in the extreme.
The Feds have limited what the money can be used for, and bonuses are not on the approved list. Taxpayer dollars could therefore not be used.
As to the wisdom of any payouts, that should be left for the Companies to decide … and as a result their Shareholders. The preferred stock the government forced upon the banks are non-voting. They usurp their authority (again) with this consideration.

Posted by David O'Brien | Report as abusive

Thank you Congress for supplying enough money for the CEO’s and friends to receive their bonuses. Without your help, they may have suffered.

Posted by Jimmy Gilliam | Report as abusive

Despite its complicated and very sad featur, this on going U.S.-global finacial crisis, also has a precious long lasting macro-economic-educational- learning exprience for Americans as well as the rest of the world. Due to its widespread grave impacts on almost every person in the U.S. plus on great majoreties of Europeans and rest of the world; now the mian street media also rutinly covering all aspects of this crisis including implications/ramifications of so-called stimulas-rescue approaches.As world geting smaller, we all learning to pay more attentions to real issues rather than mostly fucosing on NBA/NFL/BaseBall and so forth. Most probably Mr.Obama will be the next president with a dunting challeng of inventing a macro-management strategy to break the vicious counter producive cycles which already have come home and roosted.The vital issues are:
A- how to stimulate the economy without increasing the existing sky-rocketing budget and trade deficit?
B- Or what type of intervention-mechanism need to be applied in free market system, without jepordising its free market sprit?
C-What type of fiar and effective tools we can design, so they simultanously would be capeable of shaping up the Waal Street and Main street (home owners, small businesses, and job creations).
I believe he has the brian and the U.S. has the needed infrastructures to accomplish these dunting tasks.
“We the people” also need to have a group of lobiest to work for us and that’s the only way out of this unprecedented- especial-interest- made-pridicament.

IT’S the MORTGAGE ECONOMY STUPID! Part III
STIMULUS II?

It’s the mortgage economy stupid! It’s still the mortgage economy stupid! MANDATE creditworthy and sensible incentivized mortgage lending by all TARP beneficiaries. Encourage the competitive neighborhood banks with mortgage stimulus incentives to expand their mortgage activity, when the major banks sit on taxpayer TARP largesse.

Why is the mortgage rate so high with the huge Fed Funds rate cuts and the massive Trillion Dollar infusions of the Fed/Treasury? Simple! Greed of the perpetrators of the credit crisis has not abated. These greedy WS/big bank genius’ don’t get it or don’t care about the economy or anything other than their own self interest.

WS/banks take the tens of Billion dollars of the taxpayers money, courtesy of former WS’er Paulson, to buy depressed priced good banks that provided responsible mortgages. Lining their future pockets with a “Buy low with taxpayer low cost money and sell high later” strategy. Shamelessly, they avoid prudent mortgage lending to responsible taxpayers.

Brainless, amoral greed is this “self-destructive” greed. Take the Money and Run, Give Nothing Back.

When the avarice of banks didn’t want to give the credit worthy fully scrutinized responsible mortgages, the Fed should have encourage the prudent banks (many of the smaller Hudson City etc.) to get much more involved, even with temporary Treasury subsidies.

Analyse the Credit Crisis

Lowering the mortgage rate for the creditworthy, reduces house inventory, price deterioration and foreclosure rates, lowers all bank write downs including CDS’s the main causes of the credit crunch.

Cure the highly infectious mortgage market! Force medicine directed at the infection, a mortgage problem resolving stimulus, and the credit market will heal.

Consider that a 1.5% lower mortgage rate on a $ 200,000 mortgage if totally subsidized for three years on TWO MILLION HOMES would cost/save $ 16 Billion over 3 years. A 1.5%, 1.0%, .5% subsidized lower rate over the first 3 years would benefit THREE MILLION HOMES at $ 16 Billion. Expanded comparable 2-4 sized mortgage stimulus variants are practical.

Variants should be broad based, include temporary (1-3 years as appropriate) aid to mitigate foreclosures of creditworthy and for ARM resets for creditworthy. Select aid for jumbo and second homes. Extra aid for the highly depressed housing markets. The key is creditworthy.

Consider the 2008 Economic Stimulus I cost $150 Billion and did virtually nothing. Compare that to the obvious effects of a $30-60 Billion mortgage stimulus.

Ten months ago, mortgage rates should have been up to 3.0% lower level with the temporary 1.5% mortgage resolving stimulus, preventing the financial crisis we now face. The creditworthy are not ignorant and will not subsidize the banks greed of usurping the entirety of the Fed funds rate reductions for their self interests.

It is not a great surprise that current new mortgages are down 20% when rates are almost 6.5%, when they should be and will be 5% or less without a mortgage stimulus. The creditworthy will wait and the American economy will deteriorate further. Thank you Paulson, Bernanke, Bair and WS and major Banks!

JUST IMAGINE, how the cascade of events in mortgages if reversed over the last 10 11 months would have unfolded.

It doesn’t take a WS genius to comprehend that if homes were more affordable from lower mortgage rates, than housing inventory would be reduced, housing prices would be less depressed and necessary bank write downs would be very much reduced and the financial crisis much less severe.

These positive impacts of a more normal housing market would transfer to all aspects of the economy from a more positive consumer, to a vastly improved stock market.

The mortgage stimulus would directly improve those most severely impacted, employment in housing construction, real estate, home furnishings and even WS.

A more positive consumer would stimulate the retail, hard goods and auto industries etc, curbing job loses and adding a few more bricks in rebuilding the house of economic confidence.

The “Year Too Late” Solution

Economic Stimulus II, if enacted must contain a mortgage resolving stimulus of $ 40-60 Billion.

We must stop giving the economy a daily dose of two aspirin and a swig of Pepto Bismol for the headache and upset stomach. It’s an infection stupid. While the economic symptoms ameliorate slightly, the infection is growing toward a deadly sepsis status that has pushed the patient into a coma. Doctors Bernanke, Paulson and Bair, it’s a deadly infection!

Give the comatose economy a ventilator and IV garamycin, the aspirin and Pepto have no symptomatic relief for the comatose.

It’s the mortgage economy stupid! It’s still the mortgage economy stupid! MANDATE creditworthy and sensible mortgage lending for all TARP beneficiaries.

Posted by John Kollar | Report as abusive

The problem started with the MORTGAGE ECONOMY and now only it is partialy that. Do you know why Mr.smart? You need to think about the whole chains of interrelated global banking system whom already have been purchasing billions of dollars of U.S.”MORTGAGE ECONOMY”s so called commercial papers or bundels of pakages of home-loans then inssurance companies like AIG company Inc.guarranteed thier risks of defualts and so on. These under valued mortgage papers accumulatively sgaterred through out many domestic and international banks;as an example China and Japan hold almost $700 billion just from Freddy Mc & Fane Mei.. Therefore currently, not only we have the U.S.MORTGAGE ECONOMY crisis, but also global-banking-financial-insurance crisis too.Lack of transparencey regarding the amount of all this toxic assets have created panic among the financial institutios. This counter party risks in turn created stopage in normal felow of funds. And unavialabilities of cash felow/credit or liqudity in the real market/system, in macro perspective, would be the real cause of high mortgage rate; despite the FED’s repeated rate cuts. Simply we all are in a middel of an on going domino effect in a very colossal measure. So this dunting challenge takes multi-dimentions approach to include all parts of the puzzel!

“Banks were FORCED to take the capital injection from the Feds”

..er ..you mean they were forced to take money after the executives flew down to Washington to beg for money? Maybe I get a different news feed than you.

Posted by bill | Report as abusive

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