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11/2/09 Geithner sinks markets
After months of ad hoc bank rescue efforts, the markets hoped the new US administration would deliver on its promise of a coherent, detailed plan for mending the financial system. So when Treasury boss Tim Geithner offered only a bare-bones outline, leaving crucial questions unanswered, investors were not amused. The S&P 500 fell some 5%, while some troubled banks’ shares declined multiples of that. The disappointment squandered precious market confidence in the administration.
Treasury’s outline of its now-renamed “Financial Stability Plan” sounds reasonable as far as it goes. The government will subject banks asking for more support to stress tests and more scrutiny. It will purchase preferred shares that can be converted into common stock. It will establish a vehicle to co-invest with private investors in banks’ troubled assets. It will boost the purchase of certain asset-backed securities. And it will offer greater assistance to hard-pressed mortgage holders.
But missing from the package are crucial details on how each of these initiatives will work. How will the stress tests improve on banks' own, and how are they going to be used - will they dictate which banks are saved and allowed to fail? How will the preferreds be priced? How much of a subsidy must the government offer private investors to lure them to buy dodgy assets? And so on.
Geithner says he is consulting with lawmakers, other regulators and market participants over these questions. That’s great. But he could have waited to unveil his plan until he had his answers. The markets would probably understand a delay caused by the desire to get the details right.
That makes the administration’s failure of expectation management that much more puzzling. President Barack Obama said as recently as Monday that a detailed plan was in the offing. Raising hopes and under-delivering may be standard procedure in the political sphere. But as today’s market rout demonstrated, it doesn’t fly in finance.
11/2/09 Lawmakers Challenge Bankers on Bailout
WASHINGTON — Eight of the nation’s top bankers faced off Wednesday against critical lawmakers in Congress, who questioned their use of tens of billions of dollars of taxpayer money and pointed out the growing public anger at the banks in the bailout.
“When you took taxpayer money, you moved into a fishbowl,” said Representative Paul E. Kanjorski, Democrat of Pennsylvania. “Now, everyone is rightly watching your every move from every side.”
The eight banks collectively received $125 billion in bailout money in exchange for shares in their companies, and two of them — Citigroup and Bank of America — were given tens of billions of dollars more because of their financial problems.
The banks’ chief executives, who testified before the House Financial Services Committee, find themselves in different positions financially, but they all face extreme scrutiny over the money they were given. Their banks provide essential credit throughout the economy, but some analysts have suggested recently that they have not used the government money to increase lending.
Lawmakers are also concerned about bonuses the banks paid out to their employees and whether the banks are able to pay the bonuses primarily because of the government money.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the committee, said the problem for lawmakers was that the government needed to help the banks to help the economy, but that many taxpayers did not want to see the banks helped.
“Here’s the dilemma: there is in the country a great deal of anger about the financial institutions, including those represented here,” Mr. Frank said.
Mr. Frank said the banks would receive “collateral benefit” because they would be helped by the government’s broader efforts to heal the economy.
The banking executives said they were aware of the ill will that surrounded them.
“It is abundantly clear that we are here amidst broad public anger at our industry,” said Lloyd C. Blankfein, the chief executive of Goldman Sachs. “Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations.”
Asked how the banks would restore confidence in the financial system, Jamie Dimon, the chief executive of JPMorgan Chase, replied: “We will beat this thing. We are bruised and battered, but we’re still standing and I believe America will do what it’s always done” and get through the problem.
Lawmakers brought up the overarching question of the day. “What did you do with the new money?” asked Gary L. Ackerman, Democrat of New York, who said it seemed to him that the banks were not loaning out the funds they received from government.
Each of the bankers outlined the ways in which they had used the government capital. Goldman, for instance, increased its financing to clients like Sallie Mae and Verizon Wireless. Morgan Stanley said it had made $10.6 billion in new commercial loans and $650 million in loan commitments to consumers.
And the bankers were emphatic that they were continuing to make loans.
“We have every incentive to lend,” said Kenneth D. Lewis, the chief executive of Bank of America. “And despite the recessionary headwinds, we are lending.”
Mr. Lewis said his bank issued $181 billion in loans in the fourth quarter, including $115 billion in new loans.
Vikram Pandit, the chief executive of Citigroup, said his bank made $75 billion in new loans.
Mr. Dimon said JPMorgan made more than $150 billion in new loans in the fourth quarter and also lent an average of $50 billion a day to other banks. He pointed out that his bank increased its lending by 2.1 percent last quarter even while consumers were cutting back their spending.
The pullback in credit, Mr. Dimon said, comes from a retreat of lenders like money market funds and hedge funds — not a retreat of the banks.
Several of the chief executives said they had not used the government money to pay bonuses, and they tried to dispel notions that they had been irresponsible in their spending.
“We have never been wasteful,” said John G. Stumpf, the chief executive of Wells Fargo.
Still, Mr. Frank asked, “If you weren’t getting a bonus, what would you not do? Would you take longer lunches or leave early on Wednesday?”
He added, “Why do you need to be bribed to have your interests aligned with the company?”
John J. Mack of Morgan Stanley replied: “We love what we do. If you gave us no bonus, we would still be here.”
Representative Jeb Hensarling, Republican of Texas, asked whether executive compensation restrictions would lead to a loss of talent. Mr. Mack responded that he was not concerned about those executives at the most senior levels, but that below that level he had already seen defections to European competitors and others.
The eight banks received the initial round of bailout money from the government’s Troubled Asset Relief Program, or TARP, at an emergency meeting in October with then-Treasury Secretary Henry M. Paulson Jr. . Since then, the government has doled out billions more to about 300 other financial companies, ranging from community banks to credit card companies to the financing arms of automakers.
Mr. Blankfein and Mr. Lewis said the banking bailout was needed to bring about stability in the financial system. If the government had not provided assistance to the banking industry, Mr. Dimon said, “the question I and nobody else will know is what would have happened.”
Also testifying at Wednesday’s hearing were Robert P. Kelly of Bank of New York Mellon and Ronald E. Logue of State Street.
At the meeting in October, Merrill Lynch’s chief executive, John A. Thain, was also present. But Mr. Thain is not at the hearing because Merrill has been merged with Bank of America, and Mr. Thain was recently dismissed amid a spate of problems at his firm.
11/2/09 Geithner sinks markets
After months of ad hoc bank rescue efforts, the markets hoped the new US administration would deliver on its promise of a coherent, detailed plan for mending the financial system. So when Treasury boss Tim Geithner offered only a bare-bones outline, leaving crucial questions unanswered, investors were not amused. The S&P 500 fell some 5%, while some troubled banks’ shares declined multiples of that. The disappointment squandered precious market confidence in the administration.
Treasury’s outline of its now-renamed “Financial Stability Plan” sounds reasonable as far as it goes. The government will subject banks asking for more support to stress tests and more scrutiny. It will purchase preferred shares that can be converted into common stock. It will establish a vehicle to co-invest with private investors in banks’ troubled assets. It will boost the purchase of certain asset-backed securities. And it will offer greater assistance to hard-pressed mortgage holders.
But missing from the package are crucial details on how each of these initiatives will work. How will the stress tests improve on banks' own, and how are they going to be used - will they dictate which banks are saved and allowed to fail? How will the preferreds be priced? How much of a subsidy must the government offer private investors to lure them to buy dodgy assets? And so on.
Geithner says he is consulting with lawmakers, other regulators and market participants over these questions. That’s great. But he could have waited to unveil his plan until he had his answers. The markets would probably understand a delay caused by the desire to get the details right.
That makes the administration’s failure of expectation management that much more puzzling. President Barack Obama said as recently as Monday that a detailed plan was in the offing. Raising hopes and under-delivering may be standard procedure in the political sphere. But as today’s market rout demonstrated, it doesn’t fly in finance.
11/2/09 Lawmakers Challenge Bankers on Bailout
WASHINGTON — Eight of the nation’s top bankers faced off Wednesday against critical lawmakers in Congress, who questioned their use of tens of billions of dollars of taxpayer money and pointed out the growing public anger at the banks in the bailout.
“When you took taxpayer money, you moved into a fishbowl,” said Representative Paul E. Kanjorski, Democrat of Pennsylvania. “Now, everyone is rightly watching your every move from every side.”
The eight banks collectively received $125 billion in bailout money in exchange for shares in their companies, and two of them — Citigroup and Bank of America — were given tens of billions of dollars more because of their financial problems.
The banks’ chief executives, who testified before the House Financial Services Committee, find themselves in different positions financially, but they all face extreme scrutiny over the money they were given. Their banks provide essential credit throughout the economy, but some analysts have suggested recently that they have not used the government money to increase lending.
Lawmakers are also concerned about bonuses the banks paid out to their employees and whether the banks are able to pay the bonuses primarily because of the government money.
Representative Barney Frank, the Massachusetts Democrat who is chairman of the committee, said the problem for lawmakers was that the government needed to help the banks to help the economy, but that many taxpayers did not want to see the banks helped.
“Here’s the dilemma: there is in the country a great deal of anger about the financial institutions, including those represented here,” Mr. Frank said.
Mr. Frank said the banks would receive “collateral benefit” because they would be helped by the government’s broader efforts to heal the economy.
The banking executives said they were aware of the ill will that surrounded them.
“It is abundantly clear that we are here amidst broad public anger at our industry,” said Lloyd C. Blankfein, the chief executive of Goldman Sachs. “Many people believe — and, in many cases, justifiably so — that Wall Street lost sight of its larger public obligations.”
Asked how the banks would restore confidence in the financial system, Jamie Dimon, the chief executive of JPMorgan Chase, replied: “We will beat this thing. We are bruised and battered, but we’re still standing and I believe America will do what it’s always done” and get through the problem.
Lawmakers brought up the overarching question of the day. “What did you do with the new money?” asked Gary L. Ackerman, Democrat of New York, who said it seemed to him that the banks were not loaning out the funds they received from government.
Each of the bankers outlined the ways in which they had used the government capital. Goldman, for instance, increased its financing to clients like Sallie Mae and Verizon Wireless. Morgan Stanley said it had made $10.6 billion in new commercial loans and $650 million in loan commitments to consumers.
And the bankers were emphatic that they were continuing to make loans.
“We have every incentive to lend,” said Kenneth D. Lewis, the chief executive of Bank of America. “And despite the recessionary headwinds, we are lending.”
Mr. Lewis said his bank issued $181 billion in loans in the fourth quarter, including $115 billion in new loans.
Vikram Pandit, the chief executive of Citigroup, said his bank made $75 billion in new loans.
Mr. Dimon said JPMorgan made more than $150 billion in new loans in the fourth quarter and also lent an average of $50 billion a day to other banks. He pointed out that his bank increased its lending by 2.1 percent last quarter even while consumers were cutting back their spending.
The pullback in credit, Mr. Dimon said, comes from a retreat of lenders like money market funds and hedge funds — not a retreat of the banks.
Several of the chief executives said they had not used the government money to pay bonuses, and they tried to dispel notions that they had been irresponsible in their spending.
“We have never been wasteful,” said John G. Stumpf, the chief executive of Wells Fargo.
Still, Mr. Frank asked, “If you weren’t getting a bonus, what would you not do? Would you take longer lunches or leave early on Wednesday?”
He added, “Why do you need to be bribed to have your interests aligned with the company?”
John J. Mack of Morgan Stanley replied: “We love what we do. If you gave us no bonus, we would still be here.”
Representative Jeb Hensarling, Republican of Texas, asked whether executive compensation restrictions would lead to a loss of talent. Mr. Mack responded that he was not concerned about those executives at the most senior levels, but that below that level he had already seen defections to European competitors and others.
The eight banks received the initial round of bailout money from the government’s Troubled Asset Relief Program, or TARP, at an emergency meeting in October with then-Treasury Secretary Henry M. Paulson Jr. . Since then, the government has doled out billions more to about 300 other financial companies, ranging from community banks to credit card companies to the financing arms of automakers.
Mr. Blankfein and Mr. Lewis said the banking bailout was needed to bring about stability in the financial system. If the government had not provided assistance to the banking industry, Mr. Dimon said, “the question I and nobody else will know is what would have happened.”
Also testifying at Wednesday’s hearing were Robert P. Kelly of Bank of New York Mellon and Ronald E. Logue of State Street.
At the meeting in October, Merrill Lynch’s chief executive, John A. Thain, was also present. But Mr. Thain is not at the hearing because Merrill has been merged with Bank of America, and Mr. Thain was recently dismissed amid a spate of problems at his firm.
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