Washington — Lawmakers had the equivalent of red meat before them Thursday: Four executives representing big financial companies were sworn in and ready to answer questions about how they planned to use billions of capital fronted by the government.
And yet, the hearing never got contentious.
Several lawmakers urged the witnesses to detail how they were using their capital injections, but there was little protest when they offered only general responses.
Instead, lawmakers—who have urged the Treasury Department to require banks to use the money for aggressive lending—offered excuses for why Congress could not force the issue.
"I really tried to stay away from the Congress … sort of dictating specifics here," Senate Banking Committee Chairman Chris Dodd, D-Conn., told reporters after his committee's hearing on the Troubled Asset Relief Program. "I'm a little reluctant in this case to start doing that or trying that."
Republican lawmakers agreed with that stance.
"It's always difficult to say that Congress ought to start micromanaging, because in many respects micromanaging generally gets it wrong," Sen. Mike Crapo of Idaho, the most senior Republican on the committee to attend the hearing, told reporters.
Sen. Tim Johnson of South Dakota, one of the few Democrats to oppose the October 3 financial rescue bill, asked bankers if they intended to use the capital to pay executive bonuses, increase dividends, or acquire other institutions.
Representatives from JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc. and Wells Fargo & Co. said that the money would not go toward executive compensation or dividend increases, and that their boards determine executive compensation and dividends largely by looking at earnings.
Jon Campbell, EVP and Minnesota CEO for Wells Fargo, also said capital would not be used for dividends, and he cautioned lawmakers to avoid actions that could hurt dividends and scare off investors.
"Continuing to pay dividends at appropriate levels while we maintain appropriate capital levels is critical to investor confidence remaining, so I would just say that while we clearly agree with you that the use of the funds is not for dividends, to consider restricting them has unintended consequences that we all should be cognizant of," he said.
The executives gave vaguer responses when pressed about purchases.
"Our growth has basically been organic, as opposed to through acquisitions," said Gregory Palm, EVP and co-general counsel of Goldman Sachs.
Sen. Dodd interrupted Palm to point out that his company had said the night before that it would increase its deposit base "through acquisitions and organically."
Palm said that even though that might be the case someday, there is "no acquisition on the table right now which involves a healthy bank" for Goldman. "It's not planned through the use of the Tarp money."
Other banking representatives offered similar responses.
Anne Finucane, a global marketing and corporate affairs executive for B of A, said that for the time being the Charlotte company is still digesting Countrywide Financial Corp. and Merrill Lynch & Co. Inc.
"In the longer term, the question is more about 'Are there troubled assets and troubled banks that we may continue to make acquisitions of?' " she said. "We don't know of any, and it would be inappropriate for me to comment on that. That is more of a question for our CEO."
Some lawmakers seemed angry that the Treasury's money could be used for acquisitions.
"I'm calling for any merger completed with the help of Tarp money to first be approved by Treasury," said Sen. Charles Schumer, D-N.Y. "While there are mergers that should take place to improve systemic stability and encourage lending … giving away government money so that it can be used to gobble up competitors that will not have any impact on the overall stability of the financial sector should not be endorsed."
During the hearing, Sen. Dodd acknowledged it was unrealistic to expect bankers to be able to prove how the government funds were used.
"It flies in the face of reality to say you can draw bright lines between private money and government capital," he said.
Much of the rest of the hearing turned on whether the Bush administration had done enough to engage in loan modifications. Lawmakers have pressed the administration to do more for months—so far to no avail. Even a requirement in the rescue bill that the Treasury begin a modification program appears to have accomplished little.
Sen. Dodd and others asked bankers whether they supported a plan from Federal Deposit Insurance Corp. Chairman Sheila Bair for the government to offer loan guarantees to institutions that engage in systematic modifications.
Industry and other witnesses generally endorsed the idea.
Barry Zubrow, an EVP and chief risk officer for JPMorgan Chase, said the New York company was "very supportive of the types of programs that Chairman Bair has proposed," though there are "a lot of details that need to be worked out."
Treasury Secretary Henry Paulson distanced himself from the Bair plan Wednesday, signaling that he did not want to use Tarp money to pay for it.
Sen. Dodd said he was disappointed by that stance, though he could not force the issue.
"I'm not inclined to do that as much," he told reporters. "It's just a question of whether they want to move on it, and I'm hopeful here that enough jawboning by people across the spectrum might convince the Treasury they ought to move forward on that."
Sen. Mel Martinez, R-Fla., argued that the government's attempts to prevent foreclosures have been "timid," and that more should be done.
Some Democrats appear focused on pressing a more radical solution next year that would let judges rework primary mortgages during bankruptcy proceedings. The banking industry remains staunchly opposed to such reform, arguing that it would force lenders to raise the cost of credit for consumers at a time when the market needs more liquidity.
President-elect Barack Obama and several other senior Democrats have supported the bankruptcy plan.
"Bankruptcy is the only answer," Sen. Schumer said. "No voluntary plan will work on its own. You need the carrot, which is the Sheila Bair [plan]. You need the stick, which is bankruptcy."
Source: American Banker
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