No one should be surprised to learn that major banks receiving taxpayer bailouts will use the funds for purposes other than what government officials promised. Just the same, Louise Story and Eric Dash of the International Herald Tribune provide a good account of the carnage to date and the plans that some banks have for these funds.
It might have helped if the strings attached to the funds matched the rhetoric of government officials, the president, and members of Congress who promoted the bailout:
“It is the government’s responsibility to set the terms and conditions on this money,” said David Walker, the former U.S. comptroller general and now president of the Peter Peterson Foundation. “This is the people’s money. They’re giving it out with no rules.”
Walker noted that the government had yet to put together a board to oversee the Treasury’s actions in implementing the bail-out, as was required by Congress.
If the bailout funds are ultimately to be used as promised, taxpayers will have to rely on the sensitivity of banks to public opinion, as the primary regulator for national banks is taking a hands-off approach:
“There is no express statutory requirement that says you must make this amount of loans,” said John Dugan, the comptroller of the currency. “But the economics work so that it is in their interest to do so.”
Dugan added that he would not examine how the banks use the money, but he said their actions would “be open to the court of public opinion.”
Story and Dash note that bank losses have now more than wiped out the supposed, record profits that banks were earning during the salad years and that were the basis for record bonus payouts, as well:
As two financial giants, Citigroup and Merrill Lynch, reported fresh multibillion-dollar losses on Thursday, the industry passed a grim milestone: All of the combined profits that major U.S. banks earned in recent years have vanished.
For every dollar the banks earned during the industry’s most prosperous years, they have now wiped out $1.06.
In the case of the nine-largest U.S. commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July of 2007, those banks have marked down their valuations on loans and other assets by just over that amount.
Money is fungible. Some of these funds will eventually make their way via lending back to taxpayers. But some will also be used to pay bonuses to the same executives who made the investment decisions that were the basis for ephemeral profits and have led to a partial nationalization of their businesses, and some will be used to pay dividends to the same institutional shareholders who voted for the same directors who failed in their duties. Or, as Story and Dash put it:
The banks could use the money from the government for any number of things. Some analysts say the banks may use it to acquire weaker competitors. Others say they might use it to avoid painful cost-cutting. And still others say the banks may sit on the capital.
But no one should be surprised by any of this.