I call it implicit nationalization. It's no better than the real thing. The New York Times reports:
Financial
institutions that are getting government bailout funds have been told
to put off evictions and modify mortgages for distressed homeowners.
They must let shareholders vote on executive pay
packages. They must slash dividends, cancel employee training and
morale-building exercises, and withdraw job offers to foreign citizens.
As public outrage swells over the rapidly growing cost of
bailing out financial institutions, the Obama administration and
lawmakers are attaching more and more strings to rescue funds.
The
conditions are necessary to prevent Wall Street executives from paying
lavish bonuses and buying corporate jets, some experts say, but others
say the conditions go beyond protecting taxpayers and border on social
engineering.
Some bankers say the conditions have become so
onerous that they want to return the bailout money. The list includes
small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.
They
say they plan to return the money as quickly as possible or as soon as
regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.
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Let's require a secret ballot too, and shareholders must have a few weeks to consider the compensation package, at least.
Frankly, I have a really tough time with a bank paying dividends and bonuses after receiving billions of TARP dollars, but I don't want the TARP at all.
I say that's encouraging.
*gasp*. government doing something that borders on social engineering? never!
Isn't it obvious that these conditions will kill the stock price of these institutions for years? Who is going to want to invest in corporations with one hand tied behind their backs vs. competitors who can do what they want (i.e. respond to the market more easily)?
Also, isn't it obvious that talented executives will flock to the competitors? It seems to me that the competitors will get the talented innovators, while these entities will get what seems like government bureaucrats.
"Also, isn't it obvious that talented executives will flock to the competitors? It seems to me that the competitors will get the talented innovators, while these entities will get what seems like government bureaucrats."
But if you assume that everyone's the same and that talent is fungible, then that issue goes out the window.
Not that it actually does, of course.
The difference between the current actions being taken and nationalization is that the latter would increase confidence and be short-term.
"Isn't it obvious that these conditions will kill the stock price of these institutions for years? Who is going to want to invest in corporations with one hand tied behind their backs vs. competitors who can do what they want (i.e. respond to the market more easily)?"
No, it's not obvious. The fact that these banks needed the bailout in the first place, due to their poor management, has ALREADY killed their stock prices for years.
But the bailouts for banks were not intended to make the stock price of the banks rise anyway. It wasn't an investor bailout. It was for a greater economic common good (increase lending, etc.). The fact that some of these banks haven't realized this yet, and apparently think it is ONLY about their shareholders, only makes me more convinced that the people running them should NOT be running them.
Frankly, I have a really tough time with a bank paying dividends and bonuses after receiving billions of TARP dollars, but I don't want the TARP at all.
The weird paradox about the government recapitalizing the banks is that the government can't recoup its investment unless there is private investor confidence to take its place. You don't instill any private investor confidence by eliminating dividends. The TARP was wrong precisely because government can't not screw it up.
One thing is kinda funny about this though. What delusional banker actually thought that the money wouldn't come with evolving strings that would eventually prove more costly than the money itself? Fortunately, if the mark-to-market rules are adjusted to reflect reality on the regulatory side, a big chunk of the emergency goes away, and fewer banks are in a position to get TARPed without at least getting dinner and flowers.
Could the point to all this be to encourage the companies to give the money back sooner rather than later?
@LoneShark: It's likely the consequence, but not the point. The do-gooders hanging these conditions on the banks will be genuinely upset that the banks don't want to play ball.
I can see why leftist think this isn't socialism. Socialism requires government to control the means of production. It's clear that in this case, government is controlling the means of production, so it's totally not socialism.
The flight of the competent has already begun. Seeing the writing on the wall, an increasing number of the most competent are leaving the banks to either join existing competitor operations or starting their own operations. Of course, the people left behind at the TARPed banks are those who are not bright enough to be lured away by competitors and can't start their own shop. With that kind of talent left in those institutions, I'm sure they'll be in need of government cheese in no time.
K Ashford, Mark to Market accounting is did not result in the banking crisis. The way you account for an asset is not what gives it value. The problem was the use of mark to market accounting in light of idiotic capital regulations. Essentially, it capped their leverage at a time when the banks needed flexibility in their leverage ratios. There's more to it because the capital ratios depended on the ratings of the assets and that brings involves a conversation about the role of the government created oligopoly in ratings agencies. Mark to Market, however, is far superior to Mark to Make Believe and getting rid of it simply makes the bank's books more opaque and adds to uncertainty.
I agree that banks that voluntarily took the funds and didn't believe there would (eventually) be strings attached were delusional. But what about the big banks (e.g., Wells Fargo) that didn't want the money but were forced to take it anyway?
So some are going to give the money back now that they have seen the catch.
WTF were their heads when the accepted the money in the first place?
It is scary to think that there are people in position of screwing with our money, public or private money, that are so stupid they think that government money is coming free of strings?
God help us!
This really is an odd thing.
It's one thing for someone to vote a certain way because of some hard wired preference to be either more idealistic or more pragmatic in their choice of political flavor, but this kind of behavior really astonishes me.
That people would line up for government assistance, and then be surprised that the help came with unwelcome attachments.
Perhaps they – the individuals in charge of such institutions – thought that they and their groups were above such strings being attached? Those kinds of prices only have to be paid by single mothers on welfare, and such as ilk as that?
That would be superbly fitting; their elitist thinking clouded their judgement and they were had by a group of elitists from the government.
Now Mr Roberts,
Isn't this what we wanted? For them not to want, need public funds and to get their act together on their own? If they can return the money then they don need it, if they don't need it then why give it to them? Doesn't this decrease the moral hazard part of the argument?
We complain that they get the money and that they give it back?!?!?!?!?!
But the bailouts for banks were not intended to make the stock price of the banks rise anyway. It wasn't an investor bailout. It was for a greater economic common good (increase lending, etc.).
The sad thing is, is that if the morons in congress really wanted to stimulate lending and unfreeze the so-called credit markets, the most logical way to do it was to reduce taxes on those who earn interest; capital would have flowed toward purchasing debt instruments and there would have been plenty of loanable funds. Of course this would have killed the incentive for investors to purchase muni bonds.
"Mark to Market, however, is far superior to Mark to Make Believe and getting rid of it simply makes the bank's books more opaque and adds to uncertainty."
True, but only as long as you are willing to suspend capital requirements when you have a sytemic collapse such as we are experiencing.
I'm a little surprised that people here are surprised that the banks didn't think there would be onerous new strings attached.
First of all, the banks are heavily regulated. There are already plenty of strings attached. Second, there were initially no new strings attached. That was the deal they were initially sold. So, if a bank can take the money but give it back if the new strings are too onerous, that's the smart thing to do from the banks' perspective.
I don't think solvent banks giving back money solves the moral hazard problem since moral hazard arises from the willingness to bailout failures.
The irony is that the attempt to save the banks too-big-to-fail will likely result in the best banks, having attracted the fleeing talent, winning the battle of competition after all.
I think it's a good lesson.
Well they are now welfare cases and therefore should be subject to such.
"But what about the big banks (e.g., Wells Fargo) that didn't want the money but were forced to take it anyway?"
This is the most disturbing part of the story.
I'm feeling 'ronery.
Methinks said:
>>>First of all, the banks are heavily regulated.<<<<
ARE U FRIGGEN NUTS, STOP LYING!!!!
/Kos Koolaid Drinker
Economist warning about deregulation of derivatives back in 2000:
Economist warns about deregulating derivatives
Wadda ya have to say to dat Methinks?
Alan Greenspan admits deregulation was a huge failure
Alan Greenspan, former chairman of the Federal Reserve, said at congressional hearings that he was partially mistaken in supporting deregulation of derivatives and that there were serious problems with the credit default swap market.
I say….
Bernie Madoff, the subprime lending market, Stanford Financial, Bear Stearns, Lehman Brothers, WaMu and to a lesser extent, WorldCom and Enron, were all regulated by either the SEC or the Fed or both.
Greenspan is really unglued, isn't he?
US regulators have failed.
Presidents, nobels, banks, people, everybody failed because it was impossible not to fail. The system is a dark one, it doesn´t permit to know.
We need changing it, and there´s a small change required, a very small one, a conceptual one.
Be trustful, there exist a B-plan.