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UPDATE on HFSC Hearing: "TARP Accountability: Use of Federal Assistance by the First TARP Recipients”

February 12, 2009

Below please find a summary of the House Financial Services Committee oversight hearing entitled “TARP Accountability: Use of Federal Assistance by the First TARP Recipients”, which adjourned about 1 hour ago (I apologize for the delay, but there was a good deal of information to weed through after this full day hearing). The following 8 CEOs testified and their opening statements are attached:

The main concern was how the TARP funds were being used, with a special concern of employee compensation and what appears to be the lack of loans being processed post the distribution of TARP funds. There was a special need to be aware of how the original funds are being used and their success, if any, before Congress grants them or any other companies more funds.

It was noted by Barney Frank (D-MA) that if the companies do not like the requirements and want to give back the money, the government will take it and if there are legal obstacles to doing so, the government will find a way to do so. (There are legal obstacles, which require a certain amount of capital to be raised by the firms, which many of them do not want to pursue).

CEO’s generally stated that they were acting to better the economy, and want to and will pay back the Federal Government. In addition, they are not using the funds to overpay their employees and they are loaning money, but it is in the interest of everyone to lend as much as can be done safely; they are giving needed liquidity to their customer base, which helps stabilize the economy. They want to make this investment successful as soon as possible and promptly repay the federal government; all CEOs stated numerous times that they believe that they will repay the federal government and that they hope to repay them early. They understand the old model does not work, and that the old rules do not apply and they will adapt to the new realities.

The following is a recap of highlights:

(1) What these Companies Been Doing with the Funds—

A big concern was what appeared to be the lack of loans being given out. The CEOs responded that they are giving out loans, but they must be prudent when doing so; not everyone who wants money, should be given money. (Frank asked that all CEOs to elaborate on this issue in writing).

The firms’ first obligation is to the soundness of their institution, it is not just about lending. TARP added to firm capital and they have used these funds and other funds to run their business, and they are making prudent loans, because loans are a part of their business; and yes they have modified mortgages. 

They have been buying/lending and much of this would not have been doable without the TARP money. But the CEOs were unable to answer what would have happened had the money not been injected, but believe they do believe that the economy would have gotten worse.

And while at first neither Goldman Sachs or BoA believed the bailout was necessary, they do believe it has supplied safety and soundness to the economy, and allowed them to lend more money then we would otherwise have done.

As to TARP’s success those firms in the consumer lending business stated that they would be able to ascertain the amount of new lending attributable to TARP.

Rep. Watt (D-NC) asked if the size of the stimulus is sufficient to serve the purpose of the program. There was no time for a response and answer will be submitted in writing at a later date.

(2) "Mark to market" or pricing mechanisms—

*Rep. Neugebauer (R-TX) asked how the companies would get the assets on their books moving? Goldman Sachs responded that the current accounting regimes allow firms to mark where the expectation will be, and allow the assets to be economically valued over time. The problem is that the assets cannot be sold at that price at this time. Banks would generally hold the securities, earn fair market value over time, however, this is disadvantageous for the current system. The problem is that there are no incentives for banks to sell assets at low prices. CitiGroup interjected that companies have a duty to shareholders, and therefore cannot sell assets at such a low price.

*Rep. Gutierrez (D-IL) asked how do we even begin to value these assets at this time? CitiGroup stated that the valuation question is difficult, because there are various kinds of assets. Instead they need to put them to the side, create a bill of the losses, and recover them later. There has not been such a discussion among CEOs, but now that the Treas. Sec. has laid out his framework, the financial industry can start moving forward. He specifically noted that there is no need to reinvent the wheel; instead we should look at what other nations have done.

*Rep Biggert (R-IL) asked if we cannot value these assets, should we do away with the market to market? Wells Fargo responded that when markets are not functioning, must look elsewhere, to another alternative, but the market to market process is not bad per se. He was generally agreed with by all 8 CEOs.

(3) Executive compensation generally, including Obama plan for $500,000 pay cap—

This was a very hit topic, and the 8 CEOs were asked, many times, how much they made, what the value of their bonuses were and if they would continue to support such supposed performance based salaries.

In response to a question by Rep. Bachus (R-AL) the Morgan Stanley CEO (with others concurring) stated that they do believe that capping bonuses, while will not lead to a great exodus of senior level employees, it will lead to a serious exodus of talented lower level employees.

*Rep Himes (D-CT) asked whether any of the CEOs were willing to implement compensation procedures that guard against taking excessive risk—all responded that they would be willing to implement some form of policy.

All 8 CEOs gave their salaries and bonuses (if yet decided) for 2007 and 2008. They ranged from a base salary of a couple $100 thousand, with various ranges of stock options and cash as bonuses. They all pointed out that their stock bonuses were indeed not worth nearly as much as they used to be.

Some CEOs gave specifics about their policies:

  • Goldman Sachs: they do pay based on performance, which they believe pushes their employees to succeed. And he noted that when the firm struggled bonuses did go down by 60%. They have also never offered golden parachutes.

  • Morgan Stanley: they get stock bonuses, thus they are on par with shareholders. In addition, they have a claw back provision.

  • Citibank: The CEO has taken a yearly salary of $1 with no bonus, until they are able to pay back the Federal government. (Assuming this does not exclude stock options, or future options).

  • Bank of America: They do not have golden parachute contracts, and they always pay bonuses post 4th quarter.


There were also specific questions and concerns about Merrill Lynch’s bonuses, and all such questions were directed to their new ‘owner’ Bank of America. It was noted by Rep. Maloney (D-NY) that bonuses to Merrill employees were over $3.6 billion right before BoA bought them with taxpayer money; and they even moved up the timing of these bonuses because of this, despite their dismal 4th quarter. Taxpayers, Maloney held, therefore paid these bonuses to managers who mismanaged. She specifically wanted to know whether BoA had any idea that these bonuses were going to occur? BoA stated that they became aware of these bonuses during their due diligence, and that they wanted the bonuses reduced, but they had no authority to tell them what to do. In addition, there were tens of millions of dollars tied into legal contracts, which skewed these numbers.

(4) Regulation and Companies that are Too Big to Die—

One recurring theme was whether companies were truly too big to fail and whether such companies should be allowed to exist, and how do you go about regulating them, in addition to the smaller firms?

Citigroup stated that they have found that with this environment, no one has been spared, it is not about size. But, indeed, they have reduced the size of the company.

Bank of America stated that diversified companies have appeared to have weathered this economic storm better, so there may actually be some strength to size. It less about size and more about a company’s role in the capital markets and markets in general

Wells Fargo believes that is more of an issue of culture, leadership, and values, then an issue of size.

All agreed that change must happen and they will work with Congress on this and that there is a need for some form of more supervision then what is now in place. A consolidation of regulatory authority is a good idea: one coordinated ‘Super Regulator’. A U.S. system which is also globally coordinated would be the ultimate goal.

(5) Credit Cards—

The concern over ever increasing credit card interest rates was a hot topic, especially considering that the citizens who bailed these firms out, are the ones being penalized by the high interest rates.

CitiGroup stated that they did not raise interest rates for 2 years, but when costs went up they needed to in order to keep credit flowing. He also noted that at the same time they increased their forbearance program to reduce individual’s rates.

And when asked by Rep. Speier (D-CA) if the firms were willing to reduce credit card rates, those CEOs who are in the business of credit cards all responded NO (with CitiGroup responding that they would do so on a case by case basis).

And in response to Rep. Speier’s (D-CA) question about a usury rate, JP Morgan did agree that there should be one.

(6) Mortgages and Foreclosures—

It was asked by many Congressmen what the companies were doing, if anything, to help homeowners side-step foreclosures. CitiGroup responded that they have had great success when they are able to talk to the person who owns the home, and they have an early warning system where they contact homeowners who they feel are in risk; Wells Fargo has a similar system in place.

When specifically asked about cram-down legislation, allowing bankruptcy judges to rewrite mortgages, Citibank stated that they were satisfied with the 10 day requirement for banks to speak with their debtors, others feared adverse consequences, but did not elaborate.

When asked by Rep Scott (D-GA) if the firms were willing to place a moratorium on all foreclosures until the Treasury Sec. can put together the new package the CEOs said they would back this concept, of there was a time limit placed on it, say 3 weeks.

(6) Other—

*There was no mention insurance agencies, the ‘bad bank’ (there was much discussion on regulation, but nothing specifically referencing the ‘bad bank’), or the extension of eligibility of TARP to US subsidiaries of *foreign* banks.

*Another concern of Congress appeared to be how aware these companies were of the pending economic meltdown before it happened, and it they were not, why, they, the captains of the financial industry, were blinded to the issues.

  • Bank of America stated that in terms of the capital markets meltdown in August of 2008, this was the first time they personally became aware of the severity and they were in contact with the Fed./Treasury. But they were not aware how bad the economy was.

  • Goldman Sachs stated that most Wall Street financial captains, thought it was solely a Wall Street issue, that the issues were not a problem of main street—they had separated Wall Street from the real economy, but the lesson has been learned: the two are intrinsically linked.

  • It was also discussed that the bigger issue was that risk and award got separated. In addition, housing in total, securitization, low interest rates, and most importantly bad underwriting, excess leverage (all over the place) led to our current situation. And yes some were known and discussed, but no one predicted this outcome.

  • Rating agencies were also blamed these agencies got things very wrong, and they did not re-investigate, and institutions relied on these ratings too much.

*Two Michigan Congressman, Rep McCotter (R-MI) and Rep Peters (D-MI) specifically questioned the CEOs about the auto industry, which is plaguing their districts. The CEOs were asked if they were willing to help ensure their success. None of the CEOs openly stated yes or no, but they did state that they will give loans to the industry and to individuals to purchase cars where possible. 

Written by Cameron Kilberg
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