February 5, 2010

Greater Good: The Unintended Consequences of Repaying TARP

It is hard to look at the big banks and hear about the bonuses, especially as the fallout from the man-made financial crisis is not over for the everyday American who doesn't earn millions of dollars a year, and lending is sluggish. Three of four major banks that were TARP recipients and announced earnings on January 20 and 21 reported net losses due, they said in their announcements, to TARP repayments.

Citigroup and Bank of America both reported fourth-quarter 2009 and full-year losses after accounting for TARP repayments. Morgan Stanley made money for the fourth quarter but lost money for the full year. But in order to be eligible to pay big bonuses for 2009, repayment was required. In other words, did the repayment of TARP funds weaken the banks again? Should that have been allowed? And, should the bonuses be taxed at 50% as was proposed in Congress on January 14th?

Goldman Sachs was the only one of these four giant banks--that posted profits after accounting for TARP repayments.

Sure, as taxpayers we want to see TARP paid back, with interest. We want to share in banks' profits, just as we taxpayers funded them in the darkest hours of the crisis to stave off worse, and to help prevent their potential demise. Yes, there is outrage over what many feel are outsized bonuses earned in a year in which banks got a huge leg up from taxpayers, with TARP bailouts and other Treasury and Fed support , including Fed Funds rates that were zero to .25%--affirmed by the Fed on January 27 to stay "exceptionally low levels of the federal funds rate for an extended period."

But, while big banks have benefited from TARP, and the equity market rally, among other things, lending lags. And the kind of transparency necessary to see what's actually going on in banks--for instance, seeing what they hold is actually worth in terms of marking certain securities to market--is still sadly lacking.

President Obama announced on January 21 a version of what has been talked about by his advisor, former Fed Chairman Paul Volker, a plan to separate some of the risk-taking operations of financial firms from deposit types of banking, and limits on "marketshare of liabilities,"--too big to fail writ large? Perhaps a new version of Glass-Steagall is not such a bad idea.

Other statespersons in the realm of business and the economy are weighing in as well, and we ought to listen to what these eminence grises have to say. The Founder and Executive Chairman of the World Economic Forum, which has its famous conference in Davos this week, Klaus Schwab, and Vanguard's Founder John Bogle, each wrote Op-Ed pieces for The Wall Street Journal over the past week. Each called financial institutions on the carpet for veering away from prudent responsibility to shareholders and the public at large, and managing to enrich themselves to the detriment of the greater good.

In "Bank Bonuses and the Communitarian Spirit," Schwab's January 14 Op-Ed, in The Wall Street Journal, he wrote: "According to the stakeholder approach, the top management of the enterprise acts as a trustee for all stakeholders--and not just the trustee of the shareholders. It is based on the principle that each individual is embedded in societal communities in which the common good can only be promoted through the interaction of all participants."

John Bogle wrote in his January 18 Op-Ed "Restoring Faith in Financial Markets," that financial institutions "held less than 10% of all U.S. stocks in the mid-1950s," and now, "own and control almost 70% of the shares of U.S. corporations." Institutions he writes, need to "behave as owners of corporate America, actively voting proxies in the interests of their principals; playing a role in dividend payouts and executive compensation as well as in mergers and acquisitions; limiting (or even eliminating) excessive stock options; and demanding the independence of directors from management (including the separation of the roles of chief executive and board chairman)."

If we want capitalism to thrive, we must revisit the big picture, and financial institutions need to remember the long-term view that they exist not simply for their self-enrichment, but as part of society as a whole.

Comments? Please send them to kmcbride@wealthmanagerweb.com. Kate McBride is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

More Wealth Manager: Viewpoint blog posts: Why Shouldn't Investors' Best Interests Come First? February 25, 2010 Are Senators strong enough--and do they have enough integrity--to stand up on behalf of retail investors and insist on extending the fiduciary standard to cover those who provide advice to retail investors?... Greater Good: The Unintended Consequences of Repaying TARP January 29, 2010 Did the requirement to repay TARP funds in order to pay bonuses for 2009 prompt some banks to repay the bailout funds too early? ... Smart Money January 19, 2010 Goldman Sachs Chairman and CEO Lloyd C. Blankfein testified that at Goldman Sachs, "...we do support the extension of a fiduciary standard to broker/dealer registered representatives who provide advice to retail investors." ... Ever Hopeful December 29, 2009 As we emerge from a challenging economic crisis, there is reason to hope that changes and opportunities we will see in this new year--some as a direct result of the economic crisis--will be positive.... Schapiro's Call for Fiduciary Standard Reflects SEC's Original Mandate December 07, 2009 "I believe that all securities professionals should be subject to the same fiduciary duty," says SEC Chair Mary L. Schapiro.... Mr. Dodd's Message from Washington November 16, 2009 Now that we have heard from both the House and Senate committees on finance and banking about investor protection, let's not misinterpret what they are saying. Can the DJIA at 10,000 Inspire "Animal Spirits?" October 16, 2009 The Dow Jones Industrial Average hit a year-to-date high and jumped above 10,000 on Oct. 14, and the next day hit another high of 10,062.94. Unless you are short, this is good news for you and for your clients. "Federal" versus "Authentic" Fiduciary Duty October 08, 2009 Both investment advisors and broker/dealer registered representatives routinely give financial and investment advice to clients. What is still different is the rules that protect those investors.... Are you Ready? September 22, 2009 Financial reform is around the corner. How will it affect you and your clients? The Capital is abuzz with discussions regarding re-regulation of financial services, something that the Administration wants to see passed by year-end.... "Trust Doesn't Come and Go" September 08, 2009 Once an advisor has that trusted relationship with a client, can the advisor "go back" to a non-fiduciary relationship?... Another Bernanke Term? August 26, 2009 President Obama nominated Fed Chairman Ben Bernanke for another four-year term on August 25, "because of his background, his temperament, his courage, and his creativity," in fighting the financial crisis that is now entering its third year. ... Can Derivatives be Tamed? August 14, 2009 Obama proposes reforms for OTC derivatives...Judge Jed Rakoff wants answers about Bank of America-Merrill bonuses...the Lewis Liman defense.... Avoiding Depression August 10, 2009 Depression Averted...says Paul Krugman...Should the Sec be self-funded? They make much more for the Treasury than they receive from Congress...... More
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