Video: Congress upset over lack of mortgage relief

updated 11/13/2008 6:45:26 PM ET 2008-11-13T23:45:26

Some of the nation’s largest banks sharing in the $700 billion government bailout of the financial industry tried to assure lawmakers Thursday they are using the money to make more loans and help financially strapped homeowners avoid foreclosure.

Barry L. Zubrow, chief risk officer with JP Morgan Chase & Co., told the Senate Banking Committee that a portion of the $25 billion capital infusion it received from the Treasury Department was being deployed to “expand the flow of credit” and to assist with rewriting residential mortgages for up to 400,000 families.

Zubrow and executives with Goldman Sachs Group Inc., Bank of America Corp. and Wells Fargo & Co. told the committee that none of the $75 billion they have received collectively from the government is being used to pay salaries or bonuses.

“The committee has asked whether (bailout) funds would be spent on executive compensation,” said Jon Campbell, regional banking president for Wells Fargo & Co. in his testimony. “The answer is no. Wells Fargo doesn’t need the government investment to pay for bonuses or compensation.”

Some of the executives said bonuses this year will be lower because of the economic downturn.

“Employee compensation will be dramatically affected by changes in the overall economic and financial environment and our performance for the full year, but it certainly will not increase as a result of receiving TARP (Troubled Asset Relief Program) funds,” said Gregory Palm, general counsel for Goldman Sachs.

Bank of America’s board has decided that this year’s bonus compensation pool will be reduced by more than 50 percent, Anne Finucane, a marketing and corporate affairs executive, told the committee.

Finucane said Bank of America originated more than $50 billion in mortgage loans in the third quarter of 2008 but acknowledged that “we are lending less than we were a year ago.”

Campbell said Wells Fargo’s commercial real estate loans are 37 percent above a year ago.

Despite the reassuring words, lawmakers pressed hard for commitments to more lending.

“Let me say as clearly as I can,” said committee chairman Sen. Christopher Dodd, D-Conn. “Hoarding capital and acquiring healthy banks are not — I repeat are not — reasons why Congress authorized $700 billion in emergency funding.”

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Sen. Charles Schumer, D-N.Y., said he and other lawmakers are looking at requiring banks to make more loans as a condition for taking part in the $350 billion second half of the bailout. Congress can block release of the second $350 billion. It also can rewrite the law to put new conditions on its use.

“Any new capital injections must come with tougher requirements,” he said.

Treasury already has lent or committed $290 billion of the first half. Democrats are working on a bill they hope to pass next week that would devote another $25 billion to the beleaguered auto industry, with the specific intent of helping General Motors Corp. avoid bankruptcy.

The banking executives also were questioned about using bailout money to acquire other banks.

Sen. Sherrod Brown, D-Ohio, noted that Cleveland-based National City Bank was denied Treasury funds, only to be taken over by PNC Financial Services Group Inc. of Pittsburgh on the same day that PNC was approved for $7.7 billion in bailout money.

“The taxpayer funds that would have been allocated to National City were instead allotted to PNC,” Brown said.

The executives said their banks have no new acquisitions planned beyond the spate of mergers that occurred before Congress passed the bailout bill.

Meanwhile on Capitol Hill five prominent hedge fund managers on Thursday told the House Oversight and Government Reform Committee they support a new central exchange to open the murky world of some complex investments partly blamed for the global financial crisis, but the billionaires offered differing views on the need for stricter regulation of hedge funds themselves.

The managers testified at a House hearing examining the role of hedge funds in the crisis, and the risks that critics say they pose to the financial system. Hedge funds, vast pools of capital holding an estimated $2.5 trillion in assets, operate mostly outside of government supervision.

As the market crisis has deepened, hedge fund selling has been widely cited as one of the reasons for the increased volatility that pounded stock and bond markets last month. After terrible results for many hedge funds in recent months, some managers at the hearing acknowledged suffering losses in their highly touted funds.

The committee is attempting to assess the role of hedge funds in the financial crisis and what could go wrong with them in the future, said its chairman, Henry Waxman, D-Calif. “Some say hedge funds have become a shadow banking system,” he said.

A new regulatory regime for hedge funds, as some lawmakers have urged, could be a pressing issue under the administration of President-elect Barack Obama. Hedge funds’ wealth represents a vast source of potential tax revenue to meet demands on government spending. The political allegiances and donations of many hedge fund managers have tilted Democratic in recent years; hedge funds and Wall Street banks gave heavily to Obama’s campaign.

Billionaire investor and liberal activist George Soros, who runs a hedge fund, testified that new regulations were needed to gauge the underlying financial strength of banks. But he warned against “going overboard” with regulations that could do more damage than good to the financial system.

Elsewhere, New York Attorney General Andrew Cuomo has subpoenaed Bank of America for a list of every executive who received a bonus of more than $250,000 over the past two years.

The demand for data on executive pay was part of Cuomo’s investigation into whether banks receiving federal bailout funds are making sure that no government money goes to line the pockets of company bigwigs.

A person familiar with the investigation says Cuomo’s office sent the subpoena after being disappointed with Bank of America’s initial response to a letter asking for similar information.

© 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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