Under fire from Democrats and Republicans alike, the White House on Thursday defended giving billions of taxpayer dollars to banks that plan to use some of the money to reward shareholders and executives — or even buy other banks.
Ed Lazear, chairman of the Council of Economic Advisers, said the government is keeping close tabs on the way banks use bailout dollars to “make sure that there are not abuses.” But he said that normal activities of banks, such as paying performance-related salaries or distributing dividends or even purchasing other banks are allowed under the law Congress passed creating the bailout program.
Members of the Democratic-controlled Congress, including some Republicans, have questioned the program in the wake of reports that banks receiving funds through the newly enacted rescue plan are going ahead with plans for dividends, bonuses or acquisitions. Lawmakers are asking why banks with the money to do those things need taxpayer-funded help.
The Troubled Assets Relief Program was created as part of the bailout to buy devalued mortgage-backed securities from tottering banks to unclog frozen credit markets. But the Treasury Department has now decided to use the bulk of that money to make direct stock investments in financial institutions, believing that could work better — or quicker — to get normal lending practices going again.
Financial institutions are skittish about extending new loans — the lifeblood of the credit-dependent U.S. economy, from households to small businesses to corporate America — given the huge losses they have racked up in bad mortgages.
But Lazear said there are signs that lending is loosening “in some markets quite significantly.”
The rescue legislation included some limits on executive compensation. And it does not allow institutions receiving the money to increase dividends. Lazear said that Treasury officials will make sure those requirements are met.
But he also suggested that the government would go no further in placing conditions on banks in the program. Lazear said that to do so may hamper their voluntary participation, and may also dampen the kind of free-market flexibility the administration believes will work best to get credit moving again. The first checks moved out to big banks this week.
Instead, he said that incentives in the program as well as free-market realities will result in the program’s success. For instance, the law requires that banks pay “quite significant dividends” to the government, meaning they have every reason to start lending again to make the kind of money necessary to both make a profit and to pay back Washington. The law requires a quarterly 5 percent dividend to the government that increases to 9 percent after three years.
“That’s almost like a gun at their heads, so that they know that they have to start making money to be able to do that,” White House press secretary Dana Perino said. She noted that “not only rich people get dividend payments,” which can form a significant portion of income for retirees and mutual funds.
“I want to make sure people understand that a lot of people could suffer if they don’t have dividend payments,” Perino said.
On executive pay, she said that participating banks are complying with the law’s requirements. Under the law, an executive who receives a bonus based on false financial statements must repay it. The law also says that “golden parachutes” are not available for the top five executives of a company.
“I’m not here to defend Wall Street,” Perino said. “I’m not here to defend their pay practices. But this is the law as it was set out, that was passed by Congress.”
She also tried to dispel talk that the administration is near agreement on a plan to help about 3 million homeowners avoid foreclosure. Perino said several different ideas are on the table, and that no announcement on any of them as the final plan is imminent.
“People float out ideas in the media,” she said.