Capital Markets

Where Has All the Bailout Money Gone?

Bankers ask senators for patience as they explain that they've just begun to use the government's equity purchases for lending.
Sarah JohnsonNovember 13, 2008

Executives at the largest U.S. banks deflected questions about how they’re spending their slices of the $700 billion bailout pie, telling a Senate committee hearing that they haven’t yet had time to fully put the additional capital on their balance sheets to work.

Anne Finucane, global corporate affairs executive at Bank of America, said during the hearing today that it’s “premature” to expect the infusion of cash to have had a huge effect on freeing up the credit markets thus far since her bank received its $15 billion portion just last week. However, she is seeing “the early stages of some movement” in lending.

Bank of America also stands to receive $10 billion as part of the government’s recapitalization plan after finalizing its Merrill Lynch acquisition. The Treasury bought $125 billion worth of preferred stock from the nine largest U.S. banks under the assumption that doing so would get the financial markets moving again.

Lawmakers, however, have criticized banks for hoarding the money rather than redirecting it to taxpayers and corporate clients in the forms of loans. So far, the government’s capital injections have not significantly increased the level of lending for businesses or consumers. Small businesses in particular are having trouble borrowing, hindering their ability to grow or even survive the credit crisis, senators lamented during today’s hearing of the Senate Committee on Banking, Housing, and Urban Affairs.

“Consumers and businesses rely on credit,” said Sen. Charles Schumer (D-N.Y.) said. “If it is not available, the recession will be deeper and longer than it has to be.” He said small businesses are getting the brunt of credit problems, citing an example of a 300-employee Buffalo, N.Y., business that may have to shut down because it cannot get financing.

The executives denied the senators’ accusations that banks are using the new capital on their balance sheets to fund dividend payouts, executive compensation, and acquisitions. Any recently disbursed dividends have come out of their earnings pool and are necessary to retain the interest of investors, the bankers said. Indeed, all of the banks represented at the hearing — Bank of America, Goldman Sachs, J.P. Morgan Chase, and Wells Fargo — are considered the strongest of the U.S. financial market and have been some of the few businesses to realize earnings during the third quarter. “Our interest is in putting money to work, not sitting on it,” said Gregory Palm, general counsel for Goldman. Barry Zubrow, chief risk officer at J.P. Morgan, said his bank will designate its $25 billion from the government toward consumers and businesses, as well as for modifications of residential mortgages.

Christopher Dodd, the Connecticut Democrat who is the committee chairman, protested the executives’ defenses and shared his impatience with seeing credit flow. Everyone has a “collective responsibility” to help unlock the credit markets, he said, and bankers should trust that investors would be understanding if the financial institutions used any extra funds to stimulate lending rather than dividends.

The hearing comes one day after Treasury Secretary Henry Paulson announced that he has ditched his initial plan to fix the credit turmoil by buying up financial institutions’ toxic assets, backed by subprime mortgages. So far, in addition to the $125 billion for the largest banks, he has designated $40 billion of the bailout money for AIG, and another $125 toward recapitalizing smaller financial institutions applying for the Treasury’s Capital Purchase Program by tomorrow’s deadline. That leaves another $60 billion available before the agency has to ask Congress to free up the second half of the $700 billion agreed upon under the Emergency Economic Stabilization Act.

In the meantime, Paulson and his colleagues at the Federal Deposit Insurance Corp., and the Federal Reserve are urging banks to lend. In an unusual joint statement yesterday, the agencies asked bankers to be prudent but keep the overarching economic stability of the country in mind. “If underwriting standards tighten excessively or banking organizations retreat from making sound credit decisions, the current market conditions may be exacerbated,” the agencies said.

Similarly, Dodd called on the bankers to get better at advertising to creditworthy borrowers that they have new capital to dole out. If they don’t begin lending again, the circular effect of wary borrowers and creditors will likely continue. “Hoarding capital and acquiring healthy banks are not — I repeat, are not — reasons why Congress authorized $700 billion in emergency funding,” he said.

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