Many Banks Say 'No Thanks' to Rescue Funds with Policy Strings
Having found themselves in a fine mess thanks to their exposure to securitized sub prime credit, U.S. banks large and small signed on for billions in bailout funds through the Treasury Department's Troubled Asset Relief Program. Now some of those banks are declining the funds and even asking where they can return money they've already received. Why? According to a New York Times report today, the bankers are unhappy with the strings attached to the bailout bucks.
The newspaper says that "financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises,and withdraw job offers to foreign citizens."
Noting the mortgage modification requirements, a Brookings Institution economics fellow, Douglas J. Elliott, told The Times: “I honestly believe the people in power pushing this policy see it as a win-win – as something that is good for the banking industry and good for homeowners and others. But there is a slippery slope and there are potentially significant negative consequences.”
An Economist magazine blog, Free Exchange, also noted those consequences. "Foes of [bank] nationalisation, take note – the government is likely to tend to banks under its control with a heavy hand." It adds, tongue-in-cheek, apparently: "Just as we feared! The government would begin focusing on its priorities rather than returning the banks to profitability. On the other hand, maybe the government is interventionist like a fox."
That fox-like wisdom was noted recently by Wharton real estate professor Susan M. Wachter in a KnowledgeToday post. Some banks, she said, might voluntarily participate in mortgage modification initiatives — a key part of President Obama's foreclosure relief plan — just to avoid being forced to take TARP funds and the other strings they bring. Banks which do not participate in the plan may be more likely to become subjects of the government's "stress tests" — reviews of their solvency required by Treasure Department. Banks failing the test could be declared insolvent or be forced to accept a TARP cash infusion. "So the question that non-participating banks have to ask themselves is, 'Do I want to be first in line for a stress test?'"
