These statements occur within a mere six paragraphs of each other in a Wall Street Journal story, “Devil Is in Bailout’s Details‘:
Upending the government’s relationship with the financial sector, the Bush administration outlined a plan Tuesday to prop up banks by injecting $250 billion into U.S. financial institutions….
The government is making clear it expects banks to lend out the funds it gets from Uncle Sam. Further exercising its clout, Treasury also extracted a promise that the financial firms would help struggling homeowners, continue lending and would sign up for loan guarantees offered by the Federal Deposit Insurance Corp.
“What we’re doing is making clear to the banks how important it is to deploy the capital,” Treasury Secretary Henry Paulson said in an interview….
Bankers and industry experts said that aside from a handful of token restrictions, the capital injections more closely resemble a blank check.
Now it is possible that this contradiction between what Paulson says he said versus how the industry is hearing it is a symptom of inept drafting by the Wall Street Journal writers. I suspect otherwise. While this article does not have much in the way of comments from the recipients of the government’s largesse, this one is revealing:
Bank of America Corp. Chairman and Chief Executive Officer Kenneth Lewis was supportive of the new plan, while acknowledging that some conditions for the government help were not ideal. “Our interest is in anything that helps the system operate more normally at this point,” said Bank of America spokesman Robert Stickler. As for the possibility of government interference, “Who knows?” he said. “We are in unchartered territory.”
This remark is a no lo contendere, it neither admits or denies the existence of any specific requests from Treasury. And believe me, helping struggling homeowners, one of Paulson’s action items, is an area where the industry’s response to government efforts has been slow and half-hearted.
In fact, the Journal authors nailed it when they used the word “token.” The banks will probably put a few measures in place so as not to embarrass their new sugar daddy. But with no formal conditions set at the time of the capital injection, the terms generous compared to recent private sector financings, and only (at most) promises made to a Treasury secretary with a bit more than three months left in office, the government assistance of early this week was as close as you get in adult life to free money.
Update 11:10 PM The New York Times provides a dramatic account of the meeting in which Paulson told the nine bank CEOs they were taking the government’s dough. It reads like Mafia strong-arming. And the telling bit is this:
The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.
This is, in its own way, every bit as brazen as the three page scribble that the Treasury Department provided as its proposed TARP. And those pages included definitions, too.
Any corporate general counsels (or lawyers who advise them) are particularly encouraged to speak up. However, I doubt that CEOs can make commitments of this magnitude without board approval (unless perhaps they had a pre-existing shelf registration, but equity is seldom sold pursuant to a shelf offering, and I would assume the same is true for preferred). And a one-pager standing in as some sort of agreement is a travesty. Such patently ridiculous going-through-the-motion-of-having-some-sort-of-procedure is worse than operating on a handshake (and handshakes work well between honorable people, but that has become a scarce commodity in the US), because it says this sort of trampling of normal process is appropriate. This is the sort of move you’d expect to see in a banana republic…..oh wait, that’s no longer a fresh observation about the US.
The bank CEOs, when finally offered the terms, saw them as attractive and quickly fell into line. But then why resort to these strong-arm tactics in the first place? Many of the moves in the meeting, as recounted by the Times, were classic coercion techniques, the sort used by cults. If CEOs, people at the very top of the food chain, aren’t willing to say, “I’m sorry, I never agreed to be held hostage, incommunicado, or sign an agreement in order to leave” then who CAN say it? Remember, as the Times tells it, they were told by Paulson they had to agree before they were told what they were agreeing to (at least in sufficient detail to evaluate it).
I guarantee this will prove to have been a Faustian bargain, not for having taken the government’s juicy deal, but for having allowed themselves be forced to make a decision, under duress, with their peers present and no opportunity to withdraw, think, or confer with advisors.
To make the point more clearly: the public at large was taken not just once, but twice, It was hosed in the unduly generous terms given to nine banks (the lack of writedown of assets to realistic values, the failure to wipe out current equity holders and subject debt holders to a haircut, the merely symbolic limits on executive pay). But it also got a less obvious shellacking in the way legal and regulatory processes were trampled. Given the Treasury and Fed’s combined banking authority, and the dubious valuations of many types of assets on these firms’ books, the powers that be could easily have compelled any bank to accept a much less favorable deal, or frankly any deal they wanted them to take. And it would not have taken all that much additional effort (although it might have taken some planning, which is a persistent shortcoming of this Administration).
But Paulson instead went through a bizarre, public exercise in sham corecion (and real sidestepping of even minimal normal forms) so as to avoid a candid discussion of how lousy the banks’ balance sheets really were. And the ruse, like the TARP itself, was another demonstration that the Treasury considers itself to be outside the law.
Early in his career, Paulson was a staffer for John Erlichman. It appears that imprinting stuck.
I am surprised to be invoking this text a second time in only a few days (if you saw this in comments, forgive me), but it may make the point more clearly. From Robert Bolt’s screenplay about Thomas More, A Man for All Seasons:
More: Yes. What would you do? Cut a great road through the law to get at the Devil?
Roper: I`d cut down every law in England to do that.
More: Oh! (advances on Roper) And when the last law was down, and the Devil turned round on you –where would you hide, Roper, the laws all being flat? (He leaves him) This country’s planted thick with laws –man’s laws, not God’s –and if you cut them down –and you’re just the man to do it –d`you really think you could stand upright in the winds that would blow then? (Quietly) Yes, I`d give the Devil benefit of law, for my own safety`s sake.