the entrance to the U.S. Treasury, on the other side of a forbidding array
of guard stations and scanners that control access to the Greek Revival building,
lies one of the most beautiful interior spaces in all of Washington. Ornate
bronze doors open inward to a two-story-high chamber. Chandeliers line the
coffered ceiling, casting a soft glow on the marble walls and richly inlaid
In this room,
starting in 1869 and for many decades thereafter, the U.S. government conducted
many of its financial transactions. Bags of gold, silver, and paper currency
arrived here by horse-drawn vans and were carted upstairs to the vaults. On
the busy trading floor, Treasury clerks supplied commercial banks with coins
and currency, exchanged old bills for new, cashed checks, redeemed savings
bonds, and took in government receipts. In those days, anyone could observe
all this activity firsthandcould actually witness the government and
the nations bankers doing business. The public space where this occurred
became known as the Cash Room.
Today the Cash Room is used for press conferences, ceremonial functions, and
departmental parties. And thats too bad. If Treasury still used the
room as it once did, then perhaps wed have more of a clue about what
happened to the billions of dollars that flew out of Treasury to selected
American banks in the waning days of the Bush administration.
Last October, Congress passed the Emergency Economic Stabilization Act of
2008, putting $700 billion into the hands of the Treasury Department to bail
out the nations banks at a moment of vanishing credit and peak financial
panic. Over the next three months, Treasury poured nearly $239 billion into
296 of the nations 8,000 banks. The money went to big banks. It went
to small banks. It went to banks that desperately wanted the money. It went
to banks that didnt want the money at all but had been ordered by Treasury
to take it anyway. It went to banks that were quite happy to accept the windfall,
and used the money simply to buy other banks. Some banks received as much
as $45 billion, others as little as $1.5 million. Sixty-seven percent went
to eight institutions; 33 percent went to the rest. And that was just the
money that went to banks. Tens of billions more went to other companies, all
before Barack Obama took office. It was the largest single financial intervention
by Treasury into the banking system in U.S. history.
But once the money left the building, the government lost all track of
it. The Treasury Department knew where it had sent the money, but nothing
about what was done with it. Did the money aid the recovery? Was it spent
for the purposes Congress intended? Did it save banks from collapse? Paulsons
Treasury Department had no idea, and didnt seem to care. It never required
the banks to explain what they did with this unprecedented infusion of capital.
Exactly one year has elapsed since the onset of the financial crisis and the
passage of the bailout bill. Some measure of scrutiny and control has since
been imposed by the Obama administration, but even today its hard to
walk back the cat and trace the money. Up to a point, though, its possible
to reconstruct some of what happened in the first chaotic and crucial three
months of the bailout, when Treasury was still in the hands of Henry Paulson
and most of the money was disbursed. Needless to say, there is no central
clearinghouse for information about the tarp money. To get details of any
kind means starting with the hundreds of individual recipients, then poring
over S.E.C. filings, annual reports, and other documentationin other
words, performing the standard due diligence that the government itself failed
to perform. In the report that follows, we have no more than dipped a toe
into the morass, but one fact emerges clearly: a lot of the money wound up
in the coffers of some very surprising institutions institutions that
should have been seen as troubling as much as troubled.
The intention of Congress when it passed the bailout bill could not have been
more clear. The purpose was to buy up defective mortgage-backed securities
and other toxic assets through the Troubled Asset Relief Program,
better known as tarp. But the bill was in fact broad enough to give the Treasury
secretary the authority to do whatever he deemed necessary to deal with the
financial crisis. If tarp had been a credit card, it would have been called
Carte Blanche. That authority was all Paulson needed to switch gears, within
a matter of days, and change the entire thrust of the program from buying
bad assets to buying stock in banks.
Why did this happen? Ostensibly, Treasury concluded that the task of buying
up toxic assets would take too long to help the financial system and unlock
the credit markets. So, theoretically, something more immediate was neededhence
the plan to inject billions into banks, whether or not they wanted or needed
the money. To be sure, Citigroup and Bank of America were in precarious condition.
So was the insurance giant A.I.G., which had already received an infusion
from the Federal Reserve and ultimately would receive more tarp money$70
billionthan any single bank. But rather than just aiding institutions
in distress, Treasury set out to disburse money in a more freewheeling way,
hoping it would pass rapidly into the financial system and somehow address
the system-wide credit crunch. Even at this early stage, it was hard to
escape the feeling that the real strategy was less than scientificamounting
to a hope that if a massive pile of money was simply thrown at the economy,
some of it would surely do something useful.
On Sunday, October 12, between 6:30 and 7 p.m., Paulson made a series of calls
to the C.E.O.s of the biggest banksthe so-called Big 9and
asked them to come to Treasury the next afternoon for a meeting on the financial
crisis. He was short on details, as he would be throughout the crisis. A series
of e-mails obtained by Judicial Watch, a Washington public-interest group,
offers a window on the moment. The C.E.O. of Citigroup, Vikram Pandit, had
agreed to attend, but asked his staff to scope out the purpose. Can
you find out soon as possible what Paulson invite to VP [Vikram Pandit] for
meeting at Treasury this afternoon is about? a Citigroup executive in
New York wrote the banks Washington office. When Citis high-powered
lobbyist Nicholas Calio called Paulsons office, he was told only that
Pandit should attend.
Top Treasury staffers were likewise in the dark. Paulsons chief of staff,
James Wilkinson, sent out a 7:30 a.m. e-mail: Can someone tell Michele
Davis, [Kevin] Fromer and me who the Big 9 are?
By midmorning, people finally had the namesVikram Pandit, of Citigroup;
Jamie Dimon, of J. P. Morgan Chase; Kenneth Lewis, of Bank of America; Richard
Kovacevich, of Wells Fargo; John Thain, of Merrill Lynch; John Mack, of Morgan
Stanley; Lloyd Blankfein, of Goldman Sachs; Robert Kelly, of the Bank of New
York Mellon; and Ronald Logue, of State Street bank. Their destination was
Room 3327, the Secretarys Conference Room, on the third floor.
Paulson laid before them a one-page memo, CEO Talking Points.
He wasnt there to ask for their help, Paulson would say; he was there
to tell them what he expected from them. To arrest the stress in our
financial system, Treasury would unveil a $250 billion plan the next
day to buy preferred stock in banks. Paulsons memo told the bankers
bluntly that your nine firms will be the initial participants.
Paulson wasnt calling for volunteers; he made it clear the banks had
no choice but to allow Treasury to buy stock in their companies. It was
basically a reverse holdup, with Paulson holding the gun and forcing the banks
to take the money.
Some of the C.E.O.s had misgivings, fearing that by accepting tarp money
their banks would be perceived as shaky by investors and customers. Paulson
explained that opting out wasnt an option. If a capital infusion
is not appealing, the memo continued, you should be aware that
your regulator will require it in any circumstance. Paulson gave the
bankers until 6:30 p.m. to clear everything with their boards and sign the
Treasury had prepared a form with blank spaces for the name of the bank and
the amount of tarp money requested. Each C.E.O. filled in the two blanks by
hand$10 billion, $15 billion, $25 billion, whateverand then signed
and dated the document. That was all it took.
But this was
just the beginning. Its one thing to call nine big banks into a room
and give them what turned out to be a total of $125 billion. That required
little more than a few hours. Its quite a different matter to look out
over the landscape of 8,000 other U.S. banks and decide which ones should
get slices of the tarp pie. Moreover, the guiding principle was never clear.
Was it to give money to essentially sound banks, so that they could help inject
more money into the credit markets? Was it to pull troubled banks into the
clear? Was it bothand more?
Regardless, the mechanism to disburse all this money even more widely was
an entity called the Office of Financial Stability. Unfortunately, it wasnt
a functioning office yetit was just a name written into a piece of legislation.
To lead it, Paulson picked Neel Kashkari, a 35-year-old former Goldman Sachs
banker who had followed Paulson to Treasury when he became secretary, in July
2006. Kashkari was an odd choice to oversee a federal bailout of private companies.
A free-market Republican, he had downplayed the gravity of the subprime-mortgage
crisis only months before his appointment, reportedly sending the message
to one gathering of bankers, There is no problem here.
other Paulson aides cobbled together the Office of Financial Stability under
immense time pressure. They press-ganged people from elsewhere in Treasury
and from far-flung government departments. By the end of the year, there were
more detailees on loan from other offices (52) than there were
permanent staff (38). They were spread out all over Treasury, from the ground
floor to the third. Some occupied space in leased offices six blocks away.
It was a strange agglomeration of peoplestretching from Washington to
San Franciscowho had never worked together before.
There were no internal controls to gauge success or failure. The goal was
simply to dispense as much money as possible, as fast as possible. When Treasury
began giving billions to the banks, the department had no policies in place
to ensure that the banks were using the money in ways that met the purposes
of the program, however defined. One main purpose, as noted, was to free up
credit, but there was no incentive to lend and nothing to stop a bank from
simply sitting on the money, bolstering its balance sheet and investing in
Treasury bills. Indeed, Treasurys plan was expressly not to ask the
banks what they did with the money. As the Government Accountability Office
later learned, the standard agreement between Treasury and the participating
institutions does not require that these institutions track or report how
they plan to use, or do use, their capital investments. When the G.A.O.
asked Treasury if it intended to ask all tarp recipients to provide such an
accounting, Treasury said it did notand would not. Theres
not a bank in this country that would lend money under [these] terms,
Elizabeth Warren, the chair of a Congressional Oversight Panel that was eventually
charged by Congress with overseeing tarp activities, would tell a Senate committee.
There wasnt even anyone within the tarp office to keep track of the
money as it was being disbursed. tarp gave that jobalong with a $20
million feeto a private contractor, Bank of New York Mellon, which also
happened to be one of the Big 9. So here was a case of a beneficiary helping
to oversee a process in which it was a direct participant.
Most of the tarp contractsfor everything from legal services to accountingwere
awarded under an expedited procedure that government watchdogs regard as high-risk,
because it lacks a wide array of routine safeguards. In its first three months
of operation, the Office of Financial Stability awarded 15 contracts worth
tens of millions of dollars to law firms, fiscal agents, management consultants,
and providers of various other services. There was enormous potential for
conflicts of interest, and no procedure to deal with them. When the possibility
of conflict of interest was raised, two of the contractors voiced vague
promises to maintain an open dialog and work in good faith
with Treasury, and left it at that.
When Henry Paulson unveiled the bank-rescue plan, he emphasized that it wasnt
a bailout. This is an investment, not an expenditure, and there is no
reason to expect this program will cost taxpayers anything, he declared.
For every $100 Treasury invested in the banks, he maintained, it would receive
stock and warrants valued at $100. This claim proved optimistic. The Congressional
Oversight Panel that later reviewed the 10 largest tarp transactions concluded
that Treasury paid substantially more for the assets it purchased under
the tarp than their then-current market value. For each $100 spent,
Treasury received assets worth about $66.
In those first few weeks, money gushed out of Treasury and into the tarp pipeline
at a torrential rate. After giving $125 billion to the big banks, Treasury
moved on to the second round, wiring $33.6 billion to 21 other banks on November
14 in exchange for preferred stock. A week later it sent $2.9 billion to 23
more banks. As noted, by the time Barack Obama took office, the tarp tab totaled
more than a quarter of a trillion dollars. In its first six months, the new
administration disbursed an additional $125 billion to banks, mortgage companies,
A.I.G., and the big auto manufacturers.
To the public, the bailout looked like a gold rush by banks competing for
tarp money. It was indeed partly that, but the reality is more complex. While
some banks lobbied aggressively for tarp money, many others that had no interest
in the money were pressured to take it. Treasurys explanation is that
regulators knew which banks were strongest and wanted to get more capital
into their hands in order to free up credit. But its also true that
spreading the money around to a large number of small and medium-size banks
helped create the impression that the bailout wasnt just for a few big
boys on Wall Street.
Its impossible to overstate how casual the process was, or how little
Treasury asked of the banks it targeted. Like most bankers, Ray Davis,
the C.E.O. of Umpqua Bank, a solid, respectable local bank in Portland, Oregon,
followed with great interest all the news out of Washington last fall. But
he didnt see that tarp had much relevance to his own bank. Umpqua was
well run. It wasnt bogged down by a portfolio of bad loans. It had healthy
Then he got a call from a Treasury Department representative asking if Umpqua
would like to participate in the Treasury program and suggesting it would
be a good thing for Umpqua to do. Davis listened politely, but the fact was,
he says, that Umpqua didnt need the funds. Our capital resources
were very high.
The next day, Davis was in his office when another call came through from
the same Treasury representative. Basically what he said was that the
secretary of the Treasury would like to have your application on his desk
by five oclock tomorrow afternoon, Davis recalls.
The application was the paperwork for a capital infusion, and
Davis was told it would be faxed over right away. By now he was sold on participating.
Here was somebody from the secretary of the Treasury calling,
Davis says, and complimenting us on the strength of our company and
saying you need to do this, to help the government, to be a good American
citizenall that stuffand Im saying, Thats good.
Youve got me. Im in.
The most urgent task was to complete the application and get it back to Treasury
the next day, and this had Davis in a sweat: I pictured this 200-page
fax that would take me three weeks of work crammed into one evening.
Imagine Daviss surprise when a staff member walked in soon afterward
with the official Application for tarp Capital Purchase Program.
It consisted of two pages, most of it white space.
If tarp accomplishes
nothing else, it has struck a mighty blow for simplicity in government. The
application was only 24 lines long, and asked such tough questions as the
name and address of the bank, the name of the primary contact, the amount
of its common and preferred stock, and how much money the bank wanted. Anyone
who has filled out the voluminous federal forms required in order to be eligible
for a college loan would die for such an application. Davis recalls that,
when the two faxed pages were brought to him, all he could say was Really?
As soon as Umpquas application was approved, Treasury wired $214 million
to Umpquas account.
What happened in Portland happened elsewhere across the country. Peter Skillern,
who heads the Community Reinvestment Association, a nonprofit group in North
Carolina, describes a conference he attended where bankers explained that
they had been contacted by their regulators and told by them that they
would be taking tarp.
One policy that tarp did decide to adopt was to keep confidential the name
of any bank that was denied tarp fundsbut it never had to invoke this
rule. In those early months, with billions being wired all across the country,
no financial institution that asked for tarp money was turned away.
With few restrictions
or controls in place, bailout money found its way not only to banks that didnt
really need it but also to banks whose business practices left much to be
desired. On November 21, $180 million in tarp money wound up in the affluent
seaside community of Santa Barbara, California. The tarp dollars flowed mostly
into the coffers of a beige, Spanish-style building on Carrillo Street, home
to the Santa Barbara Bank & Trust.
This might appear
to be just the kind of regional bank that Treasury had in mind as an ideal
beneficiary of tarp. The bank has been a fixture in Santa Barbara for decades,
serving small businesses as well as wealthy individuals. It sponsors Little
League teams, funds scholarships to send local kids to college, and takes
an active role in community groups. It plays up its longstanding commitment
to giving back to the communities we serve.
How much tarp money made its way through S.B.B.&T. and into the local
community is not known. But, as it happens, the bank also operates a little-known
and controversial program far from the lush enclaves of Santa Barbara. Like
an absentee landlord, the community bank with the give back philosophy
in Santa Barbara turns out to be a big player in poor neighborhoods throughout
the country. And not in a nice way. Outside Santa Barbara, S.B.B.&T. peddles
what are known as refund-anticipation loans (rals)high-interest loans
to the poor that are among the most predatory around.
A ral is a short-term loan to taxpayers who have filed for a tax refund. Rather
than waiting one or two weeks for their refund from the I.R.S., they take
out a bank loan for an amount equal to their refund, minus interest, fees,
and other charges. Banks operate in concert with tax preparers who complete
the paperwork, and then the banks write the taxpayer a check. The loan is
secured by the taxpayers expected refund. rals are theoretically available
to everyone, but they are used overwhelmingly by the working poor. Ordinarily,
the loans have a term of only a few weeksthe time it takes the I.R.S.
to process the return and send out a checkbut the interest charges and
fees are so steep that borrowers can lose as much as 20 percent of the value
of their tax refund. A recent study estimated that annual rates on some rals
run as high as 700 percent.
is one of three banks that dominate this obscure corner of the banking marketthe
other two being J. P. Morgan Chase and HSBC. But unlike the two big banks,
for which rals are but one facet of a broad-based business, Santa Barbara
has come to rely heavily for its financial well-being on these high-interest
loans to poor people. Interest earned from rals accounted for 24 percent of
the banking companys interest earnings in 2008, second only to income
generated by commercial-real-estate loans. Under pressure from consumer groups,
some banks, including J. P. Morgan Chase, have lowered their ral fees. Not
Santa Barbara. Chi Chi Wu, of the NationalConsumer Law Center, in Boston,
calls Santa Barbara Bank & Trust a small bank with sharp teeth.
The U.S. Department
of Justice and state authorities in California, New Jersey, and New York have
taken action against tax preparers with whom S.B.B.&T. works, charging
them with deceptive advertising and with preparing fraudulent returns. Santa
Barbara later took a $22 million hit on its books because of unpaid refund-anticipation
The bank insists
that its tarp money didnt go to finance ral. The capital received
by Santa Barbara Bank & Trust under the U.S. Treasury Departments
Capital Purchase Program was not intended nor is it being used to fund or
provide liquidity for any Refund Anticipation Loans, according to Deborah
L. Whiteley, an executive vice president of Pacific Capital Bancorp, Santa
Barbaras parent company. Other banks that have received tarp money have
made similar statements, contending that money received from Washington simply
became part of their capital base and was not earmarked for any specific purpose.
But in a conference call with analysts on November 21, Stephen Masterson,
the chief financial officer of Pacific Capital Bancorp, admitted that tarp
obviously helps us .
We didnt take the tarp money to
increase our ral program or to build our ral program, but it certainly helps
our capital ratios.
infusion from Treasury may well have been a lifeline for Santa Barbara. The
Community Reinvestment Association of North Carolina, which has been tracking
S.B.B.&T.s finances and its ral program for years, concluded in
2008 that S.B.B.&T. would be losing money if it werent putting the
squeeze on poor people around the country.
KeyBank of Cleveland is another institution that was given the nod by Treasury
officialsand another bank whose lending practices prompt the question:
What were they thinking?
Last fall KeyBank
received $2.5 billion in tarp money. Its parent company is KeyCorp, a major
bank holding company headquartered in Cleveland. With 989 full-service branches
spread across 14 states, KeyCorp describes itself as one of the nations
largest bank-based financial services companies, with assets of $98
billion. It also ranks as the nations seventh-largest education lender.
In the summer of 2008, as banks and Wall Street firms were unraveling faster
than they could count up their losses, KeyCorp delivered a decidedly upbeat
report on its condition to investors. Our costs are well controlled,
the company stated. Our fee revenue is strong.
Our reserves are
We remain well capitalized.
What the report
did not mention was a host of other problems. KeyCorp was in the midst of
negotiations with the I.R.S. over questionable tax-leasing deals, and had
had to deposit $2 billion in escrow with the governmentforcing it to
raise emergency capital and slash dividends after 43 consecutive years of
annual growth. Meanwhile, consumer advocates had KeyBank in their sights because
of the way it conducted its student-loan business, which they described as
nakedly predatory. The Salt Lake Tribune reported that KeyBank not only
funds unscrupulous schools, it seeks them out, strikes up lucrative partnerships,
and, in the process, suckers students into thinking the schools are legitimate.
Over the years,
thousands of students have secured education loans from KeyBank to attend
a broad range of career-training schoolsschools offering instruction
in how to use or repair computers, how to become an electronics technician
or even a nurse. One of the schools was Silver State Helicopters, which was
based in Las Vegas and operated flight schools in a half-dozen states. During
high-pressure sales pitches, people looking to change careers were encouraged
to simultaneously sign up for flight school and complete a loan application
that would be forwarded to KeyBank. Once approved, KeyBank, in keeping with
long-standing practice, would give all the tuition money up front directly
to Silver State. If a student dropped out, Silver State kept the tuition and
the student remained on the hook for the full amount of the loan, at a hefty
The same rule applied if Silver State shut itself down, which it did without
warning on February 3, 2008. Because the monthly operating expenses,
even at the recently streamlined levels, continue to exceed cash flow,
an e-mail to employees explained, the board has elected to suspend all
operations effective at 5 p.m. today. More than 750 employees in 18
states were out of work. More than 2,500 students had their training (for
which they had paid as much as $70,000) cut short.
Helicopters was a flight school, but it might more accurately be thought of
as a Ponzi scheme, according to critics. As long as there was a continual
source of loan money, keeping the scheme afloat, all was well. KeyBank bundled
the loans into securities, just as the subprime-mortgage marketers had done,
and sold them on Wall Street. But when Wall Street failed to buy at an adequate
interest rate, the money supply evaporated. As KeyBank dryly put it, In
2007, Key was unable to securitize its student loan portfolio at cost-effective
rates. Without the loansin other words, without the cooperation
of Wall Streetthe school had no income.
2009, Fitch Ratings service, which rates the ability of debt issuers to meet
their commitments, placed 16 classes of KeyCorp student-loan transactions
totaling $1.75 billion on Ratings Watch Negative, signaling the
possibility of a future downgrade in their creditworthiness.
behemoth Capital One, an institution that many Americans probably dont
even realize is a bank, maintains its headquarters in McLean, in northern
Virginia. Over the years, Capital Ones phenomenally successful marketing
strategy has made the company the fifth-largest credit-card issuer in the
U.S., and it has used its profits to expand into retail banking, home-equity
loans, and other kinds of lending.
never revealed what it planned to do with the $3.5 billion tarp check it received
from the U.S. Treasury on November 14, 2008, but three weeks later, the company
bought one of Washingtons premier financial institutions, Chevy Chase
Bank. To Washingtonians, Chevy Chase was a model corporate citizen. But outside
Washington, it had a different reputation. The companys mortgage subsidiary
had engaged in practices that were at the core of the nations mortgage
meltdownrisky loans with teaser interest rates that later went bad.
The banks portfolio of mortgages from around the country was stuffed
with a high percentage of so-called option armadjustable-rate mortgages
with many different payment options. One of the most common kept a homeowners
monthly payment the same for years, but the interest rate rose almost immediately.
When the interest exceeded the amount of the monthly payment, the excess was
tacked onto the principal, pushing homeowners ever deeper into debt. Having
been lured by what a federal judge would call the siren call of
this kind of mortgage, many Chevy Chase mortgage holders were on the brink
of foreclosure, or had already fallen over the edge. By mid-2008, Chevy Chases
nonperforming assets had tripled to $490 million since the previous
With Chevy Chase rapidly deteriorating, along came Capital One. Flush with
tarp money, Capital One became a bailout czar of its own. It bought Chevy
Chase for $520 million and assumed $1.75 billion of its bad loans. The purchase
price was a fraction of what Chevy Chase would have brought before it wandered
off into the wilderness of exotic mortgages and risky lending.
as it was bailing out Chevy Chase, Capital One was putting the squeeze on
many thousands of its own credit-card holders, sharply raising their interest
rates and imposing other conditions that made credit far more expensive and
difficult to obtain. For many cardholders, rates jumped overnight from
7.9 percent to as much as 22.9 percent. Rather than using its multi-billion-dollar
government infusion to prime the credit pump, Capital One in fact began turning
off the spigot.
Capital Ones actions enraged its customers, many of whom had been cardholders
for decades. The bank was engulfed with complaints. The last I checked
you were given money from the government for the specific purpose of freeing
up credit to stimulate spending and help move the economy out of recession,
wrote a woman in Holland, Michigan. This was just the opposite of what
you did. But other credit-card companies that received federal bailout
money, such as Bank of America, J. P. Morgan Chase, and Citibank, would take
the same route as Capital One, sharply raising interest rates, cutting off
credit to millions of people, and frustrating the stated rationale for Treasurys
Because all dollar bills are alike, and because follow-up tracking by the
government has been so minimal, its often impossible to determine if
any bank or other financial institution used tarp money for any particular,
discernible purpose. Only A.I.G., Bank of America, and Citigroup were subject
to any reporting requirements at all, and the reporting has been spotty. But
what is possible to say is that tarp allowed many recipients to spend money
in ways they would have been unable to do otherwise. Its also the case
that recipients of tarp money continued to behave as if a financial earthquake
hadnt just shaken the world economy.
The Riviera Country Club is about a mile from the Pacific Ocean, in a scenic
canyon north of Los Angeles. Riviera is home to one of the most storied tournaments
on the P.G.A. Tour. This year the tournament was sponsored by a tarp recipient,
the Northern Trust Company of Chicago. Northern was founded more than a century
ago to cater to wealthy Chicagoans, and not much about its clientele has changed
since then, except that now the company caters to the wealthy not just in
Chicago but everywhere. According to the bank, its wealth-management group
caters to those with assets typically exceeding $200 million.
The company manages $559 billion in assetsa sum nearly as great as what
has so far been spent on the tarp program itself.
When Northern Trust received $1.6 billion in tarp funds, a spokesman for
the bank said that it was too soon to say specifically how the
money would be used. But the companys president and C.E.O., Frederick
Waddell, noted that the program will provide us with additional capital
to maximize growth opportunities. Three months later, the bank sponsored
the Northern Trust Open, flying in wealthy clients from around the country.
To entertain them, the bank brought in Sheryl Crow, Chicago, and Earth, Wind
& Fire. A Northern Trust spokesman declined to say how much all this cost,
but explained that it was really just a business decision to show appreciation
Northern Trust was acting no differently from many other tarp recipients.
One of the most blatant examples was Citigroups plan to buy a $50 million
private jet to fly executives around the country. A public outcry forced Citigroup
to abandon that scheme, but the bank quietly went ahead with a $10 million
renovation of its executive offices on Park Avenue, in New York. Given
that Citigroup had already gone to the government three times for tarp assistance
totaling $45 billion, and was not a paragon of public trust, retrofitting
the windows with Safety Shield 800 blastproof window film may
have just been common sense.
The excesses werent confined to big-city banks. A subsidiary of North
Carolinabased B.B.&T., after accepting $3.1 billion in tarp money,
sent dozens of employees to a training session at the Ritz-Carlton hotel in
Sarasota, Florida. TCF Financial Corp., based in Wayzata, Minnesota, sent
40 high-performing managers, lenders, and other employees on a
junket in February to Cancún, soon after receiving more than $360 million
in tarp funds.
face it: episodes like these, infuriating as they may be, arent the
real issue. The real issue is tarp itself, one of the most questionable
ventures the U.S. government has ever pursued. Adopted as a plan to buy
up toxic assetsone that was quickly deemed impractical even by those
who first proposed itit evolved into something more closely resembling
an all-purpose slush fund flowing out to hundreds of institutions with their
own interests and goals, and no incentive to deploy the money toward any clearly
defined public purpose.
By and large, the cash that went to the Big 9 simply became part of their
capital base, and most of the big banks declined to indicate where the money
actually went. Because of the sheer size of these institutions, its
simply impossible to trace. Bank of America no doubt used a portion of its
$25 billion in tarp funds to help it absorb Merrill Lynch. Citigroup revealed
in its first quarterly report after receiving $45 billion in tarp funds that
it had used $36.5 billion to buy up mortgages and to make new loans, including
largest single tarp beneficiary, wasnt even a bank. The insurance company
used its $70 billion in tarp funds to pay off a previous government infusion
from the Federal Reserve. The original bailout money had flowed through A.I.G.
to Wall Street firms and foreign banks that had incurred big losses on credit-default
swaps and other exotic obligations. These were basically the casino-style
wagers made by A.I.G. and the counterpartieswagers they lost. The government
justified the help by saying it was necessary to prevent disruption to the
economy that would be caused by a disorderly wind-down of A.I.G.
The collapse of Lehman Brothers had occurred just days before the Fed took
action, and the shock waves on Wall Street from yet another implosion might
have been catastrophic. Bankruptcy court, where troubled corporations routinely
wind down their disorderly affairs, would have been another option, though
that prospect might not have quickly enough addressed the gathering sense
of urgency and doom. Well never know. Certainly bankruptcy court
would not have allowed A.I.G.s clients to get full value for their bad
Instead, A.I.G. was able to pay off its counterparties 100 cents on the dollar.
The largest payout$12.9 billionwent to Goldman Sachs, the Wall
Street investment house presided over by Paulson before he moved into his
Treasury job. Merrill Lynch, the worlds largest brokeragethen
in the process of being taken over by Bank of Americareceived $6.8 billion.
Bank of America itself received $5.2 billion. Citigroup, the nations
largest bank, received $2.3 billion. But it wasnt just Wall Street that
benefitted. A.I.G. also funneled tens of billions of tarp dollars to banks
on the other side of the Atlantic.
Some banks receiving tarp funds bristle at the notion that the taxpayer-funded
program is a bailout. They say it is an investment in banks by the federal
government, one that requires them to pay interest and ultimately pay back
the money or face a financial penalty. In fact, many banks are making their
scheduled payments to Treasury, and others have paid off billions of dollars
in tarp funds (as well as interest). To tarp supporters, this is evidence
of a sound investment. But at this stage it isnt clear that every institution
will be able to make the interest payments and buy back the governments
holdings. As of this writing, some banks, including Pacific Capital Bancorp,
the parent of Santa Barbara Bank & Trust, have not been able to make their
scheduled payments. No one can predict how many banks will ultimately come
up short. But in the meantime tarp has been a very good deal for banks, because
it gave them, courtesy of the taxpayers, access to capital that would have
cost them substantially more in the private market, while exacting nothing
from the beneficiaries in the form of a quid pro quo.
Based on the reluctance of many banks to take the money in the first place,
and the swiftness with which other banks have repaid tarp funds, the main
conclusion to be drawn is that relatively few were actually endangered. Rather
than targeting the weak for reliefor allowing them to fail, as the
government allowed millions of ordinary Americans to failPaulson
and Treasury pumped hundreds of billions of dollars into the financial system
without prior design and without prospective accountability.
What was this
all about? A case of panic by Treasury and the Federal Reserve? A financial
over-reaction of cosmic proportions? A smoke screen to take care of a small
number of Wall Street institutions that received 100 cents on the dollar for
some of the worst investments they ever made?
More than five months after the bulk of the bailout money had been distributed
into bank coffers, Elizabeth Warren plaintively raised the central and as
yet unanswered question: What is the strategy that Treasury is pursuing?
And she basically threw up her hands. As far as she could see, Warren went
on, Treasurys strategy was essentially Take the money and do
what you want with it.