Are the banks using the government bailout money to pay bonuses to executives, hoarding it, rather than making loans to homeowners, which is what was expected when the tax dollars were distributed?
Some of the nation's largest banks sharing in the $700 billion government bailout of the financial industry tried to assure lawmakers Thursday they are using the money to make more loans and help financially strapped homeowners avoid foreclosure.
Barry L. Zubrow, chief risk officer with JP Morgan Chase & Co., told the Senate Banking Committee that a portion of the $25 billion capital infusion it received from the Treasury Department was being deployed to "expand the flow of credit" and to assist with rewriting residential mortgages for up to 400,000 families.
Zubrow and executives with Goldman Sachs Group Inc., Bank of America Corp. and Wells Fargo & Co. told the committee that none of the $75 billion they have received collectively from the government is being used to pay salaries or bonuses.
"The committee has asked whether (bailout) funds would be spent on executive compensation," said Jon Campbell, regional banking president for Wells Fargo & Co. in his testimony. "The answer is no. Wells Fargo doesn't need the government investment to pay for bonuses or compensation."
Some of the executives said bonuses this year will be lower because of the economic downturn.
"Employee compensation will be dramatically affected by changes in the overall economic and financial environment and our performance for the full year, but it certainly will not increase as a result of receiving TARP (Troubled Asset Relief Program) funds," said Gregory Palm, general counsel for Goldman Sachs.
Bank of America's board has decided that this year's bonus compensation pool will be reduced by more than 50 percent, Anne Finucane, a marketing and corporate affairs executive, told the committee.
Where is the money going?
The US government has staged a U-turn on its plans for bailing out the country's financial system, saying that it no longer intends to buy the toxic mortgage assets at the heart of the credit crisis.
The announcement came less than six weeks after the Treasury won a gruelling battle with Congress for the authority to conduct the purchases. Hank Paulson, Treasury secretary, said that the remainder of the $700bn bail-out fund will instead be used to buy more direct stakes in banks and other financial firms.
As he spoke, the Federal Reserve and other banking regulators made an unprecedented joint statement urging banks to use money already received from the government to issue new loans, rather than hoarding the cash to pay dividends and staff bonuses.
The change of plan reflected the speed with which the credit crisis has overwhelmed government efforts to restore order to debt markets. They continue to be gummed up in a way that is starving businesses and consumers of loans and are throttling the US economy.
Mr Paulson's new statement did little to reassure markets, which remain confused over the scope and ultimate effectiveness of government intervention. "I will never apologise for changing an approach or a strategy when the facts change," he said. "During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on 3 October that we needed to act quickly and forcefully, and that purchasing troubled assets – our initial focus – would take time to implement and would not be sufficient given the severity of the problem."
The Treasury's original plan was based on the assumption that removing toxic mortgage assets from banks' balance sheets would finally establish how much they were worth, thereby restoring confidence and enabling companies to raise private money. But Mr Paulson said the Treasury would spend an initial $250bn buying direct stakes in banks before it turned to the mortgage purchases. Economists had argued that directly recapitalising the banks was more efficient, because institutions could leverage the new money to make many times that amount in new loans.
Finucane said Bank of America originated more than $50 billion in mortgage loans in the third quarter of 2008 but acknowledged that "we are lending less than we were a year ago."