Friday, October 31, 2008

Bailout Misuse 2

Yesterday Binyanim Appelbaum reported in the Washington Post that "U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years."

The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.

"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.

The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.

The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.
The Financial Times reports today that AIG, the huge bailout beneficiary, has borrowed from one federal program to pay back loans taken out from another federal program. The reason? "Analysts said that AIG might have used the commercial paper facility to pay back the loan because the interest rates charged were lower. The government demanded a punitive rate of 8.5 per cent over the London Interbank Borrowing Rate on its $85bn two-year loan, while the Fed is charges interest of around 2-3 per cent for three-month commercial paper."

Another contrast with Europe: the German Bundestag's bailout legislation, passed October 17th, restricts executive salaries at any beneficiary institution to 500,000 Euros per year. Some executives warned that this would discourage banks from participating, thus admitting that many executives would consider letting their banks default rather than try to survive on the minimum wage of 500k a year. But it passed nonetheless, the conservative prime minister Angela Merkel intoning, "no aid without a quid pro quo."

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