The AIG Bonuses, Part 7:
Can TARP recipients give the money back?
4 Apr 2009 in Regulatory Economics, Regulatory Policy, Legislation
This post is not about the AIG bonuses on congressional reactions thereto, but because it is so closely related we're continuing to use the same thread.
In today's Wall Street Journal, Fox Business Channel host Stuart Varney claims that at least one bank has not been allowed to return, with interest, the TARP funds it received last September.
Here's a snip from Varney's commentary:
Here's a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.
Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He's been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with "adverse" consequences if its chairman persists. That's politics talking, not economics.
Jeff Poor of the Business and Media institute says Napolitano believes this is extortion:
Napolitano told viewers on FNC’s April 1 “Studio B” that he had a conversation with a head of $250-billion bank that explained the federal government, under the threat of an audit, forced him to accept TARP funds.
“This person runs a bank that’s worth about $250 billion, it has no subprime loans, it has no bad debts, wasn’t involved in credit default swaps,” Napolitano said. “It didn’t need any money. It didn’t ask for the money and didn’t want it. The FDIC with Treasury backing – officials from both the Federal Deposit Insurance Corporation and the Treasury said if you don't take this money, we will conduct a multi-year public audit of you.”
Though the bank was solvent, as Napolitano explained, fighting the government on the terms wasn’t worth in the final cost-benefit analysis and the bank’s board decided to accept bailout money, despite the protests of that bank’s head and having the government become part-owner of the bank.
“It would cost them millions in employee time to give the government the documents it wanted, it would cost terrible publicity. The terrible publicity and that would mean a loss of business,” Napolitano continued. “He begged his board of directors to let him tell the Feds to go take a hike. The board caved. He was forced – the board was forced to issue a class of stock just for the federal government. The federal government owns 2 percent of this huge bank. As a result of that minority ownership, they now want to control salaries. They want to see his books and they want to tell him who he can do business with.”
But as Napolitano explained, the tactic the government employed was nothing short of extortion, under its legal definition. And, as a consequence of the government having a stake in the bank, it is susceptible to having the government dictate business decisions and employee compensation.
“Extortion – this occurred in September of 2008,” Napolitano said. “Extortion is an attempt to control somebody else’s free will by threatening to perform a lawful act. Is an audit lawful? Absolutely. Is the threat to engage in an audit in order to force them to sell stock to the federal government lawful? Of course not! It’s a crime. That happened in September of ’08 under the Bush administration. In March of ’09 is when the Treasury said we own 2 percent, we’re going to tell you how to run the place.”
Varney's inference is that the Obama administration does not want the money back because it wants to control the banks. He writes this about H.R. 1664:
This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration's goal of controlling the financial system.
In our most recent post in this series, we noted that the House of Representatives' had passed a second bill to regulate TARP recipient employee compensation. Under H.R. 1664, therefore, Varney is correct that "any company taking a dime of TARP money" would be subject to new Treasury Department employee compensation restrictions. But we lack sufficient access to facts to evaluate Napolitano's story or Varney's conclusion (which really is a testable hypothesis) about the Obama administration's policies.
Napolitano's bank president's insistence on anonymity necessarily weakens confidence in his version of the events because there are other possible explanations besides extortion for the government's conduct. A willingness to abandon anonymity is a signal (though not proof) of veracity. It allows facts to be verified and claims to be rigorously tested by others. Former AIG vice president Jake DeSantis publicly announced his resignation on the op-ed page of the New York Times, an act that deprived New York State Attorney General Andrew Cuomo the ability to publicly disclose his identity for the express purpose of damaging his professional and persoal reputation -- which the AG had publicly threatened to do, an act that also satisfies Napolitano's definition of extortion. But by going public, DeSantis neutralized extortion as a weapon.
Napolitano's anonymous bank president has the same option available to him. It seems highly likely that the Wall Street Journal, having published Varney's commentary, would welcome a first-person account from Napolitano's bank president detailing how the Bush Treasury Department used extortion to force acceptance of TARP funds the bank did not want. Those officials are now gone, so it is hard to imagine how they could retaliate. The Obama Treasury Department could retaliate, of course, but revealing that the bank had been victimized by extortion last year would make retaliation look obvious.
Moreover, Napolitano's bank president could publicly document how the Obama Treasury Department has refused to accept repayment of TARP funds. This would support Varney's hypothesis that the Obama administration does not want the money back, which could be deeply embarrassing given its repeated public statements to the contrary.
