From TARP to ?Bad Bank?; an Update on your $700 billion

The “good bank/bad bank” plan that has been discussed recently is being held up on Capitol Hill as legislators look into executive compensation, loans to distressed mortgage holders, President Obama’s stimulus plan, a separate stimulus plan offered by Senate Republicans, and a host of other factors.

“It’s very frightening, the game plan is shifting from quarter to quarter,” said John Jay, senior analyst at Aite Group. “This is what TARP was to be initially, then they did an about face and started just throwing money at the banks.”

The initial TARP distribution had no accountability for how recipients would use the money and has come under fire after revelations of high compensation, lavish office decorating expenses and travel/convention junkets taken by executives of the financial institutions that received some of the first $350 billion tranche of the $700 billion in bailout money. This has led to consumers and many legislators to call for increased oversight for any more funds, leading to some changes by some of the financial institutions.

Tuesday, Citi defended its use of at least some of the TARP money, issuing its first quarterly progress report detailing the deployment of the $45 billion of capital the U.S. Treasury invested in the company. The report, which covers the fourth quarter of 2008, is titled, "What Citi is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S. Economy."

The bank said that its goals in deploying TARP capital are threefold: to help expand available credit for consumers and businesses; restore liquidity and stability to the capital markets; and support the recovery of the U.S. economy.

According to Citi, the company’s report describes the procedures the financial services firm “has established to oversee its deployment of TARP capital, as well as other efforts the company is making to help Americans remain in their homes, assist distressed borrowers and support U.S. businesses and communities.”

“Americans from all walks of life are facing real economic hardship, and Citi must do whatever we can to help them,” said Citi CEO Vikram Pandit. “Our responsibility is to put TARP capital to work quickly, prudently, and transparently to support U.S. consumers, businesses and our communities during these challenging times.”

Public outcry has also led to at least one change at Wells Fargo, as it canceled this week a four-day convention planned for Las Vegas. The bank initially defended the trip as a business retreat, but relented as the public complaints continued.

Now Congress is attempting to add to the public pressure. An amendment offered by US Representative Sue Myrick to TARP that would prevent any company that receives funds from outsourcing new customer service or call center jobs to a foreign-based company, passed by voice vote earlier this week in the House.

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“Given the amount of federal dollars pouring into U.S. companies from the TARP, and given the fact that the US unemployment rate is now above 7 percent, I don’t think it’s unreasonable to demand that American workers are used to fill any new customer service jobs for the companies who are assisted with American taxpayer dollars,” Rep. Myrick said during a floor speech in support of the amendment today.

However, Rep. Myrick voted against the bill — HR 384 — when it came to the floor for a vote.

“My amendment made this a better bill, but I still had concerns about the terms of the release of the $350 billion under it,” said Rep. Myrick. “It expanded the uses for TARP funds, which were originally approved in order to free up the credit market. Under this bill, the funds can be used far beyond the original intent of the program.”

H.R. 384 passed in the House by a vote of 260-166.

President Barack Obama Wednesday proposed a salary cap of $500,000 on top executives at companies receiving TARP funds. However, Jay warns that there are several ways to “game” the compensation levels with various accounting tricks.

But the most important thing the legislators and the financial institutions should be doing, according to Jay, is to get lending into the market. Is not that credit isn’t available. But lenders are seeking double-digit rates for some financing, while paying nearly nothing for the funds themselves.

“The rates have to come down,” Jay said. Until that happens, the credit markets will stay frozen. With all the back-and-forth among legislators, bankers, etc., foreign investors might someday re-evaluate their investments in U.S.-backed financial instruments, which would lead to more trouble.

“Each week there seems to be a new idea,” Jay said. “It’s a real big mess when homeowners are expecting reworked mortgages.” The problem is the original mortgages were already securitized and sold, so any such cramdowns could play havoc with the bond market.

“It’s all interrelated,” Jay said.