tarp

Pay Czar Ordering Bailed Out Companies to Reduce Pay

by Flexo on October 22, 2009

The executives of these companies had to see this coming. When a company is “too big to fail,” it becomes a public institution in senses of the phrase but the most literal. And for a number of banks and other financial companies in the past year, the public has become a partial owner thanks to infusion of cash from the government bailouts.

A company has a responsibility to do what is in the best interest of its stakeholders. For these bailed-out companies, taxpayers hold more of that stake than ever before. Those who own shares of stock in these companies want nothing more than the companies to be self-sustaining and profitable, but taxpayers, all who have lent money to the companies to help prop up their balance sheets and create liquidity, just want these loans paid back regardless of profit.

The government officially represents the taxpayers, not the shareholders, but you can be sure the government wants to see these companies profit, too. The Obama administration’s “pay czar,” Ken Feinberg, is going to determine the compensation for the highest 25 paid individuals in each of the companies that have not yet repaid government funds. The new compensation plans would reduce total pay by an average of 50% per individual and would reduce the cash portion of pay by an average of 90%.

Wall Street This could benefit both taxpayers and shareholders in the short term:

Pay reductions create an incentive for companies to pay back the taxpayers and become fully private.
Lowering pay lowers companies’ expenses so they can report bigger profits in their quarterly an annual financial statements.

The challenge with government-mandated compensation restriction is that executives and boards of directors believe that bailed-out companies will be less appealing to the best and brightest talent. Corporate leaders who find they can only earn $40 million at Company A but could earn $80 million or more by moving to a company not partially controlled by the public might defect for greener pastures.

That sounds like a solid threat, but it’s not likely on a large scale. There are enough talented and qualified senior-level executives out there who would be happy to take the reins of a company partially owned by the government. At least, that is what Ken Feinberg is hoping.

It’s unlikely taxpayers will see bailed-out companies repay all of the money that they received. The government’s job right now is to get back as much of those funds as possible while still, to a point, preventing the companies from failing.

Photo credit: epicharmus
Wall Street Pay Cuts Stoke Debate About Washington’s Reach, Julianna Goldman, Ian Katz and Robert Schmidt, Bloomberg, October 22, 2009

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Insurance Companies Now Qualify for TARP Bailout Money

by Flexo on May 15, 2009

Even though they are not bank holding companies as originally required for the original qualifications for receiving bailout money from the public, six insurance companies will now have the option of receiving this money.

Among others, Allstate, Ameriprise Financial, Hartford Financial Services, Lincoln National Group, Principal Financial, and Prudential applied earlier for inclusin in the Troubled Asset Relief Program. These six companies have now been approved for a chance to shore up their balance sheets with a piece of the $135 billion remaining for bailout.

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You Be the CEO: Should Bailed-Out Banks Cut Limousine Usage?

by Flexo on March 5, 2009

As the government continues to bail out the banking industry and taxpayers continue to increase their stake in these companies, how far should the banks go to cut back spending on the excesses that have grown over the past several decades? The local New York City NBC news program aired a feature on the use of town car limousines by Bank of America, JP Morgan Chase, Morgan Stanley, and Goldman Sachs. Despite billions of dollars from taxpayers, bankers continue to travel extravagantly when more frugal options are available.

The media love this topic. Exposing the continued excesses of troubled companies destined for bankruptcy or in search of taxpayer assistance riles up people’s emotions. That’s the perfect formula for great ratings. The concept is simple: the reporter stands outside the corporate offices, counts the limousines waiting outside to take bankers to lunch meetings with clients or home at the end of the long day. They try to interview the bankers who refuse to talk to the cameras. (Corporations generally tell employees not to talk to reporters under any circumstances, to allow the marketing department — “public communications” — to control the public message.

The marketing departments aren’t doing a very good job. The court of public opinion is important here, as stock prices in the financial industry are tanking. Yes, the banks should do whatever they can to cut back on all these little expenses like limos and parties that add up over time. Yes, they should not use bailout funds to make poorly researched major acquisitions. Just like typical personal financial advice for managing a family’s money, corporations that are now somewhat accountable to the public should focus on both the repetitive small expenses (see the ECRD Factor) and the more expensive decisions (like buying a used car rather than a new car). But most importantly, the industry should be communicating that they understand that the gift of taxpayer funding means they have a new stakeholder, a new boss who cares about how their money is spent. Marketing departments should be ensuring the public sees the extent that the companies are utilizing the funds responsibly.

Brokerages that accepted bailout funds have rationalized the continuation of high salaries and bonuses for their best performers by citing the need to keep top talent. Yes, this does mean that the executives are fine with the concept of “wealth redistribution” when it works in their favor. In these cases, taxpayers are funding the compensation for investment managers and stock brokers whose salaries continue to soar while their companies’ profits sink.

Executives of some banks that received money in the form of bailout have stated they don’t like the terms attached to the funds. Two banks, Northern Trust and US Bank, will return the funds they received through the Troubled Asset Relief Program (TARP) to the government, as fast as possible, so they do not need to answer to the public. This is an interesting concept; in most cases, the TARP funds were in the form of loans to banks, which were intended to be returned to the government with interest anyway. Of course they are returning the bailout funds as soon as possible. That was the plan from the beginning.

Banks who don’t agree to reducing expenses and answering to the public should return the funds in entirety immediately, not over time as quickly as possible.

Put yourself in the shoes of the top executive in a bank that was facing bankruptcy when it asked for an accepted billions of taxpayer dollars. You are the CEO. Assuming you haven’t been fired for nearly driving your company into the ground, what financial decisions would you make to fix your struggling enterprise while maintaining a favorable public opinion?

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What Would You Ask the Banking CEOs?

by Flexo on February 11, 2009

Today, CEOs from the largest banks receiving the first batch of funds from the Troubled Asset Relief Program (TARP), billions of dollars initially designed to loosen the credit crunch, will be visiting Washington today to be grilled by the House of Representatives’ Financial Services Committee. There is no doubt that the bankers will be asked to describe and justify how money from the government was spent (or not spent).

I think it’s fair to know how $176 billion of taxpayer money, lent to the government by investors, has been used to stabilize the banking system. Answering questions will be:

Vikram Pandit, Citigroup
Kenneth Lewis, Bank of America
Lloyd Blankfein, Goldman Sachs
James Dimon, JP Morgan Chase
John Mack, Morgan Stanley
Robert Kelly, Bank of New York Mellon
Ronald Logue, State Street
John Stumpf, Wells Fargo

With taxpayer money invested in these companies, some newly designated as banks just so they could receive funds from the TARP, these CEOs are now partially working for the public. They answer to all Americans. Do you have any questions for these eight CEOs?

Update: As I was writing this post, David Ellis from CNN offered four questions he would ask the CEOs:

What did you do with the money?
What have you done to act more responsibly?
How many more potential losses are there?
How did you get to Washington?

What would you add?

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Is it Effective to Limit CEO Compensation?

by Flexo on February 4, 2009

in Career and Work

Let’s say you are the chief executive officer of a formerly strong financial company. Either your company has faltered under your leadership or you’ve managed to steer clear of toxic assets but the slumping economy has affected you. Or perhaps you are newly hired, brought in to oversee a struggling shell of a company as it tries to regain its stature.

Either your company desperately needed the funds it has received from the Troubled Asset Relief Program (TARP) or the business was competitively forced to take the handout because you wanted your company to stay on par with your peers who were bailed out.

Now President Obama wants to limit your compensation to a measley $500,000. No fair, right?

It makes sense to limit executive pay when taxpayers have stepped in to propr up your balance sheet, whether the company needed the money or not. But it’s largely symbolic, like when CEOs declare they will reduce their salary to $1 per year. They can do that for two reasons: they’ve already made a fortune, and they’ll continue to make a fortune thanks to stock options, deferred compensation, and other perks worth millions of dollars.

Obama says the CEOs can continue to be compensated above and beyond $500,000 through company stock, restricted from sale until the TARP obligations are complete and the government has been paid. This is a great deal; financial stocks have been pummeled. They may go lower, but this built-in waiting period will almost ensure that CEOs stand to win in the long-run.

What do you think about this $500,000 “limit?”

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How Citigroup Used $45 Billion from the Government

by Flexo on February 3, 2009

in Consumer

Citigroup released a report today explaining how it “spent” the $45 billion provided to the company by the government as part of the Troubled Asset Relief Program (TARP). On a high level, the report accounts for $46.5 billion spent or allocated to a variety of programs across five categories: residential mortgages, personal and business loans, student loans, credit cards, and corporate loans.

First, $10 billion was used to purchase mortgage bundles from Fannie Mae. The bundles mature this month, which means Citi will receive the $10 billion back and be able to use the funds elsewhere. The report says that this decision was to “help provide liquidity to the secondary market.”

$10 billion is being used to invest directly in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. Half of this amount is invested in 15-year fixed rate mortgages while the other half is invested in split between 3-year and 5-year adjustable rate mortgages.

$7.5 billion is being used to buy other mortgages on the secondary market; that is, Citi is buying mortgages offered by other lenders from those other lenders.

$8.2 billion is being used to offer non-conforming mortgages directly to consumers. Non-conforming loans are those with high values, starting at an average of about $500,000, usually necessary in areas with high property values. Interest rates on these loans are higher and so are the risks associated with offering these mortgages.

$1 billion is earmarked for loans to businesses facing short-term financial problems. These loans would be secured by commercial property of illiquid assets.

$1.5 billion is being offered to consumers who would like to consolidate personal debts or who need money to meet other financial obligations.

$1 billion will offered to students as loans through the Federal Family Education Loan Program (FFELP) to help middle income and low income families afford tuition.

$5.8 billion is earmarked for credit cards in order to expand offers for balance transfers, increase credit lines, and acquire new customers. In the statement, Citigroup says, “Credit cards play a critical role in helping people and businesses purchase basic goods and services. Based on available national economic figures, Citi estimates that 20 percent of total personal spending flows through credit card transactions, often for everyday essentials.”

$1.5 billion is being invested in securities backed by commercial loans.

The above amounts are earmarks. Citi did not describe in detail amounts that have already been invested or used vs. amounts that are waiting to be spent at the right time, for example, when there is sufficient liquidity or supply.

Citigroup also offered a description of permitted uses and prohibited uses for money provided by the government. Here is what is permitted:

Citi’s guidelines call for TARP capital to be deployed in a prudent and disciplined manner consistent with Citi’s strategic objectives and the Treasury’s goal of strengthening the financial system in the United States and expanding the flow of credit. TARP capital is equity, in the form of preferred stock. It will be used exclusively to support investments and not for expenses, which are covered as part of our cash flow.

And here is what is not permitted for the TARP funds:

TARP capital may not be used for any of the following purposes: Compensation or bonuses, dividend payments, lobbying or government relations activities, marketing, or advertising or corporate sponsorship activities. TARP capital will not be used for any purposes other than those expressly approved by Citi’s Special Committee.

Accountability and transparency is necessary so consumers can understand how the funds approved by government representatives to bail out financial instituions are being used. I’m happy to read that Citi’s TARP funds are not going to bonuses and executive compensation, but is this the most effective use of the money? I would like to see more funds set aside for direct relief for consumers.

Here is the full 43-page report from Citigroup, called What Citi is Doing to Expand the Flow of Credit, Support Homeowners and Help the U.S. Economy: TARP Progress Report for Fourth Quarter 2008 [pdf], February 3, 2009.

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$350 Billion Additional TARP Funds to Go to Banks

by Flexo on January 26, 2009