Taxpayers Need to Shout: Enough Bank Bailouts!

By Verschoor, Curtis C. | Strategic Finance, February 2010 | Go to article overview

Taxpayers Need to Shout: Enough Bank Bailouts!


Verschoor, Curtis C., Strategic Finance


The continued use of taxpayer money to help keep large banks and finance companies from going into bankruptcy or otherwise becoming insolvent will only lead to further instances of the unethical risk-taking that created the current financial crisis. It's time for taxpayers to tell the government to stop throwing away their money.

The Financial Crisis Inquiry Commission is a bipartisan group appointed in mid-2009 to thoroughly study the causes of the financial crisis of the last few years, which most observers believe resulted largely from excessive greed and other fraudulent or unethical activities in the banking sector. Created by the Fraud Enforcement and Recovery Act of 2009, the Commission is charged with investigating 22 different areas of possible cause. In spite of the fact that the scheduled date for release of the Commission's report isn't until December 2010, there has been tremendous pressure to at least enact partial "solutions" beforehand. Unfortunately, some of those actions don't appear to consider the underlying ethical causes of the crisis.

One area where Washington's corrective interest has been sparse--and where the outflow of taxpayer funds could be at least partially reduced--is in the operations of Freddie Mac and Fannie Mae. These are two public corporations largely owned, financed, and overseen by the U.S. government as government-sponsored enterprises (GSEs). They received Christmas Eve gifts (without any Congressional involvement) of "unlimited" financial aid and approval to continue growing their bloated portfolios of risky mortgage investments to $1.62 trillion. The previous limit was $1.36 trillion and included a mandate to begin reducing the amount in 2010. Rather than minimizing the continued excesses of these entities, it appears that perhaps these entities are now too big to shrink and are being kept alive to lose even more money!

It's interesting that the U.S. government chose to accept only a 79.9% ownership stake in the GSEs in return for the formerly $400 billion, but now "unlimited," bailout. This percentage is the maximum allowable ownership that avoids an entity being accounted for "on the books" as part of the annual federal budgeting process with full Congressional scrutiny. The timing of the bailout near the end of the year enabled the administration to take action without Congress getting involved. On January 1, 2010, the two companies, still considered to be publicly held although nearly worthless, would have been forced into receivership because of their negative net worth.

At about the same year-end Washington quiet period, the two GSE firms revealed the compensation awarded to their five highest-paid executives. After considering the $135 billion in losses they reportedly suffered in 2009, Treasury agreed to all-cash compensation for both firms totaling more than $42 million, including retention and other incentives. The highest amounts ($6 million) went to each of the CEOs, who received substantial raises. Although the Treasury pay czar has successfully redirected compensation at TARP banks to include substantial amounts of equities, who would accept virtually worthless shares of Freddie or Fannie that have little hope of improvement? Thus, these fortunate executives received only cash.

One emerging bright spot for financial reform among Congress is a proposal gaining traction to reinstate certain provisions of the 1930s-era Glass-Steagall Act.

Glass-Steagall was repealed in 1999 to allow Citigroup and others to engage in insurance underwriting and investment banking as well as commercial banking. Senators John McCain (R.-Ariz.) and Maria Cantwell (D.-Wash.) have introduced the Banking Integrity Act of 2009, which essentially would prohibit commercial banks from intermingling their activities with investment banks.

Only one year ago, the February 2009 Ethics column, "Did Repeal of Glass-Steagall for Citigroup Exacerbate the Crisis? …

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Taxpayers Need to Shout: Enough Bank Bailouts!
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