The banks are in financial trouble. Now that they are on the public dole, they are answerable to a frustrated Congress, and their survival could depend on further support.
In many ways, the capital of American finance is now Washington, not Wall Street.
For the economy’s sake, the federal government must make sure that the banking system survives as it confronts a historic wave of credit losses. It’s the government that has the deep pockets needed to conduct that rescue.
All this put bankers on the defensive Wednesday, as lawmakers asked what they’re doing with that government help.
The shift of financial power to Washington also puts pressure on policymakers themselves. It will take Congress, the Obama administration, and private-sector players to dig out of the credit crisis.
In that light, the CEO hearing was partly a dialogue aimed at reconciliation and setting the stage for future cooperation.
“We have to regain the public’s trust and do everything we can to help mend our financial system to restore stability and vitality,” Lloyd Blankfein, CEO of Goldman Sachs, told the House Financial Services Committee.
He conceded that “we are here amidst broad public anger at our industry…. Many people believe – and, in many cases, justifiably so – that Wall Street lost sight of its larger public obligations and allowed certain trends and practices to undermine the financial system’s stability.”
Aid used for loans
The bankers said they have helped hundreds of thousands of homeowners avoid foreclosure and are using the government aid as seed money to make new loans.
They also noted that they are paying billions of dollars in annual dividends on the taxpayer infusions of capital.
The CEOs touted their efforts to restore their firms’ health by restructuring and they talked of curbing rich perks and big pay packages, as they work through the crisis.
“I get the new reality,” said Vikram Pandit, CEO of Citigroup, citing a recent about-face in which the company canceled the publicized purchase of a new corporate jet.
“Now is a good time to remind ourselves that we play a supporting role in the economy – not a lead role,” said Ken Lewis, Bank of America’s CEO. “Our job is to help the real creators of economic value – people who make things, and people who use them – get together and do business.”
All this came after a knuckle-rapping statement by Barney Frank (D) of Massachusetts, as he opened the meeting. He described the effort to rescue banks as the opposite of “collateral damage,” such as when innocent civilians are harmed during a military action.
This bank bailout represents a “collateral benefit,” in which the government showers help on managers and institutions who helped create the financial mess, Mr. Frank suggested.
But even as the banks stand accused of running the nation’s vital credit industry economy nearly into the ground, government is also in the hot seat this week.
Geithner keeps pushing
Timothy Geithner, the Obama administration’s Treasury secretary, was back on Capitol Hill Wednesday to continue the difficult sales job for a redesigned bank-rescue plan.
Mr. Geithner’s plan met a cool reception by lawmakers and investors when it was unveiled Tuesday, largely because it lacked details on how it would work. (Click here for a look at what's behind the lack of clarity.)
Washington politicians have played their own role in the crisis; they created the regulatory environment in which risky mortgages and even riskier mortgage securities were made.
And politicians, from the White House to Congress, will have to work with industry to fix the problems.
Some in Congress are blunt about their own responsibility.
Arguing that politicians have helped to create problems in activities such as schools and healthcare, Alabama Rep. Spencer Bachus (R) told the bankers, “Now we’re turning our attention to you. May God help us … as we do that.”
But he also said that government actions so far may be helping.
Amid concerns about why banks aren’t lending more, Mr. Bachus took the opposite view. Credit availability might be worse, he suggested, but for the Treasury’s investment of new capital in the banks.
But, if the bailouts so far have arguably helped to offset a huge financial storm, they have not fully calmed it.
Four pillars in plan
The Geithner plan includes four key elements, intended to be a comprehensive fix and to maintain the economy’s flow of credit:
•A fund to buy bad loans, the source of uncertainty about banks’ health, using a mix of public and private funds. A key question is how to value those assets so that banks will sell them and investors will buy them.
•Closer scrutiny of the health of major banks, coupled with new capital infusions from the government and new strings attached.
•About $100 billion in funding for a Federal Reserve program, the Term Asset-Backed Securities Loan Facility, designed to stimulate $1 trillion in new consumer and business loans. This program could help to revive the now-stalled market for “securitization,” the bundling of loans into securities sold to investors.
•Some $50 billion or more to reduce foreclosures by modifying troubled home loans, which may help reverse declining home prices.
Geithner is battling both to win congressional support for this next phase of the bailout and to persuade worried investors and business leaders that the plan will be effective.