Panel of 5 Picks Bailout Winners, Losers
There was a rare moment of levity at the Treasury Department on Friday as the children of government workers scampered from office to office in Halloween costumes. A few minutes later, the children were gone and the hallways were retaken by grim-faced grown-ups — handing out tricks and treats of a different sort.
The Treasury building is ground zero for the Bush administration’s $700 billion rescue of the financial system — an ambitious, increasingly embattled program that passed an early milestone last week when the government wired the first $125 billion to the nine largest banks in the United States.
Having been handed vast authority and almost no restrictions in the bailout law that Congress passed a month ago, a committee of five little-known government officials, aided by a bare-bones staff of 40, is picking winners and losers among thousands of banks, savings and loans, insurers and other institutions.
It is new and unfamiliar terrain for the officials, who are making monumental decisions — a form of industrial policy, some critics say — that contradict the free market philosophy they usually espouse. Predictably, the process is stirring alarm from Capitol Hill to Wall Street.
“People are always going to second-guess what you do,” said David G. Nason, the assistant Treasury secretary for financial institutions, who designed the program and sits on the investment committee. “We don’t have time to complain; we need to manage our time so we can make progress.”
Other officials said it was premature to condemn the program, given that the first capital injections were made only last week. The Treasury’s overriding goal, they said, is to stabilize the nation’s financial system after its worst crisis since the 1930s.
Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, its precise goals opaque. Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick.
And officials have yet to say they even have a broader strategy, though banking executives are convinced the government wants to encourage acquisitions of sick banks by healthy ones.
Industry sources said that banks, after filing a two-page application, are assigned a ranking from 1 to 5 — with 1 or 2 essentially guaranteeing that they are eligible, and 5 insuring they are not — by their regulator. The five officials then make what can be a life-or-death decision, with a thumbs-down generally interpreted to mean that a bank was not healthy enough to survive on its own.
The work is complex, far-reaching and telescoped into an impossibly tight timetable. And it is being done against the backdrop of a change of power in Washington, which will throw many of these people out of their jobs on Inauguration Day.
“There is a real urgency to deploy this money quickly and effectively,” said James H. Lambright, who took a leave three weeks ago as the president of the Export-Import Bank of the United States to become the interim chief investment officer of the rescue effort.
A trim, self-confident former investment banker, Mr. Lambright, 38, is the chairman of a committee of relatively young officials — all are in their 30s or 40s — with backgrounds in law, banking or regulation. None of them could have expected this kind of responsibility; Mr. Lambright himself was a last-minute substitute after a previous appointee was kept in his old job.
On Friday evening, Mr. Lambright was lugging a six-inch-thick pile of folders — plus a pair of BlackBerrys and a cellphone — as he prepared for a Sunday afternoon meeting of the committee to select the next banks to receive capital infusions.
With more than $80 billion left to spend, and hundreds of banks in line for it, the days, nights and weekends of the overworked, sleep-deprived Treasury staff members are a blur of meetings and conference calls, and constant pressure.
“This is a four-ring circus,” said Tim Ryan, a former director of the Office of Thrift Supervision, who helped run the savings and loan cleanup in the 1980s and 1990s.
Already, critics from Capitol Hill to Wall Street are lashing out at the program, saying the banks are misusing the capital infusions by hoarding the money rather than lending it, as the Treasury Secretary, Henry M. Paulson Jr., urged in order to unclog the credit markets.
The government, the critics say, is wrongly steering funds to banks to take over weaker rivals. The rescue program prodded one such merger last week, when Treasury agreed to inject $7.7 billion into PNC Financial Services and rejected an application for cash from the National City Corporation, an ailing bank in Cleveland. The two announced a merger the same day that PNC was approved.
“Where we are headed is credit allocation by the federal government,” said William Poole, a former president of the Federal Reserve Bank of St. Louis. “It really reminds me of the morass we got into with wage-price controls in the 1970s.”
Critics also say that, by not barring banks from paying dividends or hefty bonuses, the Treasury is leading taxpayers to think their money is being spent frivolously.
All this comes after Mr. Paulson abruptly shifted the focus of the program to injecting capital rather than buying distressed mortgage-related assets from the banks. This meant that Congress had never debated the details of how the government ought to carry out a recapitalization.
The absence of that debate comes with a price. Treasury officials have been pressured by industry lobbyists to stretch the program to include insurance companies, transit agencies and even automakers.
Indeed, the helter-skelter nature of the program is drawing so much criticism that even some of the bailout bill’s biggest proponents on Capitol Hill are complaining that its legitimacy is being thrown into question. “What the Treasury doesn’t understand is the anger in the country about this,” said Barney Frank of Massachusetts, the chairman of the House Financial Services Committee.
Mr. Frank, who has scheduled oversight hearings later in November, warned that he might try to block the Treasury from getting the second $350 billion approved by Congress.
Inside the Treasury — where officials shuttle between each other’s offices on the building’s southwest corner, facing the White House and the Washington monument — the view, not surprisingly, is different.
They say the critics have not offered solutions about how to compel banks to lend money. The Treasury has to walk a fine line, officials add, since using brute force could lead to the banks making more bad loans, which is how they got into this mess.
Treasury officials acknowledge their actions might speed a shakeout in the industry, even if that is not the main motivation.
“The primary goal is not consolidation; the primary goal is to strengthen the system,” said Michele A. Davis, the chief spokeswoman. “If consolidation strengthens the system, it’s a positive.”
Bank executives say that increased lending depends on attracting more capital from private investors. To do that, it may be essential for a bank to strengthen its market position by making acquisitions. Suspending dividends could send investors running for the exits.
Besides, they add, the bailout law only allows the government to stop banks from increasing dividends, not banning them outright.
The committee — which also includes Neel Kashkari, interim head of the rescue program, and two other senior Treasury officials, Anthony Ryan and Phillip L. Swagel — acts on a recommendation from the primary regulator of the financial institution. That could be the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift Supervision.
What happens next, when the application and recommendation go to the Treasury, is largely a mystery. The criteria by which the Treasury decides which banks get money and which do not are secret.
Mr. Nason said the process had to be confidential so that rejected banks did not suffer damage in the markets. Even to disclose the selection criteria could quickly destabilize banks perceived to have the wrong profile, he said.
The committee members study financial statements and sometimes kick back applications to the regulators for more information. They also analyze the market in which a bank operates, looking for the mix of strong and weak banks. As the number of applications increases, Mr. Lambright said he was recruiting a team of banking analysts to help with the process.
“When we move from a dozen banks to hundreds of banks, we’ll need a system,” Mr. Lambright said.
He said his work at the Export-Import Bank, where he selected American exporters to receive trade financing, was good preparation for this job, even if he will hand out more money in a few weeks at the Treasury than his bank’s entire $60 billion credit portfolio.
Though Treasury officials are loath to require banks to lend, they do seem to be jawboning. “They must meet their responsibility to lend, and support the American people and the U.S. economy,” Mr. Ryan told a securities industry conference last week.
Mr. Frank said they should do more by requiring banks to show a dollar-for-dollar relationship between the government funds and increased lending.
“If they lend out all the money they got from the government,” he said, “they can do whatever they want with the rest. If they don’t feel this is going to encourage lending, then don’t take the money.”
It is the regulators, more than the Treasury Department, who are doing the coaxing by suggesting, for example, that a desired merger by a bank would be more likely to win approval if a bank participated in the capital injection program, industry executives said.
The Treasury’s approach has its defenders, among them a former senior Treasury official, Edwin M. Truman, who said he believed the people running the bailout were technocrats trying to shore up the system, not ideologues.
Donald V. Hammond, a longtime Treasury official who is the interim chief compliance officer of the program, said that, in any event, Congress had put in place layers of oversight. Mr. Hammond began his government career working on the bailout of the Chrysler Corporation.
“This is more intense,” he said.