They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.
Other institutions like Johnson Bank of Racine, Wis., initially expressed interest in seeking bailout funds but have now changed their minds. Bank executives told The Milwaukee Journal Sentinel that one reason they rejected the government money was to avoid any disruption in the bank’s role in the local community, including supporting the zoo or opera company if they chose to.
One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.
The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.
“We are taking an approach that wants the banks to help the economy and whether it is ultimately good for a particular bank is secondary,” said L. William Seidman, the former senior regulator during the savings and loan bailout. “Weak banks are being asked to do things that will erode their position.”
A senior Treasury official involved in the bailout effort said the administration was carefully trying not to do anything that could harm the banks and was giving financial incentives to modify mortgages. The official said the restrictions were part of a larger effort to clean up bank balance sheets and assist the economy.
“We’re having to take some very unpleasant actions when the alternatives are so much worse,” said the official, who spoke on condition of not being identified.
But a growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.
“I honestly believe the people in power pushing this policy see it as a win-win — as something that is good for the banking industry and good for homeowners and others,” said Douglas J. Elliott, a former investment banker who is now an economics fellow at the Brookings Institution. “But there is a slippery slope and there are potentially significant negative consequences.”
Mr. Elliott says that by modifying loans, banks that are already fragile could wind up losing more money.
“What gets us in real trouble,” he said, “is when we try to fudge things and pretend that something is in the direct interest of both the government and the financial institutions when it in fact costs the banks money or increases their risk levels.”
Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity.
Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.
- Slideshow: Origins of the Financial Crisis
In service of both shareholders and what they asserted was the public good, they borrowed extensively in order to buy and hold mortgages in their own investment portfolios. They purchased billions of dollars in risky subprime mortgages.
As a consequence of having a public mandate, they also had a credit line with the Treasury and their risky business strategies were viewed by the markets as being guaranteed by the government.
To satisfy both mandates, the companies also faced fewer restrictions and were allowed to take on more debt than other financial companies. But when buyers began defaulting and home prices plunged, the companies nearly collapsed and last fall were placed under government conservatorship. Mr. Elliott said that some banks participating in the bailout program are now in the same conflicting position that Fannie Mae and Freddie Mac were in.