Do Banks Owe Taxpayers More Than TARP Funds?
ROBERT SIEGEL, host:
So, what if anything do the banks owe American taxpayers beyond repayment of TARP money. They were saved from the financial catastrophe, so lending to small businesses or forgoing huge compensation packages or accepting a new more strict regulatory regime instead of lobbying against it are, as some see it, civic obligations that the banks should now make good on.
We're going to hear two views of that proposition. Robert Shapiro, the founder and chairman of the economic advisory firm Sonecon is with us. He was undersecretary of commerce for economic affairs in the Clinton administration. Welcome.
Mr. ROBERT SHAPIRO (Founder and Chairman, Sonecon; Former Undersecretary, Commerce Department): It's a pleasure to be here.
SIEGEL: And Alex Pollock of the American Enterprise Institute joins us from Chicago. He used to be president and CEO of the Federal Home Loan Bank of Chicago. Welcome to the program, Mr. Pollock.
Mr. ALEX POLLOCK (Resident Fellow, American Enterprise Institute; Former President and CEO, Federal Home Loan Bank): Nice to be with you.
SIEGEL: And first, Robert Shapiro: Do the banks owe us anything more than our billions back?
Mr. SHAPIRO: Well, of course they do. To begin, you know, there's a rule in politics and it's the same rule is in business. If somebody gives you a trillion dollars they get to call a lot of the tune, that's what's happened here. What the banking sector owes the rest of the country is practices which protect the rest of the country from enormous costs if they melt down again. And that is largely the regulatory reform agenda. It means capital requirements that are tied to the riskiness of an institution's portfolio. It means a reform of compensation practices which provide enormous bonuses based on the projected earnings from a deal rather than the actual earnings, which incentivizes enormous risk. It means that every financial transaction needs to be transacted either through a public clearinghouse or a public market, so there is transparency and full disclosure of those transactions.
SIEGEL: And just to be clear, as you see it, is that part of a quid pro quo because of the bailout? Or would you say the banks owe us that just the same even if there hadn't been a bailout?
Mr. SHAPIRO: I think as a practical matter they owe the country this because the country saved all of them.
SIEGEL: That's Robert...
Mr. SHAPIRO: Every single one of the major institutions would have gone down, including Goldman Sachs and JP Morgan, not because problems that they had internally but because of the problems of their counterparties who were all rescued.
SIEGEL: That's Robert Shapiro. Now, to Alex Pollock of the American Enterprise Institute: What do you think? Do the banks owe us in the way that Robert Shapiro says?
Mr. POLLOCK: I think they owe something but definitely not what Robert just said, in my view. What the banks who got TARP money owe us is to run their banks on a profitable, very sound basis. And my view is that the right way to manage investments that are made during times of crisis, like the TARP investments, is to run them as an investment on behalf of the involuntary taxpayer investors, those are about 60 percent of the households who actually pay federal income taxes, so they're successful investments and it looks like we have a chance of doing that. In other words, the fundamental discipline involved, in my view, is an investment and a management discipline, not a political deal. That leads us in the wrong direction.
SIEGEL: But how do you answer the argument that the taxpayers rescued these institutions from indiscipline, from wanton indiscipline?
Mr. POLLOCK: I'm not sure it's indiscipline. It was certainly a series of mistakes to which the government itself contributed mightly. What should happen if we're lucky with the TARP investments is that overall in the end they should turnout to have profitable, maybe moderately profitable. That's a good investment outcome. And I prefer the view that if they are, what should really happen is the taxpayer should cash dividend, but I put a low probability on that outcome.
SIEGEL: Since we taxpayers, the way I understand it, essentially we own Citigroup now, yes�
Mr. POLLOCK: We own a big piece of it.
SIEGEL: Well, do they owe us more in the way of obliging Washington's will than an institution whose common stock isn't held by the U.S. government, Mr. Pollack? I mean, it's our bank now, isn't it?
Mr. POLLOCK: It isn't your bank, but it is partially your bank. And you ought to - if you're a large investor in anything, you ought to act in such a way as to make that investment as successful as possible.
SIEGEL: Robert Shapiro?
Mr. SHAPIRO: Well, you know, it's interesting because here - I think I'm taking a more conservative view than Alex. I don't think that the government should participate in management decisions regardless of the share it holds in a place like Citibank. I think what it does is properly set rules for the entire sector in order to protect the interest of the American people and the American economy.
SIEGEL: So, a banker comes out of the meeting with President Obama at the White House and goes back to his bank, to his executives and to his board. Can he say, Mr. Pollock, this is - look, the president wants from us. I've got to do this. Remember, you know, what they did for us.
(Soundbite of laughter)
SIEGEL: I think you've answered my question. What does he say?
Mr. POLLOCK: He has to take everything into account as a general manager of any enterprise. You have to take as - all of the relevant factors into account, the politics of the matter is one relevant factor and do those things which will make your enterprise successful on a medium and long-term basis.
SIEGEL: Robert Shapiro?
Mr. SHAPIRO: Well, you know�
(Soundbite of laughter)
Mr. SHAPIRO: �the president is not like anybody else. He's the most powerful man on the planet. And when the President of the United States says to you this is really what I want you to do, you better listen to it very carefully.
SIEGEL: Robert Shapiro of Sonecon, Alex Pollock of American Enterprise Institute, thanks to both of you for talking with us.
Mr. POLLOCK: Great to be with you.
Mr. SHAPIRO: It's a pleasure.