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Do Banks Owe Taxpayers More Than TARP Funds?

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Do Banks Owe Taxpayers More Than TARP Funds?


Do Banks Owe Taxpayers More Than TARP Funds?

Do Banks Owe Taxpayers More Than TARP Funds?

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript

President Obama said Monday that U.S. banks that received bailout funds from taxpayers must help rebuild the economy. Do banks owe U.S. taxpayers anything beyond repayment of money borrowed from the Troubles Assets Relief Program? Alex Pollock, resident fellow at the American Enterprise Institute for Public Policy Research, and Robert Shapiro, chairman of the economic advisory firm Sonecon, offer their insight.


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.

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Obama Presses Banks To Boost Lending

President Obama speaks during a meeting with the members of financial services industries to discuss economic recovery, small-business lending, improving lending practices for homeowners, and the administration's plans for financial reform, at the White House on Monday. Jewel Samad/AFP/Getty Images hide caption

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Jewel Samad/AFP/Getty Images

President Obama speaks during a meeting with the members of financial services industries to discuss economic recovery, small-business lending, improving lending practices for homeowners, and the administration's plans for financial reform, at the White House on Monday.

Jewel Samad/AFP/Getty Images

President Obama urged the nation's biggest banks Monday to increase lending and stop resisting new safeguards meant to prevent another meltdown like the one that pushed the industry to the brink last year.

"Given the exceptional assistance banks received to get them through a difficult time, we expect them to explore every responsible way to help get our economy moving again," Obama said after the White House meeting with the heads of 12 banks — three by phone, due to bad weather.

In the president's brief but harsh statement, he also said the industry had "lobbied vigorously" on Capitol Hill to prevent reform.

Despite promises to the contrary, Obama said, "there's a big gap between what I'm hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they're a member up on Capitol Hill.

Heard On 'All Things Considered'

"I urged them to close that gap, and they assured me that they would make every effort to do so."

US Bancorp's chief executive, Richard Davis, said Monday that the financial industry had not done enough to articulate its support for regulatory reform.

"We do support regulatory reform," Davis said after meeting with the president. He said he agreed with Obama that there was a "disconnect" between what executives and bank lobbyists were saying about the issue.

Obama urged bankers to take a harder look at finding ways to help creditworthy small- and medium-sized businesses get the loans they need.

U.S. business lending has plummeted since the financial crisis struck, from a peak of $1.65 trillion in October 2008 to around $1.35 trillion earlier this month.

The president's remarks echoed comments he made on CBS' 60 Minutes, in which he laid into financial industry executives, many of whom received millions of dollars in bonuses even as their firms took bailout money.

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street," Obama said during the interview, which aired Sunday.

The White House meeting came on the same day that Citigroup said it would repay $20 billion in rescue funds. Last week, Bank of America said it had repaid $45 billion.

The president referred to Citigroup's announcement Monday, declaring that the government was "determined to recover every last dime" of the bailout funds issued under the Troubled Asset Relief Program, or TARP.

Citigroup's repayment of TARP funds allows it to lift pay restrictions that came as an unwelcome condition of the rescue dollars. The bank was among the hardest hit by the credit crisis and rising loan defaults, and it received one of the largest bailouts of any bank. Citigroup got $45 billion in loans, while the government also backed $300 billion in risky investments.

The government also will divest itself of a huge stake it took in the banking giant as part of the bailout plan.

Most other major commercial and investment banks, including JPMorgan Chase, Morgan Stanley and Goldman Sachs, have already repaid the government.

With Citigroup's repayment, which includes interest, the Treasury Department is in line to end up about $13 billion in the black, depending on how much it makes selling the stock, a Treasury official told The Associated Press on condition of anonymity.

By approving the repayment, the government is saying that the bank is once again on a strong financial footing after having faltered on bad mortgages and other shaky debt.

Obama acknowledged Monday that "no one wants banks making the kinds of risky loans that got us into this situation." But he added that he was "getting too many letters" from small businesses that can't secure loans despite being creditworthy.

Bank of America CEO Kenneth Lewis pledged to Obama that his bank would lend $5 billion more to small- and medium-sized businesses in 2010 than it did in 2009. He said the move is part of a broader effort to support an economic recovery.

JPMorgan said last month that it would boost such lending by $4 billion.

From NPR staff and wire reports