Banks must not squander bailout money

on January 26, 2009 at 9:10 AM, updated January 26, 2009 at 9:17 AM

From The New York Times

What is it with American bankers and their sense of entitlement?

After losing billions of dollars, taking billions of dollars from taxpayers and avoiding disaster only by selling itself to Bank of America, Merrill Lynch was still ready to give a multimillion-dollar "performance" bonus to its chief executive, John Thain. It refrained only after a storm of protest that reached from Main Street to Capitol Hill.

As it turns out, the outrage was not enough to stop the flow of money to other executives. According to a report in The Financial Times on Thursday, Merrill granted $3 billion to $4 billion in bonuses in December -- part of a total compensation budget of $15 billion for the year that was just slightly less than that of 2007.

The year-end bonuses were approved by Merrill's compensation committee just days after shareholders approved the merger and days before Bank of America was made aware of Merrill's stunning fourth-quarter losses. The news of the rushed bonuses almost prompted Bank of America to pull out of the deal and ultimately required the Treasury to provide an extra $20 billion, as well as a guarantee on billions more in potential losses.

Thain stepped down on Thursday. But the problem is not one banker. The entire financial industry must be made to understand that the billions of dollars it has gotten from the public purse are not a reward for the havoc it wreaked on the financial system and the lives of so many Americans.

The $700 billion federal rescue package was meant to shore up the banks' balance sheets and revive moribund lending to consumers and corporations. But banks have mostly refused to increase lending. Some healthy banks have used government money to buy their more sickly brethren -- which might raise their standing but does the economy little good.

Many have been lavishing dividends on their shareholders. JPMorgan Chase has maintained its dividend despite plunging profits, squandering needed capital. Citigroup and Bank of America cut their dividends only when they got a second helping of rescue funds.

Though the Obama administration has not set specific criteria for the next chapter of the bank rescue, President Barack Obama insisted he would toughen the restrictions. Clear rules are needed to limit dividends and give the government the option to block mergers between banks receiving taxpayer funds.

The vague rules on executive pay in the rescue legislation also must be tightened. Barney Frank, chairman of the House Financial Services Committee, has proposed banning bonuses altogether for the top 25 executives of a bank that is getting money from the Treasury rescue package. The banking rescue package was meant to serve the American economy. It's not the bankers' money.