Fall Out between the Government and the Nation’s Biggest Banks

The nation’s biggest banking institutions might have been rescued by the turmoil of their own making, but they aren’t thanking the government for it. While Tim Geithner and Hank Paulson, who at the time were New York Federal Reserve president and Treasury secretary respectively, were trying to iron out the details of the $700 billion rescue plan, CEOs of the banking companies were kept in the dark about their plans.

At the time, they simply knew that the program was referred to as the Troubled Asset Relief Program (TARP) and that its passage had been a rough affair through Congress. With it, the stock market caved in after receiving the first initial disapproval. And after it was passed, banking executives thought that it was supposed to jumpstart the problematic credit market and for businesses and individuals to start trading again.

In essence, the TARP money was just supposed to infuse fresh capital by helping banks get rid of toxic assets that were weighing them down. Little did they know that the TARP would take many shapes and forms as well as revolve inside out based on political perceptions. At the meeting where the TARP funds were distributed, they found out that the government has changed its original intensions. It now wants a more direct program wherein the government will own preferred shares of individual banks.

In the same meeting, some bankers actually balked at the offer but Paulson wasn’t taking no for an answer. According to him, “we don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed”. So some bankers were straddled with bailout funds they don’t want and had to bear its consequences.

It is clear though that certain institutions like Citigroup would no longer exist in its current structure without the TARP funding. But for other banks, accepting government money came at a very high cost to their reputation and business. Four months after agreeing to Paulson’s offer, the CEOs of the problematic banks were dragged before a House committee and humiliated.

One lawmaker referred to them as “captains of the universe” while another told them that people don’t trust them anyone. After several days, bankers that were actually encouraged to accept the TARP money were forced to cancel their “employee recognition” events because in the minds of politicians, there was “lavish junkets”. The banks’ customers called them angrily, frustrated and demanding to be bailed out from their credit card debt and mortgages. According to Wells Fargo CEO John Stumpf, there was widespread belief that they got free money but that “it was not a bailout, and we never asked for it”.

The negative experience has become a reminder for banks, and the business sector in general, that receiving government funding should only be done as a last resort. A mere eight months after joining the program, banks that have become stable enough are scrambling to leave it. In fact, 10 big banks announced on June 17 that they had repaid $68 billion in total.

About the banks

 

Wells Fargo

Wells Fargo & Company is a diversified financial services company with $1.3 trillion in assets, providing banking, insurance, investments, mortgage and consumer finance through more than 11,000 stores, over 12,000 ATMs and the internet (wellsfargo.com) across North America and internationally.

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