Smart Borrower Blog

The Problem With The Bailout


Jan 31st, 2009 @ 4:24 PM by Alden Smith


On the NBC Nightly News this week, President Obama made it very clear that he thought the actions of Wall Street banks and lending institutions was “shameful” for their practice of giving out bonuses to employees when they are standing in line for bailout money from the Fed.  Many Americans, including myself, are enraged by this, and I hope that this issue is addressed.  It is common knowledge that John Thain, CEO of Merrill Lynch, issued bonuses just before the takeover by Bank of America.   Billions were paid out, and it doesn’t sit well with people because ML did this long before their usual schedule of bonus giving.  Instead of in late January-early February, these bonuses were given out in December, effectively saddling BOA with even more debt.  This prompted BOA to go to the Fed for another handout.  In other words, taxpayers paid the bonuses for the ML employees, and got nothing in return except anger.

I find it interesting that banking executives now managing billions in taxpayer money are the same ones who oversaw the industry’s near collapse.   The Associated Press did an analysis of regulatory and company documents, and found that 9 out of 10 top execs were still in place when these fiascos begin in 2006.  No action has been taken, and these top execs maintain their job, doing business as usual.  Yet 100,000 bank employees were laid off during a two-year stretch when banking industry unemployment nearly tripled.   What sticks in the craw of most Americans are the facts that now they are stakeholders in these banks and lending indstitutions, yet have no say as to who shall lead them.  Can the American public actually take it on blind faith that these execs will change their ways and start doing business ethically and responsibly?

Feelings on this issue run strong. University of Maryland business professor Peter Morici said “If they got involved in questionable loans and contributed to the speculative bubble, they should be out.  These people should be removed and banned from banking, unless we wanted to make them all janitors. But the question then is, can they be trusted wandering around the offices at night?”

I never understood why the Wall Street banks were just handed billions of dollars with no parameter in place for its use.  This seems like a dreadful oversight to me, or else it is bargaining behind closed doors, which is probably the most likely story.  This became very obvious to me when I learned that the money given to needy banks was used to shore up books that were in the red, making ledgers look prettier.  Although I do not specifically research this subject, I would bet dollars to donuts that very little of this bailout money from TARP has trickled down to Main Street.  Yet Main Street is footing the bill.  What is wrong with this picture?

Ed Yingling, president of the American Bankers Association, had this to say.  “Are we going to have the American people saying, ‘We’re invested in you, so now we should look at your margins, look at every loan you make, look at your lending policies?   No. That was never discussed.  You can’t micromanage banks.”   Jamie Court, president of the California-based group Consumer Watchdog, said “When you deal with the same dogs, you’re going to end up with the same fleas.”  I think his response was much more eloquent and in line with the way the American public feels.

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