Corporate & Securities Law

Because Barney Frank Knows Better Ways to Woo High-End Bank Clients

A couple of weeks ago, Rep. Barney Frank sent a snippy letter to Northern Trust, a Chicago-based bank that caters to very wealthy clients. Mr. Frank and some other Platonic guardians on the House Financial Services Committee were incensed that Northern Trust, a recipient of TARP funds, had sponsored and hosted clients at a California golf tournament. Messrs. Frank et al. wrote:

At a time when millions of homeowners are facing foreclosure, businesses and consumers are in dire need of credit, and the government is trying to keep financial institutions — including yours — alive with billions in taxpayer funds, this behavior demonstrates extraordinary levels of irresponsibility and arrogance.

We insist that you immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events. Federal taxpayers should not and will not stand for such abuses, and we will insist that any future Treasury support for Northern Trust be conditioned on a thorough reform of your company’s policies and practices.

Northern Trust didn’t immediately respond to Mr. Frank and his colleagues. Instead, it posted an open letter to its shareholders, clients, and staff explaining that:

* it was a healthy bank that did not need TARP funds;

* it never sought out TARP funds but instead “agreed to the government’s goal of gaining the participation of all major banks in the United States”;

NOTE: As this WSJ account explains, the government initially strong-armed banks into accepting TARP funds in exchange for preferred stock. It did so because it worried that troubled banks wouldn’t request funds for fear of signaling that they were in distress. Widespread reluctance to send a bad signal by participating in the TARP program might limit the program’s effectiveness. Getting all the major banks to participate, then, was necessary to prevent the signaling effect that could stymie the program. Despite its sound financial position, conservatively managed Northern Trust agreed to play along.

* it’s paying dividends of around $20 million per quarter on the government’s preferred stock investment in the company (i.e., this TARP money isn’t a gift!);

* thanks to the TARP funds, it increased its loans and leases by 21% in 2008 (that’s what the government wanted, right?);

* it was contractually obligated since 2007 — well before TARP — to sponsor the golf tournament that so offended Mr. Frank and his colleagues, so canceling its sponsorship likely would have created contractual liability;

* it was able during the tournament to woo 2,000 clients, offering them three financial education seminars (which undoubtedly pushed the bank’s own products and services); and

* it raised millions for charity through the tournament.

A few days later, Northern Trust sent a letter to Mr. Frank and his committee colleagues explaining that the bank “has been consistently profitable,” that it used the TARP money to make additional loans (increasing total loans by 21% in 2008), and that it “ha[d] engaged [its] regulators with the goal of repaying [TARP] funds as quickly as prudently possible under the new [TARP] guidelines.”

Now would be a nice time for Mr. Frank and his colleagues to apologize for publicly smearing the conservatively run bank, which played by all the rules and agreed to involve itself with TARP, even though it didn’t need the money, because it was trying to be a good citizen.

Instead, Mr. Frank — who has never worked a day in the business world, having spent his entire career in the Massachusetts legislature and the U.S. Congress — chooses to dispense business advice to other banks that might try to pull a Northern Trust. While he won’t “rul[e] out [golf tournament] sponsorhip, especially because tournaments support charities,” he won’t tolerate any client entertainment at those tournaments. “There are cheaper, more cost-effective ways to get to know people and understand them,” said the career politician.

Full post as published by Truth on the Market on March 11, 2009 (boomark / email).