Banking Law

When I stated last month that I got a kick out of Elizabeth Warren, the Harvard professor who's head of the Congressional Oversight Panel that oversees the Treasury Department's bailout programs, I should have qualified that by adding "up to a point."

Professor Warren's performance on CNN yesterday certainly isn't going to be saved among the Treasury Department's "Greatest Hits News-bits." As Joe Weisenthal at Clusterstock put it today, "Elizabeth Warren seems to be going out of her way to undermine Geithner and Obama on this plan." By "this plan," Joe means the PPIP, pursuant to which the government proposes to partner with private investors and investment managers to offload securities and other assets from the balance sheet of (mostly) large commercial banks.

If you listen to the clip of Warren's back-and-forth with CNN commentators that's posted at Clusterstock, she responds to a reporter's statement that perhaps PIMCO's CEO's pay should be subject to limits if PIMCO is chosen as one of Treasury's investment managers this Friday, Warren responds "I think these are entirely appropriate questions" because "they are taking the government's money." Just asking the question at her level should be enough to chill a CEO's backside. Then again, you can never underestimate the power of greed to cloud judgment, so who knows?

Weisenthal knows, or at least he thinks he does.

We're pretty sure the PPIP is totally dead. The fact that all of the banks passed the stress tests takes the onus off them to sell any assets. And if you're going to be a buyer, getting into bed with the government seems like suicide.

Well, "passing" the stress test is a flexible concept. Some banks need to raise capital within the next six months and some don't. Even those who don't appear to be going to market to raise it so that they can repay the Treasury Department the CPP preferred stock and warrants and get out from under the executive compensation program and jump out of a bed with a "partner" who can turn on a dime, redo the deal, and make you wish you'd never hitched your wagon to its horse. Still, Weisenthal's correct in his view that if you've got enough capital to withstand a supposed "worse case" scenario, then the incentive to unload assets at rock-bottom prices that would be attractive to private investors is lessened. The Treasury can still arm twist Citigroup, Bank of America and some others, but the power to influence banks with enough capital is severely diminsijed. Most banks may just hang on and wait until prices tick upward.

It's the investors and professional investment managers that people like Warren is scaring off. She and Treasury's Inspector General Neil Barofsky, who a few weeks ago released a report that alleged that Treasury Department lawyers had told him that managers and purchasers of so-called "toxic assets" could be subject to executive pay retsrictions (contradicting Geithner and Obama's claims to the contrary), seem to be leading a campaign to kill these programs. The unreliability of the Treasury Department as a partner, coupled with uncertainty that Congress, prodded by people like Warren, might change your deal for the worse after the fact, makes intelligent investors and professionals wary. In addition, to stretch the concept of "taking government money" to those private parties who contract with the Treasury Department to provide the Treasury Department with asked-for assistance and who receive compensation for that assistance seems a stretch beyond the breaking point. The executive compensation limits were intended (unfairly or not) to restrict those insurance companies, investment banks, commercial banks, and other businesses who were truly "bailed out" by the federal government (think AIG). The fact that those restrictions extended to many large banks that were asked to take the money by the federal government even though they didn't need it to remain "well capitalized" (think Chase) is questionable, and is one of the major reasons that many of those banks have and will continue to give the money back (if they can do so).  Suggesting that a firm like PIMCO that will be, in effect, an independent contractor for the Treasury Department, providing services for value, are somehow equivalent to an AIG seems designed to consciously discourage those firms from bidding to provide those services, which the Treasury Department asserts it needs them to provide.

 A friend who worked for the FDIC reminded me the other day that when the FDIC hires outside counsel, they impose a much more burdensome conflicts-of-interest policy on them than is required by applicable state ethical rules. I responded that at least outside counsel was certain as to the rules of the game before they started to play. With TARP, PPIP, CIP, TALF and other forms of assistance, you have absolutely no guarantee what the rules will be when you wake up in the morning. Why anyone would want to play in that game is beyond me. As I said, maybe the expected returns justify the risk, but that's the same tune I heard sung by some banks when they decided to take CPP investments, and most of them are now singing an entirely different tune.

If people like Elizabeth Warren are deliberately trying to undermine the Treasury's efforts, they're doing a great job.