It’s been over 51 months – four-and-a-quarter years – since TARP became law in the waning days of the Bush Administration. Yet here we are, still seeing bad news as a result of the bailouts.
The first bit of bad news is something that has been controversial since the bailouts were first proposed: executive pay. From The New York Times, on a report from the TARP Inspector General’s office:
The report comes from the special inspector general for the Troubled Asset Relief Program, the bank bailout law passed at the end of the George W. Bush administration. The watchdog, commonly called Sigtarp, found that 68 out of 69 executives at Ally Financial, the American International Group and General Motors received annual compensation of $1 million or more, with the Treasury’s signoff.
All but one of the top executives at the failed insurer A.I.G. — which required more than $180 billion in emergency taxpayer financing — received pay packages worth more than $2 million. And 16 top executives at the three firms earned combined pay of more than $100 million.
The Treasury Department is defending itself, of course:
In a response letter included in the report, Patricia Geoghegan, acting special master for TARP executive compensation, disputed several of its assertions. For one, the compensation packages for A.I.G. and General Motors executives were comparable to those received by executives at other firms, Treasury said. Pay packages at Ally were higher than the median because of “unique circumstances,” it said.
Treasury also noted that the Obama administration had cut pay for executives at bailed-out firms and required that the companies pay top employees with more stock and less cash. Treasury “continues to fulfill its regulatory requirements,” the letter said. It has “limited executive compensation while at the same time keeping compensation at levels that enable the ‘exceptional assistance’ recipients to remain competitive and repay Tarp assistance.”
According to the Times, the Inspector General report says repayment was more important than preventing excessive executive compensation. While this would otherwise be a worthy trade-off, the fact is that the Treasury Department has long been in cahoots with the big banks instead of protecting the public’s interests. Treasury’s defense regarding executive compensation at non-bailed out companies is outrageous – companies that don’t get bailouts and succeed on their own get to dictate what executive compensation is. Companies bailed out by the taxpayers should not.
The other bad news is even worse. From Investor’s Business Daily in mid-January:
New mortgage rules issued last week by the administration will have the effect of forcing lenders to approve prime loans to borrowers who would normally only qualify for subprime loans carrying higher interest rates and fees to cover the added risk of default.
Banks are already under renewed pressure from federal prosecutors and regulators to make home loans to low-income borrowers with blemished credit as part of the administration’s stepped-up enforcement of anti-redlining laws.
You may remember that subprime loans and betting on said loans were major factors in the financial crash of 2008. Apparently, the government hasn’t learned its lesson:
“Under its tortured definition of ‘prime,’ a borrower can have no down payment, a credit score of 580, and a debt (-to-income) ratio over 50%,” as long as the borrower is charged a prime rate, said former Fannie Mae chief credit officer Edward Pinto.
Pinto, now a fellow for the Washington-based American Enterprise Institute, agrees: “CFPB’s definition will force a lender to either subsidize risky loans to get the presumption of affordability (for lower-income borrowers), or subject itself to a rebuttable presumption (by charging subprime rates), which will bring certain litigation from the tort bar at every attempt made to foreclose.”
I have little sympathy for the big banks. They used government incentives to privatize massive profits, then socialized their losses. Even so, these standards are very similar to the “get everybody a house” standards that led to the crash.
What’s the best part? Dodd-Frank is responsible for this future debacle:
The Consumer Financial Protection Bureau, the Dodd-Frank Act-created agency that wrote the 800-page mortgage regulation, has decreed that the way to distinguish a prime loan from a subprime loan is by the interest rate charged, even though the main distinguishing feature of a subprime loan is a sub-660 credit score.
Let’s get this straight. Government creates a mess with its buddies in the private sector. Government helps out its buddies once the mess they co-created becomes an even bigger mess. Government then tells its buddies how to do business, while giving them big bonuses and all but guaranteeing future bailouts if/when things come crashing down again.
Tea Party Patriots has said it before, and it bears repeating: the free market is the best reformer of the banks. Get rid of Dodd-Frank, never bail out another bank again, and the market will self-correct. Simple, painful, but a lot better than what we’re seeing today.