- The Washington Times - Sunday, November 2, 2008

The troubled rollout of the Treasury Department’s $700 billion Wall Street rescue package has exposed some contradictions at the heart of the program designed to encourage the country’s shell-shocked banks to start lending again.

Key lawmakers are already complaining that the Treasury is not demanding that banks that have accepted the taxpayer largesse use the money to make new loans, and the White House has warned banks against hoarding the cash. Banking groups complain that their members stand accused of breaking promises they never made for a program many never wanted to join in a market where good loans are hard to find.

Caught in the middle, the Treasury Department is trying to encourage banks to open the credit spigots without making the conditions so onerous that banks will refuse to take the government’s money.

House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, on Friday became the latest top lawmaker to complain that the banks in line to get up to $250 billion in capital infusions from the government are “distorting” the purpose of the rescue plan.

“Any use of these funds for any purpose other than lending - for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc. - is a violation” of the bailout law, Mr. Frank said.

Treasury Secretary Henry M. Paulson Jr. “must make it absolutely clear to any participating entity that the federal government will insist on compliance,” Mr. Frank added, saying he planned two oversight hearings this month on the program.

It is not just congressional Democrats who are unhappy. House Minority Leader John A. Boehner, Ohio Republican, sent a blistering letter to Mr. Paulson last week about reports that banks in the bailout program are using the money for acquisitions, including the buyout of Cleveland-based National City Corp. by Pennsylvania rival PNC Financial Services Group.

“These are not the types of expenditures you described during your many discussions on Capitol Hill earlier this fall, and these are certainly not the types of expenditures members of Congress envisioned when the plan was sent to the president,” Mr. Boehner said.

Even White House spokeswoman Dana Perino issued a veiled warning to banks against hoarding the taxpayer money.

Federal bank regulators “will be watching very closely” how the bailout money is used, she told reporters Wednesday.

But the American Bankers Association, in its own angry letter to Mr. Paulson on Thursday, complained that confusion about the aims of the program have “grown dramatically” in Congress and the media in recent days, with banks bearing the brunt of the public relations meltdown.

With a deadline of Nov. 14 to sign up for the program, “it is completely unfair to ask thousands of banks across the country - and they are being explicitly asked by their regulators - to participate in a program when the impact on those banks is unknown,” said ABA President Edward L. Yingling.

“Proposals to stop dividends, restrict compensation and require certain types of lending can have a devastating impact” on a bank, Mr. Yingling contended. ” … Bankers across the country are extremely upset about the manner in which the [capital-infusion program] is rolling out,” he said.

Treasury officials acknowledge they are walking a fine line.

Put too many conditions and restrictions on the money and banks will refuse to participate in what is supposed to be a voluntary program. Place too few strings on the money, and the government has no way to force banks and other beneficiaries to make loans.

The central mechanism of the program, in which the Treasury injects money into banks by purchasing nonvoting preferred stock, was selected so the government would not have a say in the boardroom and would not be in a position to “micromanage” participants, Neel Kashkari, the Treasury point man on the bailout, told Congress last week.

Bankers complain that there are not many eager borrowers in an economy that may be tipping into recession, and regulators and the press will be even more critical if the taxpayer money is used to make unsound loans.

Some critics point to the British bank bailout, widely seen as a model for the U.S. capital-injection program, as a better approach, with real conditions attached to force banks who receive help to make new loans.

But the London Times reported Friday that Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling are also growing increasingly frustrated at the slow pace of bank lending among major British banks since the rescue.

Valley National Bank of Wayne, N.J., announced Oct. 24 that it would sell $330 million in nonvoting senior stock to the government under the program - despite its deep capital base and healthy balance sheet. Ira Robbins, the bank’s senior vice president, said fears in Congress that the bank would sit on the money were misplaced.

“We have regulators in here all the time,” he said. “If they see we aren’t using the money for its intended purposes, they’re going to let us know.”

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