Dance with the Devil

Banks trying to give back federal money – bailout smacks of “social engineering”.  Well, duh!

[NYT} WASHINGTON — The list of demands keeps getting longer.

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote onexecutive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachsand Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.

Other institutions like Johnson Bank of Racine, Wis., initially expressed interest in seeking bailout funds but have now changed their minds. Bank executives told The Milwaukee Journal Sentinel that one reason they rejected the government money was to avoid any disruption in the bank’s role in the local community, including supporting the zoo or opera company if they chose to.

One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.

The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.

[snip]

But a growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.

UPDATE: The WSJ reports that investment bankers are leaving that industry, too.

The past week alone has seen the announcement of several high-profile departures: Jean Manas, head of Americas M&A for Deutsche Bank; Deutsche Bank media banker Fehmi Zeko; Goldman Sachs Group partner Joseph Ravitch; and UBSmanaging director Jeff Sine. They follow a parade of other senior bankers who have recently left big firms, including Robert Scully at Morgan Stanley, former UBS Vice Chairman Robert Gillespie, and George Ackert, the former head of Merrill Lynch’s transportation group.

In London, the exodus of talent has been no less acute than in New York. At Bank of America, for example, where bankers are grappling with both the financial downturn and a tumultuous takeover of Merrill Lynch, a raft of senior Merrill bankers have jumped ship. Many of them, including Mark Aedy, the recently named head of corporate and investment banking for Europe who was close to such blue-chip Merrill investment-banking clients as miner BHP Billiton, have left without another job lined up.

[snip]

In the past, many of these bankers would have been locked in place with stock options, accumulated after years of toiling from junior analyst to managing director. History is now of little concern as many firms are remade or wiped out by mergers, and stock options are mostly worthless. The market’s collapse has also laid bare tensions between traders who generated most of the firms’ outsize profits — and losses — over the past five years and the advisers who weren’t risking firm capital.

“I still believe in the investment-banking business, but it has become a bit of a boat anchor, in that there doesn’t seem to be a difference between an advisory banker who generates fees without capital and a [proprietary] trader whose job is like going to the casino every day,” said one senior banker who is still constrained by agreements with his former firm.

 

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