There is general consensus that the distribution of first $350 Billion of the Trouble Assets Relief (TARP)Funds has been a disaster of non- transparency. The largest banks have not noticeably increased their lending to either consumers or businesses. Ending the "credit freeze" was the stated goal of Congress and former Secretary of the Treasury Henry Paulson for using tax payers' funds.
So what have the banks done with the money? Making strategic acquisitions of other firms has been a priority for some of our largest banks. In response to one survey, 15% of the top 100 Bank CEO's stated that they would use TARP funds for acquisitions, while only 20% had plans to increase lending.
When asked by one reporter to disclose what they did with the money they received from TARP, most of the banks in one informal survey refused to disclose exactly how they used the money. However, in "What CEO's of Top 100 Banks Think", a recent anonymous survey conducted by the financial firm UBS, author Matthew O'Connor reported that banks were planning to further reduce their lending. 85% of banks planned to tighten the lending standards they use for making commercial real estate and construction loans. 45% thought they would raise the standards they apply to consumer home equity loans. Even consumers with great credit are likely to encounter more trouble qualifying for prime loans given that 38% of survey respondent expected to raise credit standards even for the best qualified borrowers.
$350 Billion of the TARP funds have been committed, with no strings attached. Congress may lack the appetite for imposing retroactive sanctions for the failure to increase lending to consumers and businesses,as promised. Its fair to examine the early returns on the strategic acquisitions that the leading banks made, instead of lending.
Both Bank of America and Wells Fargo are now posting major losses. The acquisitions have compromised the profitability of both previously healthy banks. These losses go in the category of "be careful what you wish for".
Bank of America acquired both Countrywide Financial, the top subprime lender in the nation, and Merrill Lynch, a once-storied investment bank, on the eve of its certain bankruptcy. Wells Fargo, won a nasty fight with Citibank to acquire Wachovia Bank.
Both the B of A and Wells Fargo acquisitions are now causing billion dollar losses. Bank of America's post acquisition position became so weak that it had to ask for a second transfusion of taxpayer funds to shore up its position.
Many banks sought to maneuver in the unstable environment of the last quarter of 2008 to leverage the combination of TARP funds and new a Treasury tax ruling that gave tax advantages to acquiring entities with big losses. Congress is now discussing undoing this tax advantage, so some of the acquisitions will either come unraveled completely, or will produce yet another round of losses.
These losses, and a second round bailout for Bank of America and Citibank, given strong reason to doubt the wisdom of the hasty, opportunistic acquisitions made three months ago.
Bank of America, a previously sound and well-run commercial bank has become ensnared in a nasty, tabloid-level dispute with John Thain, the former- CEO of Merrill Lynch. Bank of America completed its acquisition of Merrill nearly a month ago. However, last week when the scale of losses from the new Merrill subsidiary turned out to be more than $15 billion in pre-merger losses, and $27 billion in losses for the year, the conflict reached a peak..
When the public learned that Merrill paid more than $15 billion in bonuses to its executives, just before completing the deal with Bank of America, the p.r. war between Bank of America and Thain, the ousted Merrill CEO reached warp speed.
Ken Lewis, the CEO of B of A, dismissed John Thain in a public humiliation in which the details of Thain's $ 1.2 million office remodeling were leaked to the press. In an interview with Maria Bartiroma of CNBC, Thain admitted to buying a $87,000 area rug, $68,000 credenza and a $1,400 parchment waste can, among other items.
He justified this as necessary because his immediate predecessors "office was very different -- than -- the -- the general décor of -- Merrill's offices. It really would have been -- very difficult -- for -- me to use it in the form that it was in."
More importantly,Thain was asked to explain how he could have paid out $15 Billion in bonuses just at the time his firm was going bankrupt and had to be rescued by Bank of America, backed up by government support. He relied on the standard story, the bonuses were needed to keep good people.
Wells Fargo, the nation's largest consumer bank, has just reported more than $2.5 billion in losses for the fourth quarter of 2008. The bank has been healthy and well-managed, prompting, Wells' CEO to initially decline TARP funds, although Wells ultimately did accept TARP money. The pressured and litigated acquisition of Wachovia bank is widely believed to be the primary source of these losses. Ironically, both Citibank and Wells Fargo sought to acquire Wachovia. Like Bank of America, Citi's also made a second visit to the bailout window. It appears that the strategic acquisitions game attracted both strong and weak players.
Wachovia had more than $219 billion worth of commercial real estate and corporate loans, including a large amount of the legendarily bad pay-option mortgages that are now defaulting at record rates because borrowers could pay whatever they chose to every month. This option simply created a negative amortization ( balloon payment at the end).
While the Wells Fargo acquisition of Wachovia has had none of the highly visible board room drama of the Bank of Americas decisions, it too has posted multi-billion dollar losses despite receiving billions in aid from taxpayers through tarp.
The results at Bank of America and Wells Fargo suggest that the strategic mistakes of the top CEO's in the banking sector have not ended. The risk-taking mode has simply shifted from buying bad mortgages directly to buying indigestible companies that owned bad mortgages. Any way you slice this, the bad mortgages are causing, even the healthiest banks to spill red ink.