TOPICS > Economy

After Infusion of Aid, Some Banks Return Bailout Funds

April 14, 2009 at 6:20 PM EST
Loading the player...
As the government invests billions to shore up the financial sector, some banks are returning rescue funds earlier than expected. A banking chief and a reporter explain the latest.
LISTEN SEE PODCASTS

TRANSCRIPT

GWEN IFILL: In his economic speech today, President Obama said troubled banks are a fundamental part of the financial crisis. Some banks have taken notable steps of their own in recent days.

Jeffrey Brown has more.

JEFFREY BROWN: For months, we’ve been reporting on the hundreds of billions of dollars the government has invested in financial institutions. Now a handful of banks want to give the money back earlier than expected.

One of the giants, Goldman Sachs, just announced a plan to begin paying back $10 billion. That follows four smaller, regional banks that have repaid the government within the last few weeks.

We talk first with the CEO of one of those institutions. Joseph DePaolo is president of Signature Bank in New York City, which just returned $120 million to the U.S. Treasury.

Well, Mr. DePaolo, first, why did you decide to repay the money?

JOSEPH DEPAOLO, Signature Bank: Well, Jeffrey, thank you for having me on. We decided to pay back the funds because the Capital Purchase Program, as originally outlined, was for healthy, well-capitalized institutions, and we received those funds in the fourth quarter of 2008.

Then, all of a sudden, it changed from a program to well-capitalized institutions to one where unhealthy banks were allowed to participate. So it went from a perception of good, a great partnership between government and business, to a stigma of being unhealthy. And the government also placed some restrictions on banks…

JEFFREY BROWN: Well, can I stop you there before we get to the restrictions?

JOSEPH DEPAOLO: Sure.

JEFFREY BROWN: Because wasn’t the original idea that there are — there were and still are very weak banks and that the government wanted healthy institutions, perhaps like yours, to participate so that those wouldn’t be even further stigmatized? Wasn’t that the original idea?

JOSEPH DEPAOLO: Yes, the original idea was that these healthy banks, like Signature Bank, would participate. We could possibly help the unhealthy banks by taking them over with the additional capital that we received from the government. Yes, that’s correct.

JEFFREY BROWN: All right, now, you said there were some restrictions put on, knew that we’ve heard some about those. Tell us, how in your — how do you believe that these all hurt your bank? What did it actually — what was the impact of participating?

JOSEPH DEPAOLO: Well, when the stimulus package was passed on the 17th of February, everyone thought that it just placed restrictions on executive management, when — for compensation purposes — when, in fact, it would affect our best sales people, our best relationship bankers.

So that effect of us being unable to possibly keep our best bankers because of the compensation restrictions, coupled with the recruiting that we would want to do and we would be unable to recruit because of the restrictions, that really hurt fundamentally what we’d like to do with the bank in growing the institution.

The last part was, they changed the game — or I should say, they changed the rules in the middle of the game. And by doing that, it created a lot of uncertainty as to what other restrictions and what other rules would they place on the healthy banks?

And, therefore, those three elements caused us to really pause and say, “It’s probably best for us to return the funds.” One other thing…

Restrictions on compensation

Joseph DePaolo
Signature Bank
I believe that everyone was tarnished and, in fact, by saying that we would give back the funds, it lets the public know, lets our clients, more importantly, know that we were able to do so.

JEFFREY BROWN: Well, on the compensation -- let me break in just on the compensation issue...

JOSEPH DEPAOLO: Sure.

JEFFREY BROWN: ... because that one, of course, has been very hard for a lot of people, a lot of public outcry there. You're saying that it was -- it's hard to retain even sales people on the salaries that you were limited to?

JOSEPH DEPAOLO: Yes, because we have a basic objective compensation model that pays a sustainable portion of compensation for the best sales people based on the business that they create and the business that they do for the institution, so most of the compensation is based on bonus and less on salary. And in order to keep your best people, you need to have those restrictions lifted.

I think the restrictions were really for those institutions that lost money and were paying out substantial bonuses, when, in fact, in 2008, Signature Bank had a record year. We had record profits in 2008. We continue to expect to do well in 2009. So not all banks are created equal, but yet the restrictions were the same for all institutions.

JEFFREY BROWN: Well, just to be clear, so you're not saying that -- you accept the notion that many financial institutions took bad risks and got themselves in deep trouble? You're saying that, what, we've tarnished -- or the public and Congress has tarnished everybody the same way?

JOSEPH DEPAOLO: Yes, I believe that everyone was tarnished and, in fact, by saying that we would give back the funds, it lets the public know, lets our clients, more importantly, know that we were able to do so.

We raised $150 million in capital in September, private capital on our own in a common equity offering. And we had substantial capital levels to begin with.

We were invited to participate in this program, but we realized that, as time went on, we were tarnished by, with one fell swoop, of all banks being unhealthy. And we felt that the way to show the world that we were a healthy institution was by applying to give it back. And we were approved and done so.

JEFFREY BROWN: And let me ask you finally, briefly, one more thing. I know you must talk to others in your industry. Do others feel the same way? Do you expect to see others taking similar action?

JOSEPH DEPAOLO: Yes, I think when you hear a Goldman Sachs wanting to give it back -- and we haven't spoken to them, but I have talked to other CEOs throughout the country that have actually called me to ask how we were able to give it back, because they want to do so, as well.

And I asked them very similar questions that the government asked us. How high are their capital levels? Because you need to have high capital levels in order for the public to feel comfortable with you. So I think there are other banks out there that want to do so.

JEFFREY BROWN: All right, Joseph DePaolo, thank you very much.

JOSEPH DEPAOLO: Jeffrey, thank you very much.

Public perceptions

Deborah Solomon
The Wall Street Journal
[T]here are a couple of concerns. One is, what happens if things get worse? Now, the government is doing some stress tests, they call them, to see whether banks can weather a severe and prolonged economic downturn.

JEFFREY BROWN: And now more on Goldman Sachs' plans and the larger banking and bailout picture. That comes from Deborah Solomon, who's been covering the story for the Wall Street Journal.

Well, Deborah, Signature, we just heard -- that's a small bank. Goldman Sachs is a giant. Are the issues similar?

DEBORAH SOLOMON, Wall Street Journal: Yes, the issues are similar. I mean, as the CEO mentioned, banks like Goldman want to get out of the restrictions that the government has imposed.

But more than that, they want to show, I think, the markets and investors that they're strong. And the way that they think to do that is to say, "We're one of the first banks to repay TARP money."

JEFFREY BROWN: And you and your colleagues reported this morning that Goldman Sachs' CEO Lloyd Blankfein had told this to President Obama several weeks ago, right?

DEBORAH SOLOMON: Right. Yes, in a meeting that the president had with bank CEOs to sort of talk about the bank bailout, Mr. Blankfein raised this and said banks that are healthy should be able to pay it back.

And the government is in somewhat of a quandary, because the previous plan, which was started under President Bush and Treasury Secretary Henry Paulson, called for these banks to keep the capital, partly as a way to prop up the financial sector by infusing healthy banks, those with enough capital, to have, you know, money, but also helping give cover to some of the weaker banks that weren't at death's door but needed a little bit of help.

This way, everybody was sort of egalitarian. It was very equal. You couldn't tell who was weak or who was strong. Everybody was getting the money.

But in February when the stimulus bill passed, there was a provision in there that allowed the banks to get out of TARP, the Troubled Asset Relief Program. Essentially, they said, if you don't want to comply with these restrictions, fine, you can get out of TARP.

That wasn't what Treasury had intended. And so now they basically have no choice but to allow healthy banks to get out of the TARP program.

JEFFREY BROWN: Well, so -- excuse me -- why is that -- I mean, it sounds like a good thing, on the one hand, for banks to be able to repay the government, and yet there is concern about that. Flesh that out a bit more for us.

DEBORAH SOLOMON: Sure. Well, one of the problems is that, if you start allowing banks to pay the money back, they may be fine right now. I mean, Goldman Sachs maybe -- you know, just had a very good quarter.

But nobody really knows what's going to happen. You know, the economy seems to be, you know, not necessarily turning the corner. I know the president said there were some glimmers of hope, but most people have a pretty downbeat assessment of where we're headed.

And so there are a couple of concerns. One is, what happens if things get worse? Now, the government is doing some stress tests, they call them, to see whether banks can weather a severe and prolonged economic downturn.

The metrics that they're using, however, aren't that far from where we are. So there is some concern that, even if banks pass that test, if things get markedly worse, they may need money and, you know, not be able to get it.

And the other part of it is that, if banks give back this money and they have capital to continue -- you know, to have high capital levels -- they may still not have enough money that they feel comfortable making loans and providing financing, that they might -- if they kept this government money.

So, in other words, Goldman can give this money back because it has enough money, it can raise money. You know, they did a $5 billion equity offering today. But without that government capital cushion there, they may not provide the financing, the flow of credit, the things that are going to enable people to get student loans, home loans, credit cards, mortgages, things that basically the government is trying to jump-start with this program.

JEFFREY BROWN: Yes, the very thing that the whole program is intended to do.

DEBORAH SOLOMON: Right.

Entering a new phase

Deborah Solomon
The Wall Street Journal
I think investors are really worried about every institution, because they just don't know where the exposure is.

JEFFREY BROWN: Yes. Now, are there other big firms out there that are suggesting they might also want to start paying back the money?

DEBORAH SOLOMON: Well, I think some of them can't. I mean, banks like Citigroup and Bank of America, which have had to get, you know, multiple infusions from the government for various reasons, probably are going to be among the last.

But, yes, I think all of these banks want to get out of this. Many of them didn't want to take the money in the first place and did so only because Treasury Secretary Paulson gave them, you know, basically a mandate and said, "You have to take this money for the good of the financial system."

They've been, you know, dying to get out of it. And the restrictions that are now on executive pay are making them even more eager.

But I think, you know, you may see banks like JPMorgan start to pay it back. Others, like John Mack, the CEO of Morgan Stanley, has said he thinks the banks should hold on to this a little bit longer. That may be because they don't feel like they are in a position to give it back right now.

I think you're going to start seeing some banks trying to give it back. But, again, this has to be done in consultation with their regulator. And so while it's the law that the banks should be able to pay it back, the regulator does have some discretion in terms of determining whether they should be approved to return the money.

JEFFREY BROWN: So as we enter this -- this sounds like a new phase in all of this -- is it possible that we're at the point where we see a real shakeout now, where we know who are the healthy banks and who's not?

DEBORAH SOLOMON: Yes.

JEFFREY BROWN: It's been a little mushy up to now, I think, in many cases. But you're suggesting now we're going to really see who stands where?

DEBORAH SOLOMON: Right. Well, I think one of the things -- you know, the Obama administration seems to not want to paint all of the banks with the same brush. And I think it's partly because they're forced to, but also because they want to give the markets confidence.

I think investors are really worried about every institution, because they just don't know where the exposure is. I mean, the things that investors are concerned about and the reason they don't want to put money into financial institutions is because of the economic picture, but also the exposure to the housing crisis.

And so I think the government feels like, if you can sort of say who's strong, who's weak, it might give the markets more confidence to know, you know, where their money's going, the government's going to be there to provide money to the weak banks. I mean, they've basically said they're not going to allow any bank to fail. They're going to provide as much money as these banks need to feel comfortable lending.

But I think there's a sense that, you know, the markets really need more information so that they can make educated decisions about who to invest in and not just stay out of the sector, you know, completely, because they just feel like there's no bottom.

Changing compensation rules

Deborah Solomon
The Wall Street Journal
So it's very hard for banks, they say, to keep talented managers and people that they need to make their institutions stronger.

JEFFREY BROWN: And as the administration and Treasury debate this, what steps to take going forward, how much is this compensation issue still on their minds, the one that provoked all the public outcry?

DEBORAH SOLOMON: Oh, it's very much on their minds. And, in fact, you know, the president had come out with his own compensation restrictions before the stimulus bill was passed. And what he had tried to do was talk about capping salary, which is very different from what Congress did. Congress capped bonuses.

And Wall Street's entire compensation structure, as Mr. DePaolo said, is basically based on bonuses. Whether that's right or wrong, that's how it works right now.

So it's very hard for banks, they say, to keep talented managers and people that they need to make their institutions stronger. And what the law did, as the CEO mentioned before, was that it went further down the pay structure.

It's not just the senior executives, but it's the top earners. So it's the people bringing in the business, doing the work that the banks feel like they need to be done in order to get stronger and healthier.

So it's very much on the mind of the administration. It's something they're wrestling with. They're supposed to issue rules in the near future that will sort of lay out exactly how these compensation rules will work.

But the other thing they're worried about is also this idea of game changing, of getting these companies to participate and then, down the road, having somebody, you know, pull the rug out from under them and say, "You're now subject to, you know, to X or Y."

So they're very cognizant of that. I think they're going to try and do something that will help give some confidence to banks that participate that the rules won't be changed down the road, as much as they can.

JEFFREY BROWN: All right. Well, Deborah Solomon of the Wall Street Journal, thank you very much.

DEBORAH SOLOMON: Thank you.