Inspector General: Treasury Secretary Forced Banks to Surrender Ownership Interest to Government
Barofsky’s report, released Monday, examines the circumstances under which the government selected the initial nine participants of its Capital Purchase Program (CPP) bailout. The report found that the government picked the banks because of their size and involvement in the U.S. financial system, not because they needed the money or not.
The inspector general’s report also found that federal officials, including then-Secretary Paulson, Federal Reserve Chairman Ben Bernanke, and current-Treasury Secretary Timothy Geithner all viewed the plan as an offer the banks could not refuse.
“Officials at Treasury, the Federal Reserve, and other federal regulators felt strongly that the nine institutions should not be permitted to reject the government’s capital infusions,” the report says.
The report also confirms and cites a set of “CEO Talking Points” provided for Paulson that indicate that the government did not consider its plan optional.
“Taken together, your nine firms represent a significant part of our financial system – therefore – in our view you must be central to any solution,” the talking points state.
“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the talking points continue. “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”
The SIGTARP report cites Paulson’s talking points, confirming them with the former secretary, who told the IG that, if necessary, he would tell the banks’ CEOs that they had no choice but to sell shares of their companies to the government.
“Furthermore, former Secretary Paulson told SIGTARP that, if necessary, the government would make clear to the nine executives that they had no choice but to take the money,” the IG report documents.
“Indeed, one bank executive told SIGTARP that the impression he received from Secretary Paulson and other regulators was that the executives did not have a choice in the matter,” states the report.
Interviews with six of those bank executives by SIGTARP reveal that the government intended that all nine banks take the funds, regardless of whether the money was needed, in order to hide the fact that some of them were in grave danger.
“These six executives also told SIGTARP that government officials strongly urged them to accept the capital injections as a group,” says the report, “irrespective of whether they believed that their institutions required such substantial assistance.”
“Federal Reserve officials later explained that acting as a group would help avoid any stigma that might have been associated with accepting capital from the government,” reads the report. “If some of the institutions had accepted and others had not, the markets might have viewed the decision to accept capital as a sign that the institution was experiencing financial problems.”
These problems, which some of the firms were in fact experiencing, might have led investors to withdraw their money because they were afraid that the banks might fail and their investments would be worthless – which some of the banks did, sending their stock values plummeting.
In fact, the report reveals that the health of the individual banks was not much of a concern for the government, which chose the banks because of their size and involvement in the U.S. financial system and not because they needed the money.
“According to government officials interviewed by SIGTARP, the relative health of the first nine institutions selected to receive CPP funds was not a primary factor in the institutions’ selection,” the report finds.
Despite statements by both Paulson and Bernanke that all nine institutions were “healthy,” government officials had concerns that some institutions needed the money while others were in relatively good shape. This fact was confirmed to SIGTARP by both Bernanke and Geithner.
“Chairman Bernanke told SIGTARP that there were differences in the nine banks in terms of strength and weakness, but that the selection was generalized in order to avoid stigmatizing any one bank as being a weak bank and creating a panic,” reads the report.
“He recounted, for example, that a few of the banks were under stress, but that they were included because they were key players in the financial markets,” the report reads.
It continues: “Secretary Geithner, who was then President of the FRBNY [Federal Reserve Bank of New York] told SIGTARP that, in selecting the first nine institutions, size and importance were the key characteristics that guided the process, and that no judgments were made as to their strength or weakness.”