Your Stimulus At Work

Yahoo Finance columnist Laura Rowley has an example of how TARP was supposed to work: Banner Bank.

Banner Bank, a 16-branch institution based in Walla Walla, Washington, received $124 million in TARP funds last November, in exchange for giving the Treasury preferred stock with a 5 percent dividend. Last weekend Banner launched a program offering 30-year, fixed-rate mortgages at just below 4 percent to buyers who put 20 percent down, and 4.875 percent for 30 years with no money down.

Buyers had to choose from an inventory of 243 homes offered by 75 builders currently financed by Banner and its subsidiary, Community Financial. In the first weekend of the program, builders sold 25 of the homes, priced from $184,000 to $2.5 million. (The offer ends March 22.)

I suspect this was one of the "Good Banks" that were asked to take the money when they didn't need it. And since they didn't need it, they decided to use it for the purpose intended.

"We think it's an effective way to utilize TARP funds and create a positive atmosphere surrounding home-purchase activity," says Banner CFO Lloyd Baker, adding that the bank hopes to lend $50 million under the program. It will also be offered in Seattle and Boise, Idaho.

Banner doesn't expect to profit on the mortgages, which include jumbo loans. Rather, it was looking for a way to jumpstart activity for its builder clients. The bank, which is well-capitalized, had almost $190 million in non-performing loans last year, 80 percent of which were residential construction and development loans.

"It doesn't serve our communities to drive by and see vacant houses -- nobody wins," says John Satterberg, president of Community Financial. "With this program, the homebuilder sells a home, the consumer gets a low interest rate, it gives the builder the opportunity to start another home, which puts the rest of the economy to work -- the excavator, the concrete company, the framer, plumber, electrician. That's what is gone from our economy."

Well, the homebuilder may decide to sit it out for awhile until demand comes back, but still. When homes start selling again it's bound to have a positive impact, even if it takes awhile.

The house across the street from us has been for sale for over a year and a half. It finally sold, though I have no idea how much they had to come down on their price. Someone from my church who works for a custom closet organizer company has said that business has picked up a touch again.

New home starts were up last month. It would be nice to think that things may be starting to turn around. If so, it'll probably be because of smaller banks like Banner being willing (and able) to do their part.

Too Many Strings Attached

Megan McArdle from The Atlantic:

Apparently, the restrictions that Congress is putting on bailout monies is pushing a number of institutions to give the money back.

What to think of this? One's first instinct is to say that this is an unalloyed good--the restrictions have made taking the funds costly enough that only truly troubled institutions will do so.

The problem is, that's precisely what the Fed was trying to avoid. Central bankers have long made a practice of keeping it a secret who borrows from them at the discount window, because publishing the names of those who need a temporary cash infusion could trigger a bank run. In order to get the money into the banks that needed it to stave off a liquidity crisis, Bernanke and Paulson very deliberately asked banks that were widely believed to be sound to take the money too. Otherwise, the government bailout funds might have touched off the very crisis we were trying to avert.

I guess the price of doing their "patriotic duty" was too high. It was bad enough for the banks taking the money they didn't need to be painted as a potentially failing bank. To accept the conditions that were pushed on them later at the risk of becomng a failed bank for real was just too much.

I wrote about this back in early February.

I think the idea of not paying the price for someone else's irresponsibility is gaining traction.

She goes on to make another good point:

It's also possible that some of the measures that express our collective rage at the bankers could tip the banks over the edge. It's satisfying to make AIG cut out junkets for independent insurance agents, but it also probably means that fewer AIG policies will be sold. Since we now own the company, we probably cost ourselves money in order to express our outrage. Similarly, watching the conga line of Merrill's top performers snaking up Wall Street to other firms, one can't help but wonder if B of A shareholders did themselves any favor by complaining about the bonus structure. The major assets of these institutions are client relations and human capital that tend to adhere to the individual, not the firm.

To reverse a popular phrase, "If you bought it, don't break it!" Like it or not, we're now stockholders in AIG and the like. If we want our money back some day we'd better support those businesses.

Bailout Banks, Not Hobble Them

The Chicago Tribune criticizes language in the Stun-ulus Bill to cap executive compensation:

But keep something in mind: Taxpayers are now deeply invested in the companies that receive a federal bailout. We want these companies to succeed.

Compensation caps would hurt the ability of these firms to attract and retain top talent. If salaries are higher at robust firms that aren't taking federal help, that's where talented people would go. Taxpayers are not going to be better off if the best business minds in the land avoid working at firms that receive federal help. The comp rules may also persuade execs at troubled firms to leave the federal assistance program before those firms are on sound footing.

I think that is right. If you're going to tinker in businesses, why not just insist that the boards fire the bad eggs, but don't hamper their ability to replace them with good ones. These banks are still struggling. They're going to need all the help they can get to survive. Just throwing money at the problem is not going to help. They need better management.

Patriotism Vs. Business

It's easy to be hard on companies who accept bailout money and still continue their lavish ways.

However, correct me if I'm wrong, but weren't there a bunch of other banks who were asked to accept bailout funds even though they didn't want them, just to help with a) protecting the anonimity of some of the other banks, and b) to stimulate the economy?

So if you're one of these banks that took money they didn't need, and now you're being told you have to abide by certain rules, including some that didn't exist when you accepted it, doesn't this actually interfere with their successful operation?

In other words, no good deed goes unpunished. This should make anyone else who wants to be helpful in the future think twice.

UPDATE: JPMorgan CEO Jamie Dimon criticizes the restrictions and makes a few good points:

“Pay got a little exuberant, and there were some legitimate complaints,” Dimon said. “But I don’t think the president of the United States should paint everyone with the same brush.”

New York-based JPMorgan, the second-largest U.S. bank, doesn’t have so-called golden parachutes or retirement packages, and all top executives must retain 75 percent of their stock- based compensation, Dimon said.

This is essentially government micromanaging businesses. Yes, there needs to be some concession from bailed-out institutions, but I don't think the Federal Government is a good candidate to determine how business should be run. After all, this is the group that has posted losses that make the banking sector look successful by comparison. And whose top officials don't feel obligated to pay taxes.