$US700bn bailout may be used for bonuses, dividends

John Dunbar
October 27, 2008 12:00am


TROUBLED US banks could use the US Government's $US700 billion bailout to buy rival banks, pay bonuses, or simply hoard, according to reports.

As the economic crisis worsens, lawmakers on both sides of Congress are starting to gripe that the much-touted $A1.04 trillion rescue package is seemingly far different from the one they were sold by the Bush administration.

The bailout was initially to be used in buying devalued mortgage-backed securities from tottering banks to unclog frozen credit markets.

Then it was about using $US250 billion of it to buy stakes in banks. The idea was that banks would use the money to start making loans again.

But reports are surfacing that bankers may instead use the money to buy other banks, pay dividends, give employees a raise and executives a bonus, or just sit on it.

Three weeks after becoming law, and with the first dollar of the $US700 billion yet to go out, officials are just starting to discuss helping strapped homeowners to avoid foreclosure.

But also of concern to some senators is the seeming change of tack from Treasury.

In buying equity stakes in banks, Treasury has "deviated significantly from its original course", says Senator Richard Shelby, on the Senate Banking, Housing and Urban Affairs Committee. Senator Shelby was one Republican who opposed the bailout.

The centrepiece of the Emergency Economic Stabilisation Act is the 'troubled asset relief program' or TARP for short. Critics note that tarps are used to cover things up.

The money was to go into buying "toxic" mortgage-backed securities whose value has slid in step with home prices. But Treasury Secretary Henry Paulson then followed European governments into the banking business, diverting $US250 billion to buy stock in healthy banks to spur lending.

Bank executives hinted they might instead use it for acquisitions. Chairman of the Senate banking committee, Christopher Dodd, said this move was "beyond troubling".

A day after Senator Dodd made the comment, the government confirmed that PNC Financial Services Group was approved to receive $US7.7 billion in return for company stock. At the same time, PNC said it was acquiring National City Corp for $US5.58 billion.

Other planned uses of the money have lawmakers bristling, even though there is nothing in the law that they just wrote to prevent those uses.

Senator Charles Schumer questioned allowing banks that accept bailout bucks to continue paying dividends on their common stock.

He said he also feared banks might stuff the money "under the proverbial mattress" rather than make loans.

Neel Kashkari, head of the Treasury's financial stability program, said there are few strings attached to the capital-infusion program because too many rules would discourage financial institutions from participating.