Barack bins bank bonuses

At the beginning of February, US President Barack Obama’s new Treasury secretary, Tim Geithner, unveiled his raft of measures aimed at restoring investor and consumer confidence in the country’s banking sector, while also curbing executive pay in those financial institutions the government was forced to bail out.

Obama’s Financial Stability Plan aims to assure US taxpayers that every dollar used in bank bailouts is directed toward lending and economic revitalisation, and that there will be a new era of accountability, transparency and conditions on the financial institutions receiving funds.

A key aspect of the plan is an effort to strengthen financial institutions so that they have the ability to support recovery. This will be achieved through the following:
1) A comprehensive stress test
This is a forward-looking assessment of what banks need to keep lending even through a severe economic downturn. Key features include:
• Increased transparency, which will facilitate a more effective use of market discipline in financial markets. The Treasury will work with bank supervisors, the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks;
• All relevant financial regulators — the Federal Reserve, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Office of Thrift Supervision ­ will work together in a co-ordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions; and
•All banking institutions with assets in excess of $100bn will be required to participate in the coordinated supervisory review process and comprehensive stress test.
2) A capital assistance programme
Once a financial institution has undergone a comprehensive “stress test” it will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital.
3) A Financial Stability Trust
Any capital investments made by the Treasury under the capital assistance programme will be placed in a separate entity ­ the Financial Stability Trust ­ set up to manage the government’s investments in US financial institutions.

Greater accountability
Firms will be required to show how the assistance from financial stability plan will expand lending. The new rules state that:
• All recipients of assistance must submit a plan for how they intend to use that capital to preserve and strengthen their lending capacity. This plan will be submitted during the application process and the Treasury Department will make these reports public;
• Firms’ monthly reports must show how many new loans they provided to businesses and consumers and how many asset-backed and mortgage-backed securities they purchased, accompanied by a description of the lending environment in the communities and markets they serve. This report will also include a comparison to their most rigorous estimate of what their lending would have been in the absence of government support; and
• All information disclosed or reported to the Treasury by recipients of capital assistance will be posted on www.FinancialStability.gov so taxpayers can determine whether these programmes are succeeding in creating and preserving lending and financial stability.

The Financial Stability Plan also aims to put strict limits on the “bonus culture” that is seen by many as being at the root of the crisis. The government says that limiting common dividends, stock repurchases and acquisitions provides assurance to taxpayers that all of the capital invested by the government under the Financial Stability Trust will go to improving banks’ capital bases and promoting lending. All banks that receive new capital assistance will be:
• Restricted from paying quarterly common dividend payments in excess of $0.01 a share until the government investment is repaid;
• Restricted from repurchasing any privately-held shares, subject to approval by the Treasury Department and their primary regulator, until the government’s investment is repaid; and
• Restricted from pursuing cash acquisitions of healthy firms until the government investment is repaid. Exceptions will be made for explicit supervisor-approved restructuring plans.

Firms will also be required to comply with the senior executive compensation restrictions announced on 4 February, including those pertaining to a $500,000 total annual compensation cap plus restricted stock payable when the government is getting paid back.

The Treasury Department also announced measures to ensure that lobbyists do not influence applications for, or disbursements of, Financial Stability Plan funds, and will certify that each investment decision is based only on investment criteria and the facts of the case.

Added to that, the Treasury Department will post all contracts under the plan on the financial stability website within five to 10 business days of their completion. Whenever the Treasury makes a capital investment under these new initiatives, it will make public the value of the investment, the quantity and strike price of warrants received, the schedule of required payments to the government and when government is to be paid back.

The terms of pricing of these investments will be compared to terms and pricing of recent market transactions during the period the investment was made, if available.

Useful links
Click here for Treasury secretary Tim Geithner’s statement.