Posturing, Not Problem-Solving

Evidence that Congress is part of the problem, rather than part of the solution, was on full display during Wednesday's hearing of the House Financial Services Committee. Invited to testify were the CEOs of eight of the nine mega-banks receiving a total of $125 billion in TARP money last October under the Treasury Department's Capital Purchase Program (CPP). Under intense scrutiny, the guest panelists submitted written testimony, then were subjected to a relentless grilling by irritated committee members.

I'll be frank, Barney. The proceedings were a disgrace. The lawmakers were not so much asking questions as blowing steam. Gathering and processing useful information is, um, way hard, requiring closed mouths and open minds. It is much more fun scoring clever sound-bites, first one to CNN or CNBC wins. Never mind the national interest; we gotta entertain the voters back home, make sure they have a target (other than us!) to whom they can vent their venom.

Congressmen who did actually read the written testimony (what? homework?) were reminded that most of these firms did not volunteer for the CPP. They were conscripted. In the words of Robert Kelly, CEO of The Bank of New York Mellon, "a key goal at the time was to have a range of institutions, including relatively healthy companies like [ours], participate in the Capital Purchase Program, removing any stigma that might be associated with accepting Treasury capital." The fear at the time was that a CPP beneficiary might be presumed by investors to be nearly bankrupt, thus inviting the kind of bank run that had brought down Lehman Brothers the month before. Treasury officials decided to hide the weak banks by mixing them into a larger flock of strong ones.

The strong ones signed on not because they needed the CPP, but out of patriotic duty. "We were not anticipating any injection of capital from the Treasury," Lloyd Blankfein, CEO of Goldman Sachs, testified. Indeed, Goldman had just raised over $10 billion in private capital--and could have raised more, as their common-stock offering was over-subscribed. A company like Goldman, acting in its own best interest, would have declined the CraPP and hunkered down for the inevitable industry shake-out. They would have emerged even more dominant than before. The word on the Street today is that Goldman, after Wednesday's circus on Capitol Hill, is more resolved than ever to give the government its money back, perhaps through a 40-million-share secondary offering.

The government needed Goldman more than Goldman needed the government. To show its appreciation, the Committee hauled in Blankfein and his Nifty Nine counterparts and scolded them over their compensation, practically guaranteeing that they will steer clear the next time they are needed.