Weekly Wrap

The Incredible Shrinking Paycheck. Last week's announcement by Bank of America that it would pay back $45 billion in TARP money doled out by the feds a year ago was a desperate move to clear a salary cap imposed by pay czar Kenneth Feinberg. The cap was crimping the company's ability to hire a suitable replacement for outgoing CEO Ken Lewis. To stay competitive, Citigroup said this week that it would follow suit, returning $20 billion to TARP (another $25 billion had been converted to common stock, which the government plans to sell "in an orderly fashion" in 2010). So are bank execs home free? Not quite. Under pressure from shareholders, Government Sachs...sorry, Goldman Sachs (the first bank to exit TARP) revealed yesterday that its top managers would not be receiving cash bonuses this year, but rain checks instead, in the form of "shares at risk" that cannot be sold for five years and may be revoked for poor performance.

Speaking of TARP, Treasury Secretary Timothy Geithner said yesterday that the program would cost taxpayers $200 billion less than earlier projected, thanks to the paybacks of principal, dividends on outstanding investments, and proceeds from the sale of warrants (JP Morgan Chase warrants held by the government were just auctioned off for nearly $1 billion). Still, the program may not break even, as tens of billions allocated to AIG, GM, and Chrysler will not be coming back. Moreover, the TARP kitty is now treated by the Obama Administration as a revolving slush fund for additional economic stimulus. In other words, money successfully recovered will be put back at risk until it gets vaporized, all to buy your vote.

What should the TARP balance be used for? How about, as bank analyst Richard Suttmeier suggests, for rebuilding the Deposit Insurance Fund, which has gone negative in the last month? Every time the FDIC closes a bank, the DIF takes a hit. FDIC Chair Sheila Bair wants prepayment of three years' worth of premiums from insured banks to put the DIF back in the black. But with hundreds more banks likely to fail in the next 12-18 months (including three announced tonight), that won't be enough. An unfortunate consequence of the ongoing credit crunch is the subordination of depositors to derivative counterparties whenever a bank must liquidate. Of all people, savers should be made whole. They're already getting punished enough with dollar devaluation. Why should they have to stand in line behind zombie investors?

Maine revenues may be stabilizing. Yesterday the Legislature's Appropriations Committee received a report that General Fund revenues came in slightly over budget in November, a welcome contrast to the first four months of the fiscal year, when revenues were 8.3% under budget and down 9.3% year-over-year. Of course, one month does not a trend make. Furthermore, it was exactly one year ago when the state's revenues went into cliff-drop mode, so merely matching year-ago revenues going forward will be no big accomplishment. Certainly not a victory, but maybe we can stop retreating.

Still out of control on the expenditure side. Maine's very own public option, Dirigo Health, continues to bleed cash, so much so that it has had to borrow $25 million from other state accounts to maintain service to 8,636 Dirigo Choice subscribers (new applicants not wanted). Yesterday members of the Appropriations Committee asked when the $25 million would be repaid. "Search me," said Dirigo's executive director, Karynlee Harrington. Wrong answer, said an exasperated Bill Diamond, Committee Chair. "All the projected good news never seems to materialize," complained Diamond, a Democrat no less who is no doubt embarrassed that his party has owned this one since way before it was broken.

Exercising damage control, the governor's office wrote up a clarifying statement for Ms. Harrington, who late today passed the cut-and-paste job on to the press. The cash advance, the Harried One now insists, will be repaid by the June 30 due date, and in her (boss's) view legislators need not treat the missing money as a new liability to be added to the state's growing shortfall. So what exactly is the reason for the cash crunch? "Members are not terminating" fast enough, said the director on Thursday. (Does that mean not dying fast enough?) "Lower attrition than forecasted," said today's statement. In other words, the lower the enrollment, the healthier the balance sheet. Some business plan. Logical next step: reduce the enrollment to zero (not by everyone dying, but by taking the money away). As Tarren Bragdon has said, Dirigo should be Diri-gone.