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This Is What Taxpayers Are Getting For TARP

Former Merrill Lynch chief John Thain, the architect of the firm's sale last year to Ken Lewis' Bank of America, was lauded for selling the company at a time when the business model for Wall Street investment banks was crumbling amid a funding and liquidity crisis. Having gone on record favoring government intervention in the financial markets (TARP) to prevent a classic bank run that could bring down the nation's entire financial system, I'm compelled to note that significant abuses of this federal intervention have recently come to light.

Bank of America shareholders are now furious that their company bought Merrill Lynch because after the transaction closed certain problems began to surface. Among these problems was the untimely (read: late, not disclosed, not accurately described) news that Merrill Lynch owned a lot of worthless securities for which Bank of America overpaid. In another day and age, Bank of America would be penalized for making such a stupid decision (buyer beware is the rule of the land in mergers and acquisitions) beginning with a serious drop in shareholder value, which in fact happened during the past weeks. But in the age of TARP, Bank of America had another alternative to what otherwise might have been a fatal mistake: ask the Fed for additional funding to cover the capital deficiency that resulted from a bad acquisition.

Understandably, Bank of America stockholders are incensed and they are suing. However, as in any monumental FUBAR, the really annoying aspects are to be found in the details. During the period of time between when the Merrill Lynch sale to Bank of America was announced (on the very day of the Lehman Brothers bankruptcy) and yesterday, when Bank Of America's chief Lewis fired Merrill's John Thain, a mind boggling list of excesses and greed have been made known:

1) Merrill Lynch expedited bonus payments (otherwise known today as the great bonus heist, exceeding one billion dollars) to employees last year before any revelations about worthless assets on Merrill's balance sheet became known.

2) Merrill Lynch CEO Thain spent (after the acquisition and receipt by BOA of billions in TARP funding) over $1,000,000 refurbishing his Manhattan office, including:

Area rug: $87,784

Mahogany pedestal table: $25,713

19th Century Credenza: $68,179

Pendant Light Furniture: $19,751

4 pairs of curtains: $28,091

Pair of guest chairs: $87,784

George IV chair: $18,468

6 Wall Sconces: $2,741

Parchment waste can: $1,405

Roman Shade Fabric: $10,967

Roman Shades: $7,315

Coffee Table: $5,852

Commode on Legs: $35,115

At a time when tens of thousand of lower level employees are being fired and the corporation's very existence is dependent upon tax payer bail out funds, it is the height of hypocrisy and irresponsibility to spend taxpayer and shareholder monies in such a fashion. In fact it's a farce and begs the usual comparisons to the French Revolution and Marie Antoinette.

This, however, is just the beginning of a sordid tale. A $900 Billion dollar stimulus package is following closely behind this TARP bailout and last year's stimulus package. While there is a comforting thought that can be drawn from the excesses mentioned above (John Thain was held accountable and fired), who is going to hold Congress accountable for the inevitable excesses in the current stimulus proposal?

If a $68,000 dollar credenza for a wealthy banker that is ultimately being paid for via TARP pisses you off, what do you expect to find in a $900 billion dollar spending binge by Congress? We are truly entering an era never seen before in US economic history. The Democrat Congress of 2008 is wholly accountable and responsible for how this disaster plays out. There is no more blaming of Bush to camouflage the base political ambitions of Democrats: this is your financial Katrina Senator Reid and Senator Dodd. The same goes for Senator Schumer and Representatives Pelosi and Hoyer.

What is incredible about the bank bailout is that shareholders of common stock and unsecured creditors of these banks are being made financially whole through the TARP program. To describe that as outrageous is an understatement because these same parties are risk participants in transactions that are routinely discharged (and unpaid) in bankruptcy courts every day in this country. Whence the preferential treatment? Where are PelosiCo & Reid on this question (if they even understand it)?

The blog Clusterstock has a very good analysis of the pending disaster that is appropriately titled "Preventing The Greatest Heist In History". It's a bit heavy with financial data but all are encouraged to read it because, among other things, it makes the domestic auto bailout look microscopic compared to the financial industry fiasco that is the responsibility of the Democrat majority.


Hat Tip: Dealbreaker


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Comments (18)

A reach around would have b... (Below threshold)
irongrampa:

A reach around would have been courteous.

The voters MUST demand fisc... (Below threshold)

The voters MUST demand fiscal conservatism. Contact your congressperson NOW. Support fiscally conservative politicians with your financial support. If your financial support must cross state lines in order to find itself in the hands of a trustworthy fiscal conservative, so be it. Let your local senator/representative know that your money is going to a politician who deserves your support.
http://www.rightklik.net/

Let your local politicians ... (Below threshold)

Let your local politicians know that they will get your support when they've earned it.
http://www.rightklik.net/

Coming on the heels of the ... (Below threshold)

Coming on the heels of the testimony by the dumbfounded "expert" that Kim highlighted earlier, this has got to be really embarrassing.

Democrats responsible? Com... (Below threshold)
GarandFan:

Democrats responsible? Come on, who are you kidding. EVERYONE knows it's George Bush's fault!

Reid, Pelosi, Dodd, Frank......they'll get us out of this. Hahahahahahahahahaha!!

Unfortunately here in Maryl... (Below threshold)
John:

Unfortunately here in Maryland we have pretty much all liberal representation...and they want a piece of the pie.

One local legislator is on tape saying that it doesn't matter if Maryland is broke as long as Obama was President...unreal...

Has anyone elst thought tha... (Below threshold)
Matt:

Has anyone elst thought that what we are seeing is simply the criminals looting the treasury before it goes completely insolvent? Similar to a mortgage holder stripping a house and selling the bits and pieces right before forclosure?

If you want to B****, go ah... (Below threshold)

If you want to B****, go ahead, but it would help if you got the underlying facts correct and didn't make unfounded insinuations, especially since presenting them accurately doesn't undermine your arguments.

Thain's remodeling came in early 2008 before BofA got any TARP money (in fact, before TARP was even on the table) and certainly before any discussion of BofA acquiring Merrill Lynch. And while the remodeling was rather expensive, at least by common standards, it's a stretch to connect that to Merrill's problems or the TARP program as a whole - ML didn't fail because Thain spent a lot of money redecorating his office.

And there is no evidence that ML accelerated bonuses to beat the bad news. First, there is no evidence that senior ML executives knew of the extent of the additional losses and thus couldn't have been trying to beat the news. Are you accusing them of securities fraud for being aware of those losses and not informing BofA? The acceleration of bonuses was to beat the acquisition date and the possibility that the more conservative BofA would renege on bonus payments to ML staff.

Willie Sutton said it best:... (Below threshold)
Gmac:

Willie Sutton said it best:

"Because that's where the money is."

If you think this is anything less than a looting of the public's back pocket and the most massive wealth transfer to the Democrat party's favorites then you are delusional.

And there is no evide... (Below threshold)

And there is no evidence that ML accelerated bonuses to beat the bad news. First, there is no evidence that senior ML executives knew of the extent of the additional losses and thus couldn't have been trying to beat the news. Are you accusing them of securities fraud for being aware of those losses and not informing BofA? The acceleration of bonuses was to beat the acquisition date and the possibility that the more conservative BofA would renege on bonus payments to ML staff.

Did you read the links in post,Steve? A substantial BOA shareholder group is in fact charging securities fraud against BOA . They are in fact alleging foreknowledge.

The accelaerstion of bonuses was wrong, period. If bonuses at ML were accelerated because of concerns that a more conservative BOA might renege on them, as you suggest, then that doesn't mitigate the wrongdoing. ML knew who they were getting in business with when they took the bonus money.

And I failed to mention this:

http://dealbreaker.com/images/thumbs/Merrill%20Lynch.pdf

Thain wanted an additional $10,000,000 bonus as late as December 2008. That's ridiculous.

I stand corrected on the timing of Thain's $1,000,000 office fit up. He merely did it while firing thousands of ML employees and incuring historic, in fact fatal losses for the firm. See:

http://www.thedailybeast.com/blogs-and-stories/2009-01-22/john-thains-87000-rug/

You can call that a lot of things, but BS it isn't. And TARP soaked up all these expenses after the fact, which makes moot your presumed point.

So what that a shareholder ... (Below threshold)

So what that a shareholder group is alleging fraud? Do they (and you, since you're jumping on their bandwagon) have any facts to support the allegations?

And for accelerating the bonuses to be 'wrongdoing', to whom was done the wrong? Not Merrill employees who got something they may not have received in the future. Not Merrill shareholders as the takeover price didn't change (they got squat). Perhaps BofA shareholders but Merrill executives - except to the extent that it was addressed in the merger agreement - didn't have a fiduciary responsibility to BofA... and if BofA forgot to address the bonus issue, that is their screwup, not Merrill's... and I applaud ML for taking advantage of that to look out for their employees.

I agree that Thain asking for an additional bonus seems ridiculous, but neither of us know the terms of his employment contract. And spending 'just' a million on redecorating while firing thousands is a bit tacky.

But you are wrong to state that Thain's redecorating took place while ML was incurring 'fatal' losses. And this isn't just semantics or playing with words: the losses (i.e., the bad loans and investments) took place long before Thain took over, what Thain presided over was the 'recognition' that ML had lost billions of dollars. Thain didn't save ML, but he sure wasn't the one responsible for its collapse.

And TARP soaked up those expenses only to the extent money is fungible. Yes, had ML not spent $1mm on redecorating, then ML would have had that amount in capital and would have needed $1mm less in TARP funds to bring its capital up to whatever level was deemed appropriate. But let's agree that the $1mm was a drop in the bucket compared to ML's bad bets on MBS. Getting pissed off because BofA's tapped TARP for $20.001 billion instead of 'just' $20.0 billion is losing sight of the big picture.

Hugh,Very well-wri... (Below threshold)
Dave Noble:

Hugh,

Very well-written and carefully researched post.

I also enjoyed the vigorous debate between you and Steve.

Steve,

Thank you for your contributions as well.

Businesses, especially financial businesses, cannot be trusted to regulate themselves.

Greed is not good. It leads to dysfunctional behaviors that profit a few on the backs of the many.

What we are witnessing is the privatization of profit and the socialization of risk and loss.

"Commode on Legs?"... (Below threshold)
Marc:

"Commode on Legs?"

Was that an actual purchase?

Or a metaphorical reference to Merrill Lynch chief John Thain?

My wife and I own a nice ho... (Below threshold)
WildWillie:

My wife and I own a nice home plus two rental properties. We were shocked to find out that the banks demand we make three separate payments.

We applied to congress to intervene for us. We think it is unfair for the banks to demand that we know what we got into.

Thanks GOD Barry is president. I don't have to worry about my mortgage, healthcare of gasoline. ww

Troubled about the Asset Re... (Below threshold)
Richard Author Profile Page:

Troubled about the Asset Relief Program?

Worried that The reign of men like Thain will take the country down the drain?

Well, Wall Street is now meeting Main Street.

Mr. Nutter, The Mayor of Philadelphia, just asked for $30mn to build a kiddie jail so he can tear down a perfectly good one to clear a building site so he can help jump start PA's unpopular Bridge To Nowhere Project, The bizarre effort underway to tear the heart, the Art out of one of our Nation's most important Cultural Landmarks, The Barnes Foundation, in Merion PA and use it to anchor a tourist attraction and Luxury Tower development in Central Philly - which is, itself, being funded by another $107mn in PA Taxpayer Midnight Pork-Barrel Earmark (that PA taxpayers were never told about and which PA doesn't have & will probably be asking for Tarp to do as well).

How will any of this make us Energy independent and help the National Defense? How does using Tarp to destroy a National Landmark serve America?

This is the state of our economy folks and how it got there - no conscience, no patriotism - just handouts for the projects of Special Interest Greed. Mayor Nutter tried to start demolition of the perfectly good kiddie jail in October 2008 - even though he apparently knew there was no money to build another. What is this Country coming to? STOP THE TARP FOR PHILLY'S NEW YOUTH CENTER! STOP THE BARNES MOVE! KEEP THE BARNES IN MERION! Dr. Barnes stood for social justice for the common man and racial equality in the 1920s and 30s well before Woody Guthrie or integration. His foundation is now being controlled by unfaithful trustees who want to deviate from and dishonor his legacy to do a strongarm grab of his Art Collection to make a tourist attraction of questionable merit in Philly. Honor his legacy and save the Barnes Foundation. see barnesfriends.org artjail.org

I have a hard time getting ... (Below threshold)

I have a hard time getting upset about this stuff.

After all, the Govt has sunk Billions into just about every bank.. and every bank still needs BILLIONS more.. because the dirty truth is they are all BANKRUPT.

Instead of getting upset at some egomaniac banker who wants to remodel the bridge of the Titantic after it the iceburg, maybe you should continue to focus your attention on the Govt that is supplying Billions of Dollars of money to keep buying coal for the Titanic's engines.

What is the result you want for complaining about this? DO you want the govt to regulate in such detail what companies can and cannot spend money on? And you want the Democrats to write up such a thing?

TARP is the fundamental travesty.

So no mention about how the... (Below threshold)
Dave:

So no mention about how the guy is going to pay back the money out of his own pocket? A whole day passes and no mention?

http://www.marketwatch.com/news/story/Thain-says-he-pay-back/story.aspx?guid={AF995FA4-60B0-4A38-A053-FF039CD0FF92}

And its not the least he can do. He doesnt have to do this nor should he have to. I know I always like to walk into the CEOs office of a multi-national and billion dollar company to sit on milk crates and have his coffee table be an old wire spool the power company threw out.

This was our last chance to... (Below threshold)
Dave:

This was our last chance to rid ourselves of the RESERVE BANKING system. Government missed the chance (or chose not to take it) and we are now locked into yet another cycle. It is inherently corrupt and has inflation as a built-in outcome. Don't be surprised as the world falls apart if we all said nothing. Get out now, phone your congressman, petition government, cause trouble. Civil disobedience and protest are the only tools we have left. Use them now before government takes those away too.




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