New York State steps into Bank of America bailout as feds settle

At least somebody in government still thinks it's their job to look out for the beleaguered U.S. taxpayer. We're speaking, of course, of New York Attorney General Andrew Cuomo, who has sued Bank of America for securities fraud over its 2008 merger with Merrill Lynch on the same day that federal authorities who pumped billions of taxpayer dollars into the bank settled their complaints for insignificant amounts of cash. In a lawsuit filed Feb. 5, Cuomo accused the bank and its two top officers of securities fraud in connection with the merger, claiming they misrepresented the financial condition of Merrill Lynch to shareholders as they were voting on whether to approve the deal, according to the New York Times. In the suit, Cuomo said the bank failed to reveal $16 billion in losses to shareholders but told federal officials that the losses necessitated an additional $20 billion from the Troubled Asset Relief Program, set up by the U.S. government to help financial institutions weather the global financial crisis. “They understated the problems, the losses to the shareholders, they overstated their ability to terminate the arrangement to the federal government to secure $20 billion in TARP money, and that is just a fraud,” Cuomo told the Times. “The Bank of America and its officials defrauded the government and taxpayers at a very precarious time.” But the U.S. Securities and Exchange Commission allowed the bank to escape federal charges by paying $150 million in fines, despite Merrill Lynch payments of billions of dollars in bonuses to its executives just before the merger. Bank officials said the fact that the government chose to settle showed that Cuomo's fraud allegations against it and against Chief Executive Officer Kenneth Lewis and Chief Financial Officer Joe Price were not true. “The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations,” Bob Stickler said in an e-mail to the Times. “The SEC had access to the same evidence as the N.Y.A.G. and concluded that there was no basis to enter either a charge of fraud or to charge individuals." Lewis and Price have since left their posts, the Times said. The SEC settlement still must be approved by a federal judge who already turned down a proposed $33 million settlement of the case. But this time, the bank agreed to have an independent auditor review its disclosures and to give shareholders the right to vote on executive pay, the Times said.

Why are banks so desperate to get out of TARP?

Talk about ingratitude! News that two of the country's largest banks have agreed to raise billions of dollars from investors to pay back bailout loans from U.S. taxpayers seems preposterous on its face and even worse after a little thought. Citigroup has reached a deal with federal regulators to repay $20 billion, after the government sells its $25 billion stake in company stock, according to Cable News Network (CNN), and the government has agreed to a $25 billion repayment in full from Wells Fargo Bank, according to the Reuters international news service. The two banks are the largest still in the Troubled Asset Relief Program, set up by the United States to prop up the ailing U.S. financial system in 2008, and are trying to get out of the stricter regulation required of institutions that accepted taxpayer financing. The announcement coincides with meetings between U.S. President Barack Obama and bank CEOs in Washington, D.C., to discuss the future of the financial system. While it's certainly a good sign that banks are able to repay their government loans, releasing them from regulatory obligations seems counterproductive. Citigroup, for example, is expected to report a $1.1 billion loss in the fourth quarter of 2009. Maybe regulators can explain how a bank losing money can afford to pay a $20 billion bill? Wells Fargo was in much better shape than Citigroup when the financial system tanked, needed less borrowing and agreed to fewer restrictions, Reuters said. Wells Fargo plans to raise most of the money by selling additional stock, Reuters said. The Citigroup deal is more complicated, and involves the issuance of billions of shares of Citigroup common stock, now selling around $3 a share, and the sale of new securities. That's great if the instruments sell, and if the bank can afford the additional burdens. But Citigroup is losing money. What it looks like is that these institutions are desperate to get out of government-imposed restrictions on how much they can pay their top executives. Isn't that the same kind of bad management and poor accounting that got these companies into trouble in the first place?

Big surprise -- Citigroup and banking regulators disagree on bailout repayment

From Washington comes word that it could be months before U.S. government banking regulators allow banking giant Citigroup to repay billions of dollars it took from taxpayers in three separate capital bailouts last year and in 2009. Citigroup wants to escape from the tight regulatory regime imposed on it after the bank accepted taxpayer money to stay afloat during the height of the economic downturn, but the multifaceted rescue has made repayment an unusually complex process, according to the Reuters international news service. While rival Bank of America's proposed path out of the Troubled Asset Relief Program involves the raising of some $20 billion to repay the government, Citigroup must figure out how to let the government sell 7.7 billion shares of stock it owns -- nearly a third of outstanding shares -- and how much to pay for the U.S. guarantee of $182 billion worth of bank securities. The government never purchased Bank of America stock and never signed an agreement to protect its assets, Reuters said. In light of Federal Deposit Insurance Corp. Chairman Sheila Bair's statement that the government would have to "be very careful" in allowing banks to buy their way out of TARP, and the array of agencies that would have to sign off on Citigroup's exit, the timeframe is most likely months, rather than weeks, Reuters said. Knowing all this, and understanding how much taxpayers have paid and will paying in the future to keep Citigroup around -- since the bailout funds were borrowed money -- it doesn't make sense for the financial institution to argue with regulators who are the only reason the bank is still around.

Lessons learned? Federal Reserve asks for some of its billions back

Here we go again! News that the U.S. Federal Reserve had asked some banks to repay money they got from last year's $700 billion financial system bailout would seem to be good news, since it means those institutions have recovered. But what many U.S. banks who are trying to repay the Troubled Asset Relief Program really want is to escape the tighter oversight imposed by the federal government as a condition of receiving taxpayer funds, the Reuters international news service reported Tuesday. Citing an unnamed source, Reuters said nine of the 10 banks that were among the 19 stress-tested in May and found to need additional capital are now clamoring to leave the program, which provided billions in capital to more than 500 banks and a few struggling industrial companies. But the nine, including Bank of America Corp., Citigroup, Wells Fargo & Co. and Fifth Third Bancorp, began to prosper again in no small part due to the restrictions imposed by the program. Requirements for participation included perfectly sensible limits on executive compensation, dividend payouts and share buybacks. If those banks are released from the program, they also get released from those requirements. What is to prevent them from doing the same things that got them into so much trouble? Sure, there are regulators, but there were regulators before and the financial collapse still happened. The 10th bank, GMAC Corp., is not expected to be able to raise capital anytime soon. The 10 banks that passed the June test repaid the government in June and have already left the program, including JPMorgan Chase & Co., and Goldman Sachs Group Inc. Citigroup's situation is different from the other stress-tested banks because the federal government invested billions of dollars in shares of the bank's common stock and trust-preferred securities in an effort to keep it solvent.

U.S. regulators let CIT Group go under despite $2 billion investment

Why would the government allow a 100-year-old lender that provided funds to hundreds of thousands of small and medium-sized businesses fail while bailing out large sectors of the financial system? That was the obvious question Sunday when CIT Group Inc. of New York filed for bankruptcy under the weight of nearly $65 billion in debt, according to the Reuters international news service. The bankruptcy is the fifth largest in U.S. corporate history, and sidelines, at least temporarily, a major source of financing for a sector of the economy responsible for nearly half of the nation's jobs. CIT said in a statement that it hoped to eliminate $10 billion of debt in bankruptcy and emerge quickly. The company has $71 billion in assets. “The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” CIT's chairman and CEO, Jeffrey Peek, said in a prepared statement. “This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence. We also acknowledge our constructive working relationship with our regulators and look forward to their continued guidance as we move through this process.” Analysts said the 101-year-old company was a victim of the global credit crisis, Reuters said, as its loan porfolio suffered heavy losses and it ultimately was unable to raise enough money by selling bonds. In a letter to customers on Nov. 1, CIT said none of its subsidiary businesses, such as CIT Bank of Utah, would be affected by the bankruptcy filing. But the U.S. taxpayer is affected, since CIT received $2.33 billion from the Troubled Asset Relief Program in December. The government will only be repaid now if any money is left after banks and bond investors are paid because it is considered a preferred stockholder. Holders of CIT's common stock will not be repaid, Reuters said.