The True Cost of the Bank Bailout

THE TRUE COST OF THE BANK BAILOUT

The Troubled Asset Relief Program is nothing new.  TARP spent $700 billion in taxpayers’ money to bail out banks after the financial crisis. That money was scrutinized by Congress and the media.

What isn't as widely know is that the $700 billion is just a small part of a much larger pool of money that has gone into propping up our nation’s financial system. Most of that taxpayer money hasn’t had much public scrutiny at all.

According to a team at Bloomberg News, at one point last year the U.S. had lent, spent or guaranteed as much as $12.8 trillion to rescue the economy. The Bloomberg reporters have been following that money. Alison Stewart spoke with one, Bob Ivry, to talk about the true cost to the taxpayer of the Wall Street bailout.

THE LEGALITY OF THE BAILOUT

The historic financial bailouts of 2008 and 2009 may have been necessary, but experts are now rethinking whether they were legal, according to a commentary in today's Wall Street Journal. None of those extraordinary turning points—from the frantic American International Group rescue to the government's takeover of General Motors—has since faced constitutional review in the way, say, Guantanamo Bay detention cases have. Two years on, however, constitutional scholars are re-examining those fretful days, taking on the questions that went ignored in the frenzy to avert financial calamity. Their consensus: the Troubled Asset Relief Program, which sprayed some $475 billion into banks and finance companies, could stand up to the ghosts of Jefferson, Madison and Hamilton. The bailouts of GM and Chrysler, however, largely failed the constitutional test, said a number of scholars from across the political spectrum. They simply "were not plausible" under the law, according to one constitutional scholar, University of Virginia's Saikrishna Prakash.


The historic financial bailouts of 2008 and 2009 may have been necessary. But were they legal?

Deputy Money & Investing editor Dennis Berman discusses with WSJ's Evan Newmark the finding of a constitutional scholars who concluded that TARP was indeed legal, whether you agree or not that it was the right response.

We'll never really know; none of those extraordinary turning points—from the franticAmerican International Group rescue to the government's takeover of General Motors—has since faced constitutional review in the way, say, Guantanamo Bay terrorist cases have.

Two years on, however, constitutional scholars are re-examining those fretful days, taking on the questions that went unasked or ignored in the frenzy to avert financial calamity.

Their consensus: the Troubled Asset Relief Program, which sprayed some $475 billion into banks and finance companies, could stand up to the ghosts of Jefferson, Madison and Hamilton. The bailouts of GM and Chrysler, however, largely failed the constitutional test, said a number of scholars from across the political spectrum. They simply "were not plausible" under the law, according to one conservative scholar, University of Virginia's Saikrishna Prakash.

This is no academic matter. The limits of government intervention were supposed to be set by the passage of the Dodd-Frank Act, which provides a step-by-step guide for euthanizing sick financial institutions. Yet the next crisis will likely be something the 2010 Congress couldn't foresee. Just how tight is it willing to tie a president's hands? Thomas Jefferson himself noted that "to lose our country by a scrupulous adherence to the written law would be to lose the law itself..."

Associated Press

Speaking at a Senate hearing on the auto industry in December 2008, from left, General Motors' Richard Wagoner, auto workers' leader Ron Gettelfinger, Ford's Alan Mulally and Chrysler's Robert Nardelli.

In that spirit, the often ham-fisted responses of Presidents Bush and Obama largely fell within a president's emergency powers, said constitutional experts who convened at a Stanford Law School conference about the constitution and bailouts, the first of its kind. Intriguingly, former Treasury Secretary Hank Paulson's first draft of the $700 billion TARP bailout fund may have violated the constitution. Written in just a few pages, it appeared to give away too much spending power from Congress to the White House, said Mariano-Florentino Cuéllar, a Stanford Law professor. Congress voted down Mr. Paulson's original version and eventually crafted the slim TARP proposal into a 157-page law instead.

The TARP law still gave the Treasury sweeping powers to dole out bailout funds. Those powers would be difficult to grant in today's political climate, especially when the likes of Sarah Palin deride it for "morphing into crony capitalism at its worst."

Rash presidential responses are "somewhat inevitable, and part of the structure of the executive branch to respond more quickly" than Congress, said Gillian Metzger, a Columbia University law professor at the Stanford conference.

Even Prof. Metzger seemed skeptical of the U.S. involvement in another controversial constitutional issue: the GM and Chrysler rescues. Begun with short-term loans by President Bush, they were formed into full-fledged TARP bailouts in early 2009, eventually totaling nearly $80 billion in assistance for the car companies and related finance arms.

That assistance was originally designated by Congress to go to "financial institutions" as "established and regulated" under U.S. law. The law makes express mention of banks, credit unions, insurers and broker-dealers.

It doesn't, however, come close to naming industrial companies as beneficiaries. And that appeared to make it a different matter for Prof. Metzger, who wondered aloud about the legality of instances when "the executive branch engages in aggressive interpretation of statutory authority in ways that Congress prohibited."

Prof. Prakash said the auto bailouts were illegal, arguing that the Bush and Obama administrations said TARP didn't cover autos "until they decided they did." It is one thing to broadly interpret an emergency, another to violate specific language. "There is no suggestion that you can bail out any institution in the nation just because you've got the word 'institution' in the language," Prof. Prakash said. Some Chrysler creditors tried to bring a case to the Supreme Court, arguing that the car maker's government-controlled bankruptcy subverted the usual bankruptcy rules. The court declined to hear the case.

That was the best chance we had for judging tough legal issues around the government's financial-crisis response. Until an issue gets to the courts, we may find that what is legal may simply be what government can get away with.

PAYMENT PROBLEMS TO DROP SHARPLY IN 2011

PAYMENT PROBLEMS TO DROP SHARPLY IN 2011

If the economy slowly improves next year, consumers are expected to get better control on their mortgage and credit card payments. Credit reporting agency TransUnion predicts that delinquencies, or late payments, on the two biggest major forms of borrowing will drop sharply again in 2011, after substantial declines seen in the second half of this year. More homeowners in every state and the District of Columbia will get current on mortgage payments, according to a forecast from the Chicago-based company. TransUnion said that by the end of 2011, it expects that just 4.98 percent of mortgages will be 60 days or more behind. The mortgage delinquency rate peaked at 7.89 percent in the fourth quarter of 2009. The prediction is still well above the 1.5 to 2 percent delinquency rate considered "normal" for mortgages.

"We're actually still significantly higher than where we'd like to be," said Steve Chaouki, group vice president in TransUnion's financial services group. Nevertheless, the figure forecasts substantial improvement, reflecting expected stabilization in the housing market and a slowly improving unemployment picture.

Another reason for the expected gains is that many of the properties where homeowners have problems making their payments have already worked through the system.

Late payments on credit cards didn't skyrocket the way mortgages did during the recession, in part because card users were careful to keep payments current so their credit lines didn't get shut down, said Ezra Becker, vice president of research and consulting for TransUnion financial services. But problem payments did increase and banks had to write off billions in balances they were unable to collect.

Delinquency rates have already dropped dramatically since their recent peak in the first quarter of 2009, when about 1.21 percent of all cards were 90 days or more past due. Already at their lowest rate in more than five years, TransUnion expects card delinquency to drop to 0.75 percent by the end of 2010.

As consumers continue to be careful about how they use credit cards in 2011, TransUnion expects that rate to drop even further, ending the year around 0.67 percent of all balances.

Along with more careful spending, stricter lending standards are playing a role in keeping card payments on time. More than 8 million consumers have dropped off the credit card rolls in the past year, many because their cards were cut off by banks. With tighter lending standards and stricter regulations in place, banks are less likely to open new accounts these days for people who have troubled credit histories, Becker noted.

"Lenders have stopped lending to riskier people, and they've avoided delinquency," Becker said.

BofA CEO Says It Has Moved Salespeople to Modify Mortgages

Bank of America Corp. says it has reassigned salespeople to modify mortgages for struggling borrowers.  This may pressure the revenue of BofA, the largest U.S. lender by assets.

“We have recently moved a couple more thousand people from our sales side, our centralized sales group, over to our servicing areas,” Chief Executive Officer Brian T. Moynihan said at an investor conference today in New York. “In addition, we continue to hire externally. Thereby we have elevated costs in this platform. These costs will stay elevated for the next several quarters and may impact our market-share momentum.”

Bank of America modified about 25,000 mortgages in October, a 52 percent increase from the previous month, the Charlotte, North Carolina-based company said Nov. 18. A U.S. unemployment rate near 10 percent is forcing borrowers to miss payments, and regulators pressured lenders to minimize foreclosures.

“If the borrower qualifies for either a private modification or a government modification, then we complete that,” Moynihan said. When that’s not possible, the bank forecloses. “All of this work is requiring more associates, more teammates,” he said.

Bank of America, with 284,000 full-time workers at the end of 2009, employed more than 26,000 “helping customers who are delinquent,”Barbara Desoer, president of the firm’s home-loan and insurance unit, said at a Nov. 16 congressional hearing.

“We’re completing permanent modifications at a rate of no one else in the industry,” Moynihan said.

New Hires

The company will also add employees in its wealth management and corporate investment banking units, while reducing headcount in technology and operations, he said.

Bank of America posted three unprofitable quarters since the beginning of 2009 as new regulations pressured fee income and borrowers fell behind on loans. The company, which cut its quarterly dividend to a penny a share in 2009, will boost the payout “as fast as we can,” Moynihan, 51, said today.

Asked if he could increase the payout next year, Moynihan responded, “I don’t see anything that would stop us.”

The lender slipped 6 cents to $11.58 at 10:44 a.m. in New York Stock Exchange composite trading. The company has dropped about 23 percent this year
.