Rescue Of The Economy - Is Your Bank Being Saved?

Will Your Bank Survive?

Bush Administration’s The Emergency Economic Stabilization Act of 2008 that Congress passed a month ago, has conferred vast authority with almost no restrictions on the Secretary of Treasury and a small select group implementers. From a 3-page proposal, it ballooned to a more than 400-page final form, after Congress injected safeguard provisions. But still, it is so sweeping and autocratic that even the courts can not question the acts of this group during its implementation period. This law allows the Treasury Secretary, without any hindrance, to purchase as much as $700 billion in troubled assets in a bid to kick-start lending, and ushers one of the most far-reaching interventions in the economy since the Great Depression. As its proponents have said- this is an effort to save our 12 trillion dollar economy.

The Treasury building is the ground zero for the ambitious and increasingly embattled program. It houses a committee of five little-known government officials, aided by a bare-bone staff of 40. This small group has the sole authority of picking winners and losers among thousands of banks, savings and loans, insurers and other institutions. It is in charge of distributing several hundreds billion dollars in a very short time. In just less than a month, it wired the first $125 billions to the nine largest banks in the United States.

“There is a real urgency to deploy this money quickly and effectively,” said James H. Lambright, who took a leave three weeks ago as the president of the Export-Import Bank of the United States, to become the interim chief investment officer of the rescue effort. A trim, self-confident former investment banker, Mr. Lambright, 38, is the chairman of a committee of relatively young officials — all are in their 30s or 40s — with backgrounds in law, banking or regulation. None of them could have expected this kind of responsibility. Mr. Lambright himself was a last-minute substitute after a previous appointee was kept in his old job. With more than $80 billion left to distribute, and hundreds of banks in line for it- the days, nights and weekends of the overworked, sleep-deprived Treasury staff members are a blur of meetings and conference calls, and constant pressure.

Treasury officials have refused to disclose their criteria for deciding which banks are healthy enough to get money — and which are too sick. Among the problems, critics say, is that despite earlier promises of transparency, the process is shrouded in secrecy, and its precise goals opaque. Industry sources said that banks, after filing a two-page application form, are assigned a ranking from 1 to 5 — with 1 or 2 essentially guaranteeing that they are eligible, and 5 indicating they are not qualified for bailout. The five officials make what can be a life-or-death decision, with a thumbs-down generally interpreted to mean that a bank was not healthy enough to survive on its own. The work is complex, far-reaching and telescoped into an impossibly tight timetable. And it is being done against the backdrop of a change of power in Washington, which will throw many of these people out of their jobs on Inauguration Day.

Already, critics from Capitol Hill to Wall Street are lashing out at the program, saying the banks are misusing the capital infusions by hoarding the money rather than lending it. Treasury Secretary Henry M. Paulson Jr. urged lending it in order to unclog the credit markets.

Critics also say, that the government contradicts the free market philosophy, by encouraging acquisitions of sick banks by healthy ones. The rescue program prodded one such merger, when Treasury agreed to inject $7.7 billion into PNC Financial Services and rejected an application for cash from the National City Corporation, an ailing bank in Cleveland. The two announced a merger the same day when fund for PNC was approved.

“Where we are headed is credit allocation by the federal government,” said William Poole, a former president of the Federal Reserve Bank of St. Louis. “It really reminds me of the morass we got into with wage-price controls in the 1970s.”

Written by Katherine M

This article is based on an article published in The New Yor Times