The Department of the Treasury under former Secretary Henry Paulson took a “passive-investor” approach to buying stakes in financial institutions, forgoing voting rights and board seats, by contrast to the more activist approach taken by the United Kingdom, according to a report.
The Bush administration thus relinquished the opportunity to exercise more control over banks such as
Bank of America Corp.,
Citigroup Inc. and
Wells Fargo & Co., into which it injected capital, according to the report by the Congressional Oversight Panel on the $700 billion bailout.
The administration also didn’t use its new ownership of bank shares to impose lending requirements on the institutions or prohibit dividends on common stock of most banks, again unlike its counterparts in the United Kingdom, according to a legal analysis contained in an appendix of the report.
“Treasury gave up an ability to influence strategic and financial operations at these banks,” said Patrick Finnegan, director of the financial- reporting policy group at the CFA Institute of Charlottesville,Va. “It might have been able to curb dividends, veto acquisitions, encourage lending and impose tighter controls over the way capital is allocated."
The legal analysis, written by lawyer Timothy Massad, who is on leave from Cravath Swaine & Moore LLP in New York, took no position on the wisdom of the U.S. approach. It said that the Treasury Department might have thought it should exercise any power as a regulator rather than an investor.
The Treasury Department imposed no lending requirements on recipient banks as either regulator or lender.
“The government gave up the ability to control day-to-day decisions and routine management, but as the banks’ regulator it still has substantial powers,” said Darrell W. Pierce, a lawyer with Dykema Gossett LLC in Chicago. “By contract or law, the government can tell the banks, if you want the money, you have to agree to certain conditions.”
The Treasury Department under new Secretary Timothy Geithner is preparing to announce next week a revamping of the Troubled Asset Relief Program, whose ineffectiveness and lack of transparency was criticized by lawmakers of both parties.
Today’s report said that the Treasury Department’s purchase of stocks and warrants from banks makes no provision for exercise of voting rights with respect to any common shares acquired on exercise of the warrants.
“This is a very unusual term,” the report said.
Normally, when one has a warrant to acquire common shares, there are no restrictions on voting the common shares if acquired.
The restriction doesn’t apply to anyone to whom the Treasury Department transfers the warrants upon resale.
“The issue of what type of voting rights, or influence over management, Treasury should have in an investment made with taxpayer funds raises public-policy concerns,” Mr. Massad’s analysis said.
By contract, the United Kingdom obtained the right to designate two or three directors at banks in which the government invested, the report said. In practice, it has the power to designate the entire board at The Royal Bank of Scotland and Lloyds TSB.
The Congressional Oversight Panel is headed by Harvard Law School of Cambridge, Mass.,professor Elizabeth Warren. The body of its report today focused on the finding that Treasury overpaid banks by $78 billion last year, or 44% more than the stocks and warrants were worth at market value of $176 billion
This week, President Obama announced tighter restrictions on executive compensation paid by recipients. The Senate released the second half of the $700 billion last month for use by the new administration.
More than 300 banks receiving aid under the program are allowed to pay the same dividends they did before. A few companies —
Bank of America,
Citigroup and the automakers — have tougher
dividend restrictions.
Mr. Paulson is traveling today and unavailable for comment, an aide said.
