Bank CEOs defend their lending Capitol Hill

Lined up in dark suits, the leaders of eight of the nation’s biggest banks today are testifying in Capitol Hill about their use of taxpayer money to stabilize their companies and jumpstart the U.S. economy.

Bank of America Chairman and Chief Executive Officer Ken Lewis testifies on Capitol Hill in Washington, Wednesday, Feb. 11, 2009, before the House Financial Services Committee.

 

In his opening remarks, Bank of America Corp. chief executive Ken Lewis noted his bank, which has received $45 billion in government capital, extended more than $115 billion in new loans to consumers and businesses in the fourth quarter. It also has renewed about $70 billion in credit lines and made some bulk purchases of loans, he said.

 

“As we manage our business going forward, we are doing our best to balance the interests of customers, shareholders, and taxpayers,” Lewis said. “But the fact is, it is in all of our interests that banks lend as much as we responsibly can – maximizing credit while minimizing future losses. That’s how consumers and businesses can prosper.”

 

Goldman Sachs & Co. Chief Executive Officer and Chairman Lloyd C. Blankfein testifies on Capitol Hill in Washington, Wednesday, Feb. 11, 2009, before the House Financial Services Committee.

Other CEOs testifying are Wells Fargo & Co. CEO John Stumpf, who bought Charlotte’s Wachovia last year; Bank of New York Mellon Corp. Bob Kelly, the former Wachovia chief financial officer; and Morgan Stanley & Co. chief John Mack, a Mooresville native. Stumpf is sitting next to Vikram Pandit, the CEO of Citigroup Inc., which is suing Wells Fargo for breaking up its agreement to buy Wachovia last fall.

 

Adding to the local flavor of the hearing, Charlotte Mayor Pat McCrory was in Washington today and stopped by the hearing.

 

House Financial Services Committee Chairman Barney Frank, D-Mass., presides over the committee's hearing on Capitol Hill in Washignton, Wednesday, Feb. 11, 2009.

Committee Chairman Barney Frank, D-Mass., began the hearing by reminding the CEOs of the public’s perception of banks that have received government aid and their responsibility to make loans to consumers and businesses amid a recession.

 

“There is a substantial public anger and alleviating that public anger, not with mumbo jumbo but with reality, is essential if we’re going to have the support of the country in taking the right steps,” said Frank.

 

After automaker CEOs were ripped for taking corporate jets to a similar hearing, CEOs were careful to find other means of transportation. Lewis took the train from New York, the Observer learned. Stumpf flew commercial.

 

From right, Citigroup Chief Executive Officer Vikram Pandit, Morgan Stanley Chairman and Chief Executive Officer John Mack, State Street Corporation Chairman and Chief Executive Officer Ronald E. Logue, testify on Capitol Hill in Washington, Wednesday, Feb. 11,2009, before the House Financial Services Committee.

In his remarks, Pandit said he has recommended to his board that he receive a salary of $1 per year and no bonus until the bank returns to profitability. He also apologized for not calling off plans to buy a new corporate jet quickly enough.

 

“I get the new reality and I will make sure Citi gets it as well,” Pandit said.

 

Mack acknowledged the anger of taxpayers over huge Wall Street bonuses, although he noted he received no payout for 2008.

UPDATE of a graphic originally posted Feb. 6, 2009; graphic shows money spent for bank bailout through time; 2 c x 5 in; 96.3 mm x 127 mm

 

“I couldn’t agree more that compensation should be closely tied to performance,” he said.

 

In his remarks, Stumpf noted the bank made $72 billion in loans in the fourth quarter and reopened credit lines to some Wachovia customers who had previously been refused credit.

 

“We do business and lend money the old-fashioned way – responsibly and prudently,” he said. “As a result, we earned a profit last year of almost three billion dollars. We have not used any of the government investment for dividends, bonuses, or compensation of any kind – nor will we.”

 

Frank said he expects to take a break at 12:30 p.m. and then resume, with the hearing lasting until about 5 p.m. “The day is shot,” he said from the CEOs’ perspective.

 

Question-and-answer session

 

 

 

Frank: Beginning the questioning, Frank asked the CEOs and other banks to delay any foreclosures until Treasury Secretary Timothy Geithner announces a new program designed to keep struggling borrower’s in their homes.

 

In his first inquiry, he asked why the CEOs need bonuses to do a good job. “Why do you need to be bribed to have your interests aligned with the company?” he asked.

 

“We love what we do,” Mack responded. “If you gave us no bonus, we would still be here.”

 

Rep. Spencer Bachus, R-Ala., the committee’s ranking member: He said he was surprised that lending was down only 1 percent and that the government’s investment will end up being a good one.

 

Rep. Maxine Waters, D-Calif.: She began her questioning by calling the leaders the “captains of the universe.” Lewis responded that he feels only like a “corporal of the universe.”

 

Waters asked Lewis if his bank has increased credit card rates for customers, and he said this has occurred with 9 percent of customers. She also asked him if he has personnel based offshore who work with struggling borrowers.

 

“If we have a loss-mitigation department offshore, I don’t know about that,” he said. “We have 5,000 people working on this issue.”

 

Rep. Michael Castle, R-Del.: He asked Lewis and JPMorgan Chase & Co. CEO Jamie Dimon about their expected credit card losses and how prepared they were to deal with the defaults.

 

“This will be the year of consumer credit losses,” Lewis said, noting the rule of thumb is that the percentage of losses is equal to the unemployment rate.

 

“Clearly, this will be an awful year for the credit card industry and all credit card portfolios,” he said. “We are doing everything we know to do in loss-mitigation efforts.”

 

Dimon said his bank expects losses of up to 8 percent and is adequately reserved. The credit card business is cyclical and losses are a price of doing business, he said.

 

Rep. Edward Royce, R-Calif.: After Royce’s question about the origins of the mortgage crisis, Stumpf said the bank was seeing problems in the industry back to 2003. For example, he noted his bank, unlike some competitors, did not make option adjustable rate mortgages, which can cause loan balances to increase rather than shrink, a process known as “negative amortization.”

 

Dimon added: “Option ARMs sunk Countrywide, probably Wachovia and WaMu (Washington Mutual).” Wachovia sold to Wells Fargo after losses in its option ARM portfolio (acquired from Golden West Financial) erupted.

 

Rep. Mel Watt, D-N.C.: Watt, who represents Charlotte, asked Bank of America and Wells Fargo CEOs whether they need extra regulation because they are “too big to fail.”

 

Lewis said that size is less important than a firm’s role in the capital markets. He also said that banks like his with a diversity of products have fared better than so-called monoline firms with just one product. With further prodding from Watt, Lewis said larger banks need “an overlay of supervision beyond what we have now.”

 

In his answer, Stumpf said culture and leadership are more important than the size of an institution.

 

Rep. Dennis Moore, D-Kan.: Going down the line, the CEOs gave their salaries and bonuses for 2008. Lewis said he was paid $1.5 million and no bonus. Stump said his pay was $850,000 and he didn’t qualify for a bonus.

 

Rep. Leonard Lance, R-N.J.: Lance said he and others are concerned about bonuses Merrill Lynch executives and employers were paid before the firm’s sale to Bank of America closed Jan. 1. “We’ve owned Merrill now for 42 days,” Lewis said. “Things have changed. We’re in charge now.”

 

Michael Capuano, D-Mass.: Capuano spent his time lambasting the CEOs for their role in the nation’s financial troubles. “You created the mess we’re in,” he said. “Now you say, ‘Sorry, trust us and by the way we really didn’t want the money.”

 

Patrick McHenry, R-N.C.: McHenry said one of the big debates in Congress is whether funds invested in the banks were for lending or for stabilizing their banks. Going down the line, the CEOs said “safety and soundness was their top priority. “

By Rick Rothacker
rrothacker@charlotteobserver.com

http://www.charlotteobserver.com

 

Staff Writers Lisa Zagaroli and Christina Rexrode contributed.