Banks draw heavy fire from Capitol Hill

Legislators lash out, saying financial firms haven't met their end of the bailout bargain

Frustrated federal lawmakers lashed out at financial companies that have received taxpayer funds under the federal bailout for not doing more to help the economy and threatened to impose greater restrictions on government aid.

At a hearing in Washington yesterday, senators from both parties said financial companies should be using government funds to increase lending - not to pay dividends, finance acquisitions of other companies, or just keep in reserve. In one pointed threat, several senators suggested they would support stronger curbs on executive pay at these firms if lending conditions do not improve.

Addressing executives from four of the nation's largest financial firms, Christopher Dodd, the Connecticut Democrat who heads the Senate Banking, Housing and Urban Affairs Committee, said, "We want to see more progress from your friends in the financial sector, more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation. And if that progress is not forth coming, then we are prepared to legislate now, if possible, but next year, if necessary."

In response, Anne Finucane, Bank of America Corp.'s highest ranking executive in Massachusetts, told the committee her company has been actively lending money since receiving $15 billion in government funds, with loan commitments up 6 percent this year. Moreover, the bank is buying mortgage-backed securities, boosting the housing market and achieving a key objective of the government bailout.

But she cautioned there is a limit to what banks can do in a slowing economy.

"The American public really isn't borrowing to the degree that it was before, because of the credit crunch, because of concerns about unemployment," Finucane said.

The senators' complaints come at a turning point in the government's efforts to combat a punishing troika of a slowing economy, a credit shortage, and a foreclosure crisis. On Wednesday, Treasury Secretary Henry Paulson detailed a strategic shift in how the $700 billion financial sector bailout passed by Congress last month would be used. Instead of buying troubled mortgages and mortgage-related securities, Paulson may inject taxpayer funds into credit card companies, auto finance firms, and other consumer lenders.

Also in a speech in New York yesterday President Bush called the economic crisis "a decisive moment for the global economy," but said it "was not a failure of the free market system. And the answer is not to try to reinvent that system." Rather, he called for steps such as improved market transparency and better accounting rules.

One upbeat note yesterday came from Wall Street, where stock markets staged a massive rally, sending the Dow Jones industrial average up 552.59 points, or 6.67 percent, to 8,835.25, the third-biggest point gain in history. Analysts said investors were drawn by cheap stock prices.

In Washington, meanwhile, senators at yesterday's hearing expressed frustration at both the financial sector and the Bush administration for not producing clear evidence that the numerous government interventions have improved the economy and helped solve the foreclosure crisis facing thousands of borrowers.

Paulson, meanwhile, acknowledged some shortcomings during an interview with PBS's The News Hour.

"We're not seeing the kind of lending we'd like to see, and that is clear. Now, I will say to you, it's going to take a while. The banks just got these funds, and even if this is working better than expected, you're still going to see lending restricted more than we would like given the severity of what's going on in the economy."

But lawmakers complained that in his recent shift, Paulson deemphasized housing problems in favor of broader consumer lending issues.

So far, large financial institutions have received up to $250 billion from the Treasury in the form of new capital, with the government receiving preferred shares in those companies. Now, senators want to know what those firms are doing with the money.

The sore points for some lawmakers are that some banks have maintained dividend payments after receiving the federal aid, have used the funds to purchase other banks, or are just sitting on the money.

Executive pay remained a hot issue, and many senators have hinted at legislative retaliation if financial firms hand out big bonuses and other lavish compensation at the end of the year.

The bailout legislation includes some limitations on executive compensation, such as prohibitions about golden parachutes and limits on other pay incentives.

"I have a problem with funds being used for executive compensation and dividends. Both of these should be rewards for a job well done," said Tim Johnson, a South Dakota Democrat.

But the banking executives at yesterday's hearing all said government funds would not be used for bonuses. Several added that, if anything, such awards will be considerably less this year because of weaker earnings. Finucane, for example, said Bank of America cut bonus pools for senior managers by 50 percent.

But this may have a limited impact on executive pay, since much of that is in the form of stock awards. Of the $24.8 million that Finucane's boss, Bank of America chief executive Kenneth Lewis, was paid last year, only $4.25 million was from a performance bonus.

Banking industry analyst Nancy Bush said she expects most other large banks will pay lower bonuses as well, because of plunging earnings - and also because of the political environment.

But, she added, "They're not going to wipe out bonuses. It doesn't work that way in the real world."

Also yesterday, Bloomberg News reported that New York Attorney General Andrew Cuomo subpoenaed Bank of America for more information about its executive pay practices. And previously, Henry Waxman, the California Democrat who chairs the House Committee on Oversight and Government Reform, has also requested compensation information from the first nine banks that received capital from the government.

Another New England lender due government capital is Webster Financial Corp. of Waterbury, Conn., parent of Webster Bank, which will receive $400 million. Its chief executive, James C. Smith, did not receive a bonus last year at his own request, according to the company's proxy filing.

Webster has said it would use the capital to support "an equal amount of credit for the communities it serves" and it also might acquire another company.

Webster senior vice president Art House said there are times when regulators would actually want a stronger bank, like his own, to buy a weaker institution.

Ross Kerber can be reached at kerber@globe.com.