|Treasury Secretary's Secret Talking Points Reveal That Banks Were Forced to Surrender Ownership Stakes to Government
CNSNews | June 03, 2009
By Monica Gabriel
(CNSNews.com) - Last October, then-Treasury Secretary Henry Paulson
ordered nine banks that the Treasury Department described as "healthy"
financial institutions to surrender ownership interests to the government
or else face regulatory action that would force them to surrender ownership
interests to the government, according to an
internal Treasury Department document.
Paulson's extraordinary threat culminated in one of the most sweeping
government intrusions into the free-enterprise system in the history of
the United States.
Judicial Watch, a nonpartisan watchdog organization, used the Freedom
of Information Act to obtain a copy of the internal Treasury Department
"talking points" that were prepared for Paulson to use at his Oct. 13,
2008 meeting with the chief executive officers (CEOs) of the nine banks.
At the meeting--to which the bankers were called at short notice--Paulson
made a conspicuous display of potential government regulatory power.
Paulson was flanked by Federal Reserve Chairman Ben Bernanke; current
Treasury Secretary Timothy Geithner (who was then president of the Federal
Reserve Bank of New York); Federal Deposit Insurance Corporation (FDIC)
Chairman Sheila Bair and Comptroller of the Currency John C. Dugan.
While none of these regulators have responded to inquiries by CNSNews.com,
the talking points mention each by first name.
The Fed, the FDIC and the Office of the Comptroller of the Currency
all regulate various elements of the U.S. banking industry.
"Ben, Sheila, John, Tim and I have asked you here this afternoon because
we are of the view that the United States needs to take strong and decisive
action to arrest the stress in the financial system," Paulson's talking
points directed him to tell the assembled bankers.
The talking points indicate that Paulson then told the nine bank CEOs
that the government was going to use $250 billion of the $700 billion approved
by Congress to shore up the financial industry through the "Troubled Asset
Relief Program" (TARP) to buy stock in banks all across the country and
that the nine banks these CEOs represented had no choice but to allow the
government to buy their stock--or else.
Paulson assured the CEOs that the government would inform the public
that the banks were "healthy institutions, participating in order to support
the U.S. economy."
In other words, according to the treasury secretary's confidential talking
points, the nine banks were not failing financial institutions that had
come to the federal government in desperate need of a bailout from the
taxpayers to stay in business.
Instead, they were healthy institutions that were being compelled to
surrender ownership stakes to the government in order to help the government
carry out a government policy.
"(T)hrough our new TARP authority, Treasury will purchase up to $250
billion in preferred stock of banks and thrifts prior to year-end," said
the talking points.
"To encourage wide participation, the program is designed to provide
an attractive source of capital, on identical terms, to all qualifying
financial institutions," Paulson's document said.
The document added, "We plan to announce the program tomorrow--and--that
your nine firms will be the initial participants. We will state clearly
that you are healthy institutions, participating in order to support the
"This is a combined program (bank liability guarantee and capital purchase).
Your firms need to agree to both," said Paulson's talking points.
Not 'Tenable' to 'Opt Out'
Did the banks have a choice? Not according to Paulson's talking points.
"We don't believe it is tenable to opt out because doing so would leave
you vulnerable and exposed," Paulson told the bankers, according to his
talking points. "If a capital infusion is not appealing, you should be
aware that your regulator will require it in any circumstance."
The nine CEOs present at the Oct. 13 meeting reportedly included Vikram
Pandit of Citigroup, Jamie Dimon of JP Morgan, Richard Kovacevich of Wells
Fargo, John Thain of Merrill Lynch, John Mack of Morgan Stanley, Lloyd
Blankfein of Goldman Sachs, Robert Kelly of Bank of New York, Kenneth Lewis
of Bank of America and Ronald Logue of State Street Bank.
The Treasury Department’s announcement of the government's action the
next day described the capital injection as a “voluntary” program for healthy
“I don’t think there was any banker in that room who was going to look
us in the eye and say they had too much capital,” Paulson told The New
York Times. “In a relatively short period of time, people came on board.”
Each of the nine CEOs present at the meeting received an application
where they hand wrote the name of their qualifying financial institution
“in support of the U.S. financial system and the broader U.S. economy.”
The banks then agreed to issue “Preferred Shares” in varying amounts,
which they wrote by hand into the provided space.
State Street took $2 billion, Bank of New York Mellon took $3 billion,
and Bank of America took $15 billion.
Merrill Lynch, Goldman Sachs, and Morgan Stanley all agreed to take
$10 billion and JP Morgan, Wells Fargo, and Citigroup all took the maximum
$25 billion in exchange for issuing preferred shares to the U.S. Treasury.
In return, the qualifying institutions under the "Capital Purchase
Program" agreed to adopt standards dictated by the Treasury Department
regarding executive compensation and corporate governance.
With the government now determining how banks should spend their money,
benefits such as “golden parachute” payments to top executives were terminated,
and banks were required to repay any bonus that was based on projected
earnings that later proved to be inaccurate. A limit of $500,000 has also
been set on the tax deductibility of salaries.
While some of the nine banks are still accepting money through TARP,
Wells Fargo Chairman Richard Kovacevich has been more vocal about the government
restrictions that have come with the TARP package.
“Is this America – when you do what your government asks you to do
and then retroactively you also have additional conditions?” Kovacevich
reportedly said, according to a March 2009 New York Post article.
In the same article, the Post reported on Kovacevich’s revolt against
the required stress tests, saying that he believed that imposing these
tests on healthier banks left then open to stock manipulation.
“We do stress tests all the time on all of our portfolios,” said Kovacevich.
“It is absolutely asinine that somebody would announce we’re going to do
stress tests for banks and we’ll give you the answer in 12 weeks.”
The stress tests were formulated by the U.S. Treasury in an attempt
to ensure the countries’ most influential banks are well capitalized.
According to a USA Today article in May, after the release of
the bank stress test results, Goldman Sachs, JP Morgan and Morgan Stanley
all expressed a wish to repay capital injections.
Government supervision over compensation and benefits will last as
long as the Treasury holds equity under the Capital Purchase Program.
A month after the meeting, during testimony at a hearing held by the
House Financial Services Committee last November, Paulson reiterated: “(T)here
are no banks, when the system is under pressure, unless they are ready
to fail, that are going to raise their hand and say, ‘Please, I need capital,
give me some capital.’”
Paulson did not return telephone calls and emails from CNSNews.com
to comment on the issue. The nine banks that participated in the Oct. 13
meeting were also mum.
Morgan Stanley spokeswoman Jeanmarie McFadden declined to answer questions
about her bank’s attendance.
Julia Bernard, a spokeswoman for Wells Fargo, told CNSNews.com, “Wells
Fargo does not discuss conversations and interactions with their regulators
and government officials.”
However, Wells Fargo’s CEO Richard Kovacevich was candid when speaking
about TARP at a Stanford University event.
“If we were not forced to take the TARP money, we would have been able
to raise private capital at the time,” remarked Kovacevich, according to
the New York Post.
The New York Times reported in article on Oct. 15, 2008 that
other bank executives besides Kovacevich objected to being brow-beaten
by Paulson at the meeting in question.
The Times said that Kenneth D. Lewis, chairman of Bank of America,
had “pushed back,” arguing that his bank had already raised $10 billion
of its own.
In addition, the same article reported that, in an interview prior
to the meeting, John J. Mack, the chairman of Morgan Stanley stated that
his bank did not need aid from the Treasury. According to the Times, Morgan
Stanley had just sealed a $9 billion deal with a prominent Japanese bank.
“Would the Treasury Department demand some control over management
in return for the capital?” the wary CEOs asked, according to the New
York Times article.
The Times source remained anonymous, the newspaper reported, because
the discussions within the meeting were to remain private.
“It was a take it or leave it offer,” The Times quoted its source
as saying. “Everyone knew there was only one answer.”
Paulson’s announcement introducing the Capital Purchase Program under
TARP legislation came as a surprise to Congress, where members generally
believed they had approved legislation to approve the Treasury's purchase
of mortgage-backed securities.
Paulson defended his decision to have the government buy ownership
interests in teh banks before the House Financial Services Committee in
“There is no playbook for responding to turmoil we have never faced,”
Paulson explained before the committee. “We adjusted our strategy to reflect
the facts of a severe market crises, always keeping focused on Congress’s
goal and our goal.”
Paulson's talking points for the meeting and related documents were
obtained under a Freedom of Information Act request filed by Judicial Watch,
which sued the government in order to force their release.
Judicial Watch President Tom Fitton--in announcing release of the document--said
that “despite promises of transparency as part of TARP legislation, the
Treasury Department has been evasive regarding the meeting on October 13,
Fitton said that in January 2009, his group filed a FOIA lawsuit against
Treasury seeking release of the documents. On Feb. 4, the government agency
responded that “a search has been conducted by this office and no records
responsive to your request have been located."
The documents were not released until May 13. CNSNews.com obtained a
copy of the Feb. 4 letter from the Treasury Department through Judicial