White House defends money for US banks

The White House, under fire from Democrats and Republicans alike, has defended giving billions of bail-out dollars to banks that plan to reward shareholders and executives or even buy other banks.

Allowing banks to engage in such normal business activities could help loosen lending and revive the sagging economy, Ed Lazear, chairman of the Council of Economic Advisers, said.

He said the administration would not impose conditions beyond those required when Congress created the bail-out programme and authorised the government to buy stock in financial institutions.

On a day of gloomy economic reports, Mr Lazear predicted “a few tough months” ahead but also said “it is realistic” to think the next president will be presiding over solid growth early in his term after taking office on January 20.

That would be a welcome change after the economy shrank at a 0.3% annual rate in the July-September quarter, the strongest signal yet that the nation has fallen into recession.

Despite the gloomy outlook, the White House offered its clearest rejection to date of a second stimulus package to boost the economy. Mr Lazear said “the appropriate stimulus right now” is only what has already been passed by Congress: the $700bn (€551bn) financial industry rescue package.

Support is growing in Congress, however, for billions in federal spending for such initiatives as public works projects, aid for cash-strapped states and new jobless benefits.

Mr Lazear was put before the cameras in the White House briefing room amid a rising chorus of complaints from politicians about the latitude that banks will have when they receive bail-out money from Washington.

That bail-out was originally sold by the administration as a plan for the government to buy toxic mortgage-based assets from financial institutions, to get them off their books and inspire them to resume normal lending. After passage, though, the administration decided the better course would be to devote $250bn (€197bn) into buying ownership stakes in banks.

With taxpayers’ money flowing into their vaults, banks are going ahead with paying dividends to shareholders, giving bonuses to top executives and acquiring competitors. Politicians are asking why banks with the money to do those things need taxpayer-funded help.

Mr Lazear said the government was keeping close tabs on the way banks used bail-out dollars to “make sure that there are not abuses” and to ensure the law’s requirements were met.

The rescue legislation included some limits on executive compensation, considered weak by many. While it does not allow institutions receiving the money to increase dividends, it does not prevent them from paying those dividends. Critics note that European banks that accept public investments have been required to suspend dividend payments.

Mr Lazear said the bail-out law required banks to pay “quite significant dividends” to the government – 5% quarterly, going up to 9% after three years. Bush officials say this is a powerful incentive for banks to start lending again so they can earn the kind of money necessary to make a profit on top of those payments.

“That’s almost like a gun at their heads, so that they know that they have to start making money to be able to do that,” White House press secretary Dana Perino said.

The White House also painted the dividend issue in populist terms.

“Not only rich people get dividend payments,” Ms Perino said. “A lot of people could suffer if they don’t have dividend payments.” Pension funds and mutual funds, for example, invest in banks.