Regulators bowed to pressure from big banks seeking a quick exit from the financial bailout programme and did not uniformly apply the US government's own conditions for repaying the taxpayer funds, a new watchdog report said today.
The report, by the office of Christy Romero, the acting special inspector general for the $400bn (£256.4bn) taxpayer bailout of the financial industry and car makers, found regulators to varying degrees "bent" to pressure from the banks in late 2009 and relaxed the requirements put in only weeks earlier.
The regulators were also motivated by a desire to cut the government's stake in the banks it had bailed out in September 2008 when the financial crisis struck, the report says.
Meanwhile, the banks wanted to get out quickly from the so-called Troubled Asset Relief Programme, or TARP, because they wanted to avoid its limits on executive compensation and the stigma associated with receiving rescue money, according to the report.
The report focused on the sales of stock to raise capital and bailout repayments by four major banks: Bank of America and Citigroup, which each received $45bn (£28.8bn) from the government; Wells Fargo, which received $25bn (£16bn); and PNC Financial Services Group, which got $7.6bn (£4.8bn).
Because the regulators failed to enforce the policy for repayments set by the Federal Reserve, the new report says "the process to review a TARP bank's exit proposal was ... inconsistent". That policy required banks to issue at least one dollar in new common stock for every two dollars in bailout money they repaid.
But the banks doggedly resisted the regulators' demands to issue common stock, seeking instead to use cheaper and "less sturdy" alternatives such as selling assets or issuing preferred stock, the report found. Issuing common stock is a better way to shore up a bank's capital base, it said.
When Bank of America, Citigroup and Wells Fargo repaid the government in December 2009, only Citigroup fully met the 1-for-2 requirement, the report said.
The regulatory agencies overseeing the banks, which negotiated the repayment terms with them, were the Federal Reserve, the Federal Deposit Insurance and the Treasury Department's Office of the Comptroller of the Currency. The treasury itself ran the bailout programme and the report said its involvement in individual banks' repayment proposals was greater than was previously known publicly.
It said the treasury encouraged the banks to speed repayment, raising the criticism that treasury officials put that goal ahead of ensuring that the banks were strong enough to exit TARP safely.
"The result was nearly simultaneous repayments by Bank of America, Wells Fargo and Citigroup in an already fragile market," the report said. The three banks issued a combined $49.1bn in new common stock as part of their repayments.
Tim Massad, the treasury's acting assistant secretary for financial stability, said "We're pleased that the report acknowledges that the nation's large banks are much stronger today as a result of the actions taken by Treasury."
Taxpayers will recoup the full amount invested in banks, around $245bn (£157bn), and will make an additional $20bn or so (£12.8bn) in profit, Mr Massad said.
He said the quickened share sales were the best approach to follow. Delaying the banks' stock offerings and repayments "carried a lot of risk with it", said Mr Massad, because it was hard to know what the market for bank shares was going to be like later on, and holding back could dampen investor confidence.
"We pushed them to raise as much private capital as they could," he said.
Robert Stickler, a spokesman for Charlotte, North Carolina-based Bank of America, said the bank's wanting to issue stock "all at once rather than in stages was because of market conditions".
He rejected the idea that his bank might have pressured the regulators for a quicker exit. The bank's primary motivation was to remove the stigma of being a TARP recipient, Mr Stickler said, and there also was concern that the restraints on executive pay were making it hard for them to keep executives.
The Federal Reserve said in written comments on the new report that, while it led the process of reviewing banks' repayment proposals, it consulted all the agencies. "All agreed with the final decision to allow each" bank to repay, the Fed said.
The Office of the Comptroller of the Currency disagreed with the report's finding that the bank review process was inconsistent. The flexibility to "deviate somewhat" from the requirements was necessary and produced positive results, the agency said.
PNC, Wells Fargo and Citigroup said the TARP repayments allowed them to focus on their businesses and were in the best interests of taxpayers and shareholders.