The federal government's response to the financial crisis provided necessary first aid, but regulating systemically risky financial companies and consumer credit products is critical to long-term recovery, according to an American Bar Association panel on the government's bailout work so far.
Other panelists worry that stringent government regulation of companies taking bailout money may scare away healthy companies and create a two-tiered system of financial companies.
The panel -- including a Troubled Asset Relief Program (TARP) Congressional Oversight Panel member, private-sector attorneys, former and current U.S. Department of the Treasury and U.S. Government Accountability Office officials and a professor -- hashed out the government's successes and shortfalls with the bailout in "Managing the Bailout: Execution and Oversight of the Federal Response to the Financial Crisis." The Feb. 12 panel at Suffolk University Law School was part of the ABA's midyear meeting in Boston.
Damon Silvers, a member of the TARP Congressional Oversight Panel whose day job is associate general counsel of the AFL-CIO, said his panel's report released on Feb. 6 calculated a $78 billion shortfall for the first $254 billion of TARP fund spending. Silvers said the money injection helped mitigate the severity of the crisis.
"We at least got some stability from these interventions," Silvers said. "We did what we had to do in terms of parachuting money in."
But preventing future crises requires ongoing regulation of companies that pose systemic risk to the economy, or so-called "too big to fail" highly connected companies, Silver said.
Silver also said that the financial regulatory system needs an agency or official designated as a consumer advocate to oversee regulation of consumer credit products, including mortgages, Silvers said.
"We ought to have someone in the regulatory system look out for consumers," Silvers said. "If we don't learn that lesson, I'm not sure what lesson we've learned and we're doomed to do it again."
William. F. Kroener III, co-chair of the ABA Task Force on Financial Markets Regulatory Reform said his views were his own opinions, informed by his stint as general counsel of the Federal Deposit Insurance Corp.
Kroener agreed with fellow panelist that "stabilization was achieved and complete meltdown was averted," but he said oversight was lacking. Kroener worries that some of the nine banks "dragged" into accepting the first $125 billion of the Treasury's $250 billion capital purchase program in mid-October, and others that have signed on since, may want out of the program because of government restrictions on their companies.
The capital purchase program includes a ban on so-called golden parachutes, or costly payouts and benefits to executives when their employment contract is terminated, according to a Treasury press release.
"We are now in a system where there are huge incentives for the healthy to pay back the money they got and go forward, leaving those that are stressed to have government controls," Kroener said. "By dividing the market in that way and putting assistance into those that fail the stress test, that means the recovery is going to be longer and slower."
Kroener, who is also a Washington, D.C. and Los Angeles counsel to New York's Sullivan & Cromwell, said he has clients among the nine banks receiving the first Treasury cash injection that "took the piece of paper and didn't know what they signed."
Professor Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University Law School, agreed that systemically risky institutions need to be intensely regulated going forward, but said people are looking for responsibility and accountability for financial companies' past actions.
"There's tremendous frustration about the lack of indictments," Hurley said. Hurley said executives at financial companies that have taken bailout money were "larding on bonuses" by booking problematic assets between 2004 and 2007.
"Now they're asking for another bailout," Hurley said. "I suggest that in order for an executive to stay in office, they should agree to a third party review of past bonuses, and we'll find out if they were truly deserved."