WASHINGTON, Nov 13 (Reuters) - Hedge fund managers, who rank among some of the world’s shrewdest dealmakers, told Congress the U.S. government’s bank capital injection program did not have enough strings attached.
“The current terms are overly generous to recipients,” said John Paulson, president of hedge fund Paulson & Co.
He was among five hedge fund managers questioned on Thursday by the U.S. House Oversight and Government Reform Committee about Treasury Secretary Henry Paulson’s management of a $700 billion bailout program to unfreeze credit markets through taxpayer investments in financial firms.
John Paulson -- whose attack on the plan was dubbed “Paulson versus Paulson” by the lawmakers -- said any bank receiving federal funds should halt cash dividends on common stock and restrict cash compensation to executives.
He also said the government should demand a higher dividend payment from participating banks, possibly around 10 percent instead of the 5 percent rate now in place.
James Simons, a mathematics professor-turned-investor who now heads Renaissance Technologies, called the bank injections “quite a sweet deal” for firms requesting the funds.
John Paulson, Philip Falcone, Kenneth Griffin, George Soros and Simons were called to testify at the hearing about the role of hedge funds, their tax status and regulation. Each executive earned, on average, more than $1 billion last year.
Soros, the billionaire chairman of Soros Fund Management and a prominent philanthropist, said the Treasury Department’s execution of the program “is not adequate or acceptable.”
Soros, who has longtime ties to Democrats, said the Treasury Department should have made the cost of capital more expensive for participating banks. That would give banks an incentive “to put it to good use to get a good return by actually lending,” he said.
The government has so far dedicated $250 billion for bank capital injections under the Troubled Asset Relief Program (TARP). [ID:nN14514692]
The Treasury Department believes participating banks have an incentive to lend because they want a return on the capital, which is relatively cheap at a 5 percent dividend for the first five years.
The program also restricts lavish executive pay, including golden parachutes for departing executives, and forbids companies to boost dividends or buy back their own stock.
Some Democratic lawmakers have threatened to add more conditions to the capital injection program, including an outright ban on dividends and setting lending requirements.
Sen. Charles Schumer, a Democrat on the Senate Banking Committee, said on Thursday the Treasury Department should have veto power over any mergers involving banks that receive federal funds.
House Financial Services Chairman Barney Frank recently said Congress may seek to block the authorization of the program’s remaining $350 billion if participating banks fail to do more lending to help jumpstart the economy.
Falcone, who runs the activist hedge fund Harbinger Capital Partners and who highlighted his humble upbringing in his testimony, said banks should receive federal capital at a cost aligned with market rates.
The contrarian view came from Griffin, whose Citadel Investment Group is facing a difficult year. His flagship Kensington and Wellington hedge funds were down about 38 percent through early November.
Griffin said the government cannot charge market rates for its capital because those rates are too high for many firms. The capital injections are “in essence an indirect subsidy to the banking system” that he said should be ultimately passed through to the consumer.
Treasury’s Henry Paulson said on Wednesday that the government had largely abandoned its plan to buy toxic mortgage assets in favor of making direct investments in financial institutions and shoring up consumer credit markets. (Reporting by Karey Wutkowski; Editing by Tim Dobbyn)
Our Standards: The Thomson Reuters Trust Principles.