New Terrain for Panel on Bailout By MARK LANDLER New York Times WASHINGTON — There

[XXPANTHAXX]

New Terrain for Panel on Bailout

By MARK LANDLER
New York Times

WASHINGTON — There was a rare moment of levity at the Treasury
Department on Friday as the children of government workers scampered
from office to office in Halloween costumes. A few minutes later, the
children were gone and the hallways were retaken by grim-faced grown-ups
— handing out tricks and treats of a different sort.

The Treasury building is ground zero for the Bush administration’s $700
billion rescue of the financial system an ambitious, increasingly
embattled program that passed an early milestone last week when the
government wired the first $125 billion to the nine largest banks in the
United States.

Having been handed vast authority and almost no restrictions in the
bailout law that Congress passed a month ago, a committee of five
little-known government officials, aided by a bare-bones staff of 40, is
picking winners and losers among thousands of banks, savings and loans,
insurers and other institutions.

It is new and unfamiliar terrain for the officials, who are making
monumental decisions — a form of industrial policy, some critics say —
that contradict the free market philosophy they usually espouse.
Predictably, the process is stirring alarm from Capitol Hill to Wall
Street.

“People are always going to second-guess what you do,” said David G.
Nason, the assistant Treasury secretary for financial institutions, who
designed the program and sits on the investment committee. “We don’t
have time to complain; we need to manage our time so we can make
progress.”

Other officials said it was premature to condemn the program, given that
the first capital injections were made only last week. The Treasury’s
overriding goal, they said, is to stabilize the nation’s financial
system after its worst crisis since the 1930s.

Among the problems, critics say, is that despite earlier promises of
transparency, the process is shrouded in secrecy, its precise goals
opaque. Treasury officials have refused to disclose their criteria for
deciding which banks are healthy enough to get money — and which are too
sick.

And officials have yet to say they even have a broader strategy, though
banking executives are convinced the government wants to encourage
acquisitions of sick banks by healthy ones.

Industry sources said that banks, after filing a two-page application,
are assigned a ranking from 1 to 5 — with 1 or 2 essentially
guaranteeing that they are eligible, and 5 insuring they are not — by
their regulator. The five officials then make what can be a
life-or-death decision, with a thumbs-down generally interpreted to mean
that a bank was not healthy enough to survive on its own.

The work is complex, far-reaching and telescoped into an impossibly
tight timetable. And it is being done against the backdrop of a change
of power in Washington, which will throw many of these people out of
their jobs on Inauguration Day.

“There is a real urgency to deploy this money quickly and effectively,”
said James H. Lambright, who took a leave three weeks ago as the
president of the Export-Import Bank of the United States to become the
interim chief investment officer of the rescue effort.

A trim, self-confident former investment banker, Mr. Lambright, 38, is
the chairman of a committee of relatively young officials — all are in
their 30s or 40s — with backgrounds in law, banking or regulation. None
of them could have expected this kind of responsibility; Mr. Lambright
himself was a last-minute substitute after a previous appointee was kept
in his old job.

On Friday evening, Mr. Lambright was lugging a six-inch-thick pile of
folders — plus a pair of BlackBerrys and a cellphone — as he prepared
for a Sunday afternoon meeting of the committee to select the next banks
to receive capital infusions.

With more than $80 billion left to spend, and hundreds of banks in line
for it, the days, nights and weekends of the overworked, sleep-deprived
Treasury staff members are a blur of meetings and conference calls, and
constant pressure.

“This is a four-ring circus,” said Tim Ryan, a former director of the
Office of Thrift Supervision, who helped run the savings and loan
cleanup in the 1980s and 1990s.

Already, critics from Capitol Hill to Wall Street are lashing out at the
program, saying the banks are misusing the capital infusions by hoarding
the money rather than lending it, as the Treasury Secretary, Henry M.
Paulson Jr., urged in order to unclog the credit markets.

The government, the critics say, is wrongly steering funds to banks to
take over weaker rivals. The rescue program prodded one such merger last
week, when Treasury agreed to inject $7.7 billion into PNC Financial
Services and rejected an application for cash from the National City
Corporation, an ailing bank in Cleveland. The two announced a merger the
same day that PNC was approved.

“Where we are headed is credit allocation by the federal government,”
said William Poole, a former president of the Federal Reserve Bank of
St. Louis. “It really reminds me of the morass we got into with
wage-price controls in the 1970s.”

Critics also say that, by not barring banks from paying dividends or
hefty bonuses, the Treasury is leading taxpayers to think their money is
being spent frivolously.

All this comes after Mr. Paulson abruptly shifted the focus of the
program to injecting capital rather than buying distressed
mortgage-related assets from the banks. This meant that Congress had
never debated the details of how the government ought to carry out a
recapitalization.

The absence of that debate comes with a price. Treasury officials have
been pressured by industry lobbyists to stretch the program to include
insurance companies, transit agencies and even automakers.

Indeed, the helter-skelter nature of the program is drawing so much
criticism that even some of the bailout bill’s biggest proponents on
Capitol Hill are complaining that its legitimacy is being thrown into
question. “What the Treasury doesn’t understand is the anger in the
country about this,” said Barney Frank of Massachusetts, the chairman of
the House Financial Services Committee.

Mr. Frank, who has scheduled oversight hearings later in November,
warned that he might try to block the Treasury from getting the second
$350 billion approved by Congress.

Inside the Treasury — where officials shuttle between each other’s
offices on the building’s southwest corner, facing the White House and
the Washington monument — the view, not surprisingly, is different.

They say the critics have not offered solutions about how to compel
banks to lend money. The Treasury has to walk a fine line, officials
add, since using brute force could lead to the banks making more bad
loans, which is how they got into this mess.

Treasury officials acknowledge their actions might speed a shakeout in
the industry, even if that is not the main motivation.

“The primary goal is not consolidation; the primary goal is to
strengthen the system,” said Michele A. Davis, the chief spokeswoman.
“If consolidation strengthens the system, it’s a positive.”

Bank executives say that increased lending depends on attracting more
capital from private investors. To do that, it may be essential for a
bank to strengthen its market position by making acquisitions.
Suspending dividends could send investors running for the exits.

Besides, they add, the bailout law only allows the government to stop
banks from increasing dividends, not banning them outright.

The committee — which also includes Neel Kashkari, interim head of the
rescue program, and two other senior Treasury officials, Anthony Ryan
and Phillip L. Swagel — acts on a recommendation from the primary
regulator of the financial institution. That could be the Federal
Reserve, the Federal Deposit Insurance Corporation, the Comptroller of
the Currency, or the Office of Thrift Supervision.

What happens next, when the application and recommendation go to the
Treasury, is largely a mystery. The criteria by which the Treasury
decides which banks get money and which do not are secret.

Mr. Nason said the process had to be confidential so that rejected banks
did not suffer damage in the markets. Even to disclose the selection
criteria could quickly destabilize banks perceived to have the wrong
profile, he said.

The committee members study financial statements and sometimes kick back
applications to the regulators for more information. They also analyze
the market in which a bank operates, looking for the mix of strong and
weak banks. As the number of applications increases, Mr. Lambright said
he was recruiting a team of banking analysts to help with the process.

“When we move from a dozen banks to hundreds of banks, we’ll need a
system,” Mr. Lambright said.

He said his work at the Export-Import Bank, where he selected American
exporters to receive trade financing, was good preparation for this job,
even if he will hand out more money in a few weeks at the Treasury than
his bank’s entire $60 billion credit portfolio.

Though Treasury officials are loath to require banks to lend, they do
seem to be jawboning. “They must meet their responsibility to lend, and
support the American people and the U.S. economy,” Mr. Ryan told a
securities industry conference last week.

Mr. Frank said they should do more by requiring banks to show a
dollar-for-dollar relationship between the government funds and
increased lending.

“If they lend out all the money they got from the government,” he said,
“they can do whatever they want with the rest. If they don’t feel this
is going to encourage lending, then don’t take the money.”

It is the regulators, more than the Treasury Department, who are doing
the coaxing by suggesting, for example, that a desired merger by a bank
would be more likely to win approval if a bank participated in the
capital injection program, industry executives said.

The Treasury’s approach has its defenders, among them a former senior
Treasury official, Edwin M. Truman, who said he believed the people
running the bailout were technocrats trying to shore up the system, not
ideologues.

Donald V. Hammond, a longtime Treasury official who is the interim chief
compliance officer of the program, said that, in any event, Congress had
put in place layers of oversight. Mr. Hammond began his government
career working on the bailout of the Chrysler Corporation.

“This is more intense,” he said.

Edmund L. Andrews contributed reporting.


By MARK LANDLER
New York Times

WASHINGTON — There was a rare moment of levity at the Treasury
Department on Friday as the children of government workers scampered
from office to office in Halloween costumes. A few minutes later, the
children were gone and the hallways were retaken by grim-faced grown-ups
— handing out tricks and treats of a different sort.

The Treasury building is ground zero for the Bush administration’s $700
billion rescue of the financial system an ambitious, increasingly
embattled program that passed an early milestone last week when the
government wired the first $125 billion to the nine largest banks in the
United States.

Having been handed vast authority and almost no restrictions in the
bailout law that Congress passed a month ago, a committee of five
little-known government officials, aided by a bare-bones staff of 40, is
picking winners and losers among thousands of banks, savings and loans,
insurers and other institutions.

It is new and unfamiliar terrain for the officials, who are making
monumental decisions — a form of industrial policy, some critics say —
that contradict the free market philosophy they usually espouse.
Predictably, the process is stirring alarm from Capitol Hill to Wall
Street.

“People are always going to second-guess what you do,” said David G.
Nason, the assistant Treasury secretary for financial institutions, who
designed the program and sits on the investment committee. “We don’t
have time to complain; we need to manage our time so we can make
progress.”

Other officials said it was premature to condemn the program, given that
the first capital injections were made only last week. The Treasury’s
overriding goal, they said, is to stabilize the nation’s financial
system after its worst crisis since the 1930s.

Among the problems, critics say, is that despite earlier promises of
transparency, the process is shrouded in secrecy, its precise goals
opaque. Treasury officials have refused to disclose their criteria for
deciding which banks are healthy enough to get money — and which are too
sick.

And officials have yet to say they even have a broader strategy, though
banking executives are convinced the government wants to encourage
acquisitions of sick banks by healthy ones.

Industry sources said that banks, after filing a two-page application,
are assigned a ranking from 1 to 5 — with 1 or 2 essentially
guaranteeing that they are eligible, and 5 insuring they are not — by
their regulator. The five officials then make what can be a
life-or-death decision, with a thumbs-down generally interpreted to mean
that a bank was not healthy enough to survive on its own.

The work is complex, far-reaching and telescoped into an impossibly
tight timetable. And it is being done against the backdrop of a change
of power in Washington, which will throw many of these people out of
their jobs on Inauguration Day.

“There is a real urgency to deploy this money quickly and effectively,”
said James H. Lambright, who took a leave three weeks ago as the
president of the Export-Import Bank of the United States to become the
interim chief investment officer of the rescue effort.

A trim, self-confident former investment banker, Mr. Lambright, 38, is
the chairman of a committee of relatively young officials — all are in
their 30s or 40s — with backgrounds in law, banking or regulation. None
of them could have expected this kind of responsibility; Mr. Lambright
himself was a last-minute substitute after a previous appointee was kept
in his old job.

On Friday evening, Mr. Lambright was lugging a six-inch-thick pile of
folders — plus a pair of BlackBerrys and a cellphone — as he prepared
for a Sunday afternoon meeting of the committee to select the next banks
to receive capital infusions.

With more than $80 billion left to spend, and hundreds of banks in line
for it, the days, nights and weekends of the overworked, sleep-deprived
Treasury staff members are a blur of meetings and conference calls, and
constant pressure.

“This is a four-ring circus,” said Tim Ryan, a former director of the
Office of Thrift Supervision, who helped run the savings and loan
cleanup in the 1980s and 1990s.

Already, critics from Capitol Hill to Wall Street are lashing out at the
program, saying the banks are misusing the capital infusions by hoarding
the money rather than lending it, as the Treasury Secretary, Henry M.
Paulson Jr., urged in order to unclog the credit markets.

The government, the critics say, is wrongly steering funds to banks to
take over weaker rivals. The rescue program prodded one such merger last
week, when Treasury agreed to inject $7.7 billion into PNC Financial
Services and rejected an application for cash from the National City
Corporation, an ailing bank in Cleveland. The two announced a merger the
same day that PNC was approved.

“Where we are headed is credit allocation by the federal government,”
said William Poole, a former president of the Federal Reserve Bank of
St. Louis. “It really reminds me of the morass we got into with
wage-price controls in the 1970s.”

Critics also say that, by not barring banks from paying dividends or
hefty bonuses, the Treasury is leading taxpayers to think their money is
being spent frivolously.

All this comes after Mr. Paulson abruptly shifted the focus of the
program to injecting capital rather than buying distressed
mortgage-related assets from the banks. This meant that Congress had
never debated the details of how the government ought to carry out a
recapitalization.

The absence of that debate comes with a price. Treasury officials have
been pressured by industry lobbyists to stretch the program to include
insurance companies, transit agencies and even automakers.

Indeed, the helter-skelter nature of the program is drawing so much
criticism that even some of the bailout bill’s biggest proponents on
Capitol Hill are complaining that its legitimacy is being thrown into
question. “What the Treasury doesn’t understand is the anger in the
country about this,” said Barney Frank of Massachusetts, the chairman of
the House Financial Services Committee.

Mr. Frank, who has scheduled oversight hearings later in November,
warned that he might try to block the Treasury from getting the second
$350 billion approved by Congress.

Inside the Treasury — where officials shuttle between each other’s
offices on the building’s southwest corner, facing the White House and
the Washington monument — the view, not surprisingly, is different.

They say the critics have not offered solutions about how to compel
banks to lend money. The Treasury has to walk a fine line, officials
add, since using brute force could lead to the banks making more bad
loans, which is how they got into this mess.

Treasury officials acknowledge their actions might speed a shakeout in
the industry, even if that is not the main motivation.

“The primary goal is not consolidation; the primary goal is to
strengthen the system,” said Michele A. Davis, the chief spokeswoman.
“If consolidation strengthens the system, it’s a positive.”

Bank executives say that increased lending depends on attracting more
capital from private investors. To do that, it may be essential for a
bank to strengthen its market position by making acquisitions.
Suspending dividends could send investors running for the exits.

Besides, they add, the bailout law only allows the government to stop
banks from increasing dividends, not banning them outright.

The committee — which also includes Neel Kashkari, interim head of the
rescue program, and two other senior Treasury officials, Anthony Ryan
and Phillip L. Swagel — acts on a recommendation from the primary
regulator of the financial institution. That could be the Federal
Reserve, the Federal Deposit Insurance Corporation, the Comptroller of
the Currency, or the Office of Thrift Supervision.

What happens next, when the application and recommendation go to the
Treasury, is largely a mystery. The criteria by which the Treasury
decides which banks get money and which do not are secret.

Mr. Nason said the process had to be confidential so that rejected banks
did not suffer damage in the markets. Even to disclose the selection
criteria could quickly destabilize banks perceived to have the wrong
profile, he said.

The committee members study financial statements and sometimes kick back
applications to the regulators for more information. They also analyze
the market in which a bank operates, looking for the mix of strong and
weak banks. As the number of applications increases, Mr. Lambright said
he was recruiting a team of banking analysts to help with the process.

“When we move from a dozen banks to hundreds of banks, we’ll need a
system,” Mr. Lambright said.

He said his work at the Export-Import Bank, where he selected American
exporters to receive trade financing, was good preparation for this job,
even if he will hand out more money in a few weeks at the Treasury than
his bank’s entire $60 billion credit portfolio.

Though Treasury officials are loath to require banks to lend, they do
seem to be jawboning. “They must meet their responsibility to lend, and
support the American people and the U.S. economy,” Mr. Ryan told a
securities industry conference last week.

Mr. Frank said they should do more by requiring banks to show a
dollar-for-dollar relationship between the government funds and
increased lending.

“If they lend out all the money they got from the government,” he said,
“they can do whatever they want with the rest. If they don’t feel this
is going to encourage lending, then don’t take the money.”

It is the regulators, more than the Treasury Department, who are doing
the coaxing by suggesting, for example, that a desired merger by a bank
would be more likely to win approval if a bank participated in the
capital injection program, industry executives said.

The Treasury’s approach has its defenders, among them a former senior
Treasury official, Edwin M. Truman, who said he believed the people
running the bailout were technocrats trying to shore up the system, not
ideologues.

Donald V. Hammond, a longtime Treasury official who is the interim chief
compliance officer of the program, said that, in any event, Congress had
put in place layers of oversight. Mr. Hammond began his government
career working on the bailout of the Chrysler Corporation.

“This is more intense,” he said.

Edmund L. Andrews contributed reporting.