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FOR IMMEDIATE RELEASE: November 13, 2008

SCHUMER: TREASURY SHOULD HAVE VETO POWER OVER NEW MERGERS INVOLVING FIRMS GETTING RESCUE FUNDS

Senator Says He Will Seek To Legislate This And Other Fixes Before Congress Approves Second Half of $700B

WASHINGTON, DC — As worries mount that the $700 billion economic rescue plan may not be meeting its objectives, U.S. Senator Charles E. Schumer (D-NY) said Thursday that any new merger involving a firm participating in the rescue must be subject to review by Treasury. Schumer said that providing Treasury with this veto authority was necessary in order to ensure that the government is not subsidizing takeovers that pose no benefit to the stability of the nation’s financial system.

“I'm calling for any merger completed with the help of TARP money to first be approved by Treasury. While there are mergers that should take place to improve systemic stability and encourage lending … giving away government money so that it can be used to gobble up competitors that will not have any impact on the overall stability of the financial sector should not be endorsed,” Schumer said.

Schumer said he planned to push this and other revisions to the capital injection program—including more formal guidelines to encourage banks to increase lending—before Congress allows the administration to tap the second half of the $700 billion initially authorized by Congress.

Schumer made the comments at a hearing held by the Senate Banking Committee on the rescue plan. A copy of Schumer’s full statement appears below.

Statement of Senator Charles E. Schumer

Senate Committee on Banking, Housing and Urban Affairs

November 13, 2008

Thank you, Mr. Chairman, and I want to thank you for your diligence throughout this period and holding a whole series of hearings. It is vital that we make sure that the programs implemented by Treasury and the Federal Reserve are accomplishing the goals of restoring our financial system in our economy and these hearings play a major role in that. So I thank you.

Although we seem to have avoided the devastating effects of a full fledged Depression through the recent emergency interventions, particularly the government backing interbank lending and business deposits in banks, we still face frozen credit markets for consumers and businesses, as well as a recession that threatens to be too long, and too painful, for the entire country. I am glad that Secretary Paulson and the rest of the Treasury team have finally seen the light and decided to abandon asset purchases. It was the worst kept secret in Washington that the asset purchases at the auctions treasury proposed wouldn’t work and were likely to be scrapped.

During the entire negotiations – from the days you and I, Mr. Chairman, and some others sat across the table – Treasury never figured out at a price the assets, whether by auction or by purchase.

So it was just a matter of time until Secretary Paulson finally acknowledged the reality, and I’m glad he did so that we could move on. Now many of my colleagues and I recognized capital injections was clearly the correct approach from the very beginning. We gave Secretary Paulson the authority to do them without him asking for it. Now I suspect he is grateful we did because it has become the most indispensable tool to restore confidence in our financial system. I'm glad we've moved away from auctions and asset purchases and to capital injection.

But the capital injection program is not working either, not because there is a fundamental flaw in the concept of capital injections, but because of the way the program is structured. Because of the way it is structured, it is not meeting its goals of improving stability in the system and increasing lending the way it should. Treasury's stated purpose for the capital injections was to give banks a strong capital base so that they could increase lending into the economy for things like credit cards, auto loans and small business loans. But in these uncertain and difficult times, where nobody is sure of asset values, banks are inclined to hoard, rather than deploy, capital. They don’t know how much lower the value of the assets they have will go, so they’re hoarding the new capital in case they go lower.

And in its zeal to include the largest banks and avoid any stigma in participating, Treasury failed to make the rules strict enough to overcome that inclination. As a result, the capital injection program is not producing very much new lending.

I intend to ask the witnesses here from the banks why they are not lending more with this additional capital. But even if Treasury cannot change the terms retroactively, any new capital injection must come with tougher requirements. Treasury should revise the terms of the next $125 billion, and if they come to us and ask us for the additional $350 billion, I intend to do my best, with the support of many of my colleagues here, to put those provisions into the new terms of the law.

Because consumers and businesses around the country depend on credit, if it is not available, the recession will be deeper and longer than it has to be. Yesterday, Secretary Paulson said, let’s focus on auto loans and credit-card loans and small business loans. But he is ignoring the best way to do it, which is through the capital injection program, but a capital injection with some stringency, that makes sure that the institutions that take it—and I'm against forcing institutions to take it, I think that was a bad idea—but those who do take it, should have to meet some requirements.

Small businesses need credit to expand and create jobs. They also need it to keep their doors open and protect the jobs they have. The Federal Reserve quarterly lending report for the third quarter reported that 75 percent of banks have tightened credit on commercial and industrial loans to small firms during the third quarter. That was up from 65 percent in the second quarter, 50 percent in the first. So Senator Kerry and I are working on adding some targeted small-business items to the stimulus package, such as temporarily waiving all lender and borrower fees and increasing the maximum loan amount. I will be asking these questions in addition to encouraging banks to lend to small businesses.

I also believe, as some have stated, that the tougher terms should include more stringent restrictions on executive compensation to ensure that there aren’t incentives for executives to take excessive risks. And more help for struggling homeowners: Chairman Bair's proposal—in combination with the change in bankruptcy laws, and this will only work if we change the bankruptcy laws—is the clearest and cleanest solution.

One more point—it is critical that we ensure that government capital is not wasted in other ways. I'm calling for any merger completed with the help of TARP money to first be approved by Treasury. While there are mergers that should take place to improve systemic stability and encourage lending—for a very weak institution, a merger may be the right way to go—giving away government money so that it can be used to gobble up competitors that will not have any impact on the overall stability of the financial sector should not be endorsed. The government assistance has to include significant help for Main Street as well as Wall Street. Consumers and businesses must see improved access to credit as a result of the government’s actions, and struggling homeowners must see a renewed commitment from the government to help them avoid foreclosure.

Thank you.

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