Bailout cash is for loans, not pay, banks vow

WASHINGTON — Some officials of the nation's largest banks sharing in the $700 billion government bailout of the financial industry tried to assure lawmakers Thursday they are using the money to make more loans and help financially strapped homeowners avoid foreclosure.

Barry Zubrow, chief risk officer with JPMorgan Chase, told the Senate Banking Committee a portion of the $25 billion capital infusion it received from the Treasury Department was being deployed to "expand the flow of credit" and to assist with rewriting residential mortgages for up to 400,000 families.

Zubrow and executives with Goldman Sachs Group, Bank of America and Wells Fargo told the committee that none of the $75 billion they have received collectively from the government is being used to pay salaries or bonuses.

"Wells Fargo doesn't need the government investment to pay for bonuses or compensation," said Jon Campbell, regional banking president for Wells Fargo.

Anne Finucane, a marketing and corporate-affairs executive at Bank of America, said it originated more than $50 billion in mortgage loans in the third quarter of 2008 but acknowledged that "we are lending less than we were a year ago."

Lawmakers pressed hard for commitments to more lending. "Let me say as clearly as I can," said committee Chairman Sen. Chris Dodd, D-Conn. "Hoarding capital and acquiring healthy banks are not ... reasons why Congress authorized $700 billion in emergency funding."

Sen. Charles Schumer, D-N.Y., said he and other lawmakers are looking at requiring banks to make more loans as a condition for taking part in the $350 billion second half of the bailout. Congress can block release of the second $350 billion. It also can put new conditions on its use.

In the House, meanwhile, five prominent hedge-fund managers said they support a new central exchange to open the murky world of some complex investments partly blamed for the global financial crisis.

The managers testified at a House hearing examining the role of hedge funds in the crisis. Hedge funds, vast pools of capital holding an estimated $2.5 trillion in assets, operate mostly outside of government supervision.

The House Oversight and Government Reform Committee is attempting to assess the role of hedge funds in the financial crisis and what could go wrong with them in the future, said its chairman, Henry Waxman, D-Calif. "Some say hedge funds have become a shadow banking system."

Billionaire investor and liberal activist George Soros, who runs a hedge fund, testified that new regulations were needed to gauge the underlying financial strength of banks. But he warned against "going overboard."

The five hedge-fund managers each earned on average more than $1 billion last year in an industry that has become stunningly profitable and powerful. But Waxman and others noted that some of their earnings can be taxed at the 15 percent rate for capital gains, while teachers, firefighters and other ordinary Americans pay much higher rates as income taxes.

Fund manager John Paulson, no relation to Treasury Secretary Henry Paulson, defended the tax regimen. But Soros and James Simons, president of Renaissance Technologies, said they wouldn't mind the rate levied on managers who take a share of profits being raised to 35 percent.