Bailouts, corporate jets and a fight over government-owned stock
warrants.
That might describe the ongoing tussle between banks and federal
regulators. It also describes a more heated clash with Chrysler
some 26 years ago.
Back then, the Detroit automaker had scurried to repay
government-backed loans that had saved it from bankruptcy, but also
carried a thick layer of federal oversight.
Afterward, Chrysler's brash chief executive, Lee Iacocca,
demanded the government rip up taxpayers' warrants in Chrysler,
which the government demanded in the rescue.
"He surprised us all by asking," Paul Volcker, then chairman of
the Federal Reserve, which helped supervise Chrysler, told Dow
Jones Newswires. "He thought we weren't entitled" to exercise the
warrants.
The government sold the warrants at auction anyway, infuriating
Iacocca. The winning bidder: Chrysler itself, which paid taxpayers
$311 million.
These days, Volcker works at the White House, which is currently
in private negotiations with banks to resolve outstanding warrants
tied to the recent rescue of the financial system.
Banks including JPMorgan Chase & Co. (JPM), Goldman Sachs
Group Inc. (GS) and Morgan Stanley (MS) are trying to wash their
hands of the close government supervision that came attached to the
Treasury's rescue of the financial system. Their outstanding
warrants are worth as much as $4.5 billion, according to a recent
Dow Jones analysis.
Volcker said he doesn't have current details relating to the
bank-warrant talks. But he did explain the rationale behind the
warrants, as conceived during the Chrysler bailout.
They were "a way for the government to, in effect, get paid for
the risk that it was taking," Volcker said.
There is growing pressure on officials to do just that, and
extract maximum profits for taxpayers.
Adding to the subtext is banks' stampede to escape government
oversight, which has brought unprecedented levels of scrutiny from
regulators and an angry public alike.
And as with Chrylser three decades ago, wrangling over corporate
jets has thickened the plot.
In 1983, as Iacocca made rounds on Capitol Hill to urge
policymakers to let Chrysler quickly repay its rescue loans, one
especially motivating factor surfaced in closed-door discussions:
under the rescue, Chrysler was forbidden to purchase a corporate
aircraft for Iacocca to use.
Iacocca "was absolutely furious because we forced him to sell
Chrysler's Gulfstream" aircraft, said Allan Mendelowitz, who
represented the Comptroller General's office in negotiating
Chrysler's rescue. Mendelowitz is now a director on the Federal
Housing Finance Board.
Iacocca didn't respond to multiple requests for comment. But he
addressed his tussle with the government on Monday in an interview
with the Associated Press.
"They're on you day and night," Iacocca said. "Their oversight
is just too extreme. That's why our 10-year loan, we paid it back
in three years. We couldn't stand the government. The bureaucracy
kills you."
With his company's loans repaid, Iacocca returned to the skies
with a flourish.
"After Chrysler paid off the guaranteed loans, instead of just
buying another corporate jet, he had Chrysler go out and buy
Gulfstream Aviation - the whole company!" Mendelowitz said.
Late last year, Congress and an angry public berated car-company
executives for using corporate aircraft even as their firms cried
for government aid.
Mendelowitz said: "If they had bothered to call me, the first
thing I would have told them is, 'Don't take your corporate jets
when you travel to Washington to ask for a hand-out."
Now it is bankers' turn to argue over warrants. Some have
decried them as excessively costly. Jamie Dimon, chief executive of
JPMorgan, which said it was forced by regulators to accept a
financial bailout alongside other firms, said recently the
government should rip up some warrants out of "fairness."
John Allison, chairman of BB&T Corp. (BBT), which likewise
says it was stiff-armed into accepting federal funds, in June
called the rescue program "a huge rip-off for us."
Mendelowitz doesn't have much tolerance for banks' current
frustrations over government stock warrants. He was the government
official who first insisted on Chrysler warrants during the rescue
talks.
The warrants allowed the government to later purchase shares in
Chrysler for $13.00. That meant taxpayers hit the jackpot when
Chrysler stock topped $26 in 1983.
-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306;
marshall.eckblad@dowjones.com