Controversial bank plan draws defense

Under fire from Democrats and Republicans alike, the White House on Thursday defended giving billions of bailout dollars to banks that plan to reward shareholders and executives – or even buy other banks.

Allowing banks to engage in such normal business activities actually could help loosen lending and revive the sagging economy, said Ed Lazear, chairman of the Council of Economic Advisers. He said the administration would not impose any conditions on banks beyond those required when Congress created the bailout program, which authorized the government to buy stock in financial institutions.

On a day of gloomy reports, Lazear predicted “a few tough months” ahead but also said “it is realistic” to think the next president will be presiding over solid growth early in his term after taking office Jan. 20. That would be a welcome change after the economy shrank at a 0.3 percent annual rate in the recent quarter, the strongest signal yet the nation has fallen into recession.

Despite the gloomy outlook, the White House offered its clearest rejection to date of a second stimulus package to boost the economy. Lazear said that “the appropriate stimulus right now” is only what has already been passed by Congress: the $700 billion financial industry rescue package. But there is growing support on Capitol Hill for billions in federal spending for such initiatives as public works projects, aid for cash-strapped states and new jobless benefits.

Lazear was put before the cameras in the White House briefing room amid a rising chorus of complaints from lawmakers about the latitude that banks will have when they receive bailout money.

That bailout was originally sold by the administration as a plan for the government to purchase toxic mortgage-based assets from financial institutions, to get them off their books and inspire the resumption of normal lending. After passage, though, the administration decided the better course would be to devote $250 billion into buying ownership stakes in banks.

With taxpayers' money flowing into their vaults, banks are going ahead with paying dividends to shareholders, giving bonuses to top executives and acquiring competitors. Lawmakers are asking why banks with the money to do those things need taxpayer-funded help.

Lazear said the government is keeping close tabs on the way banks use bailout dollars to “make sure that there are not abuses” and to ensure the law's requirements are met.

The legislation included some limits on executive compensation, considered weak by many. And while it does not allow institutions receiving the money to increase dividends, it does not prevent them from paying those dividends.