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America’s banking executives are having a tough time. First, they mess things up so badly that they require a humongous federal bailout. No sooner do they get the federal funds than they start complaining about how difficult it is to manage a bank when taxpayers are looking over their shoulders. The logical thing for an executive in such a situation to do would be to make the most strenuous efforts possible to return the bailout funds. Would it surprise you to learn that the bankers complaining most about the shackles that come along with bailout money don’t seem to have much of a sense of urgency about doing so?

In October, Northern Trust, the Chicago-based bank announced it would take $1.5 billion in TARP funds. But now it’s expressing annoyance that members of Congress are teed off about its sponsorship of a golf tournament. The bank, which is in good health, says it didn’t seek the funds but agreed to participate because the government wanted all the major banks to take part. So is Northern Trust making maximum effort to pare expenses, conserve cash, or raise new capital so that it can return the TARP funds and avoid all this scrutiny? Not so much. Last Friday, CEO Frederick Waddell said the profitable bank wanted to repay funds “as quickly as prudently possible.” Last month it declared its regular quarterly stock dividend of 28 cents per share, which costs about $62.5 million per quarter, or $250 million a year—enough to pay down one-sixth of the suddenly onerous obligation.

Bank of America CEO Ken Lewis said that taking an extra round of bailout funds to help digest the acquisition of Merrill Lynch had been a “tactical mistake.” If he had it to do over again, Lewis said, he would have taken $10 billion less. This is rich on many levels. The market, in its wisdom, has decided that Bank of America is worth about $18.5 billion. Let’s do a simple thought experiment. If Bank of America had received $10 billion less in cheap, taxpayer-provided capital to soak up losses at Merrill Lynch, would Bank of America’s stock be a) higher, or b) lower? And the mistake of taking too much TARP capital would seem to be an easily reversible one—Bank of America could pay it back or at least return some fraction of the $45 billion it has received. But Bank of America hasn’t done that, either. In the interview, Lewis said the bank would pay back the taxpayers “as soon as we think things are stabilized.”

Back in February, Morgan Stanley CEO John Mack made similar noises about repaying the $10 billion in TARP funds it had received. “Our intent is to pay it off as soon as it is feasible,” he said. Goldman Sachs CFO David Viniar echoed Mack. But neither Morgan nor Goldman appears to have made a significant move to free up cash to make a down payment. Both continue to pay out quarterly dividends.
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The challenge is that banks have to pay back TARP funds either by generating cash or by issuing new preferred or common stock. And in this environment, issuing new stock is an expensive proposition. Last year, when Goldman sold preferred shares to Warren Buffett, it agreed to pay a huge 10 percent interest rate. And last fall, when Morgan Stanley raised about $9 billion from a Japanese bank, the preferred shares likewise carried a 10 percent dividend.

Of course, it’s not impossible to pay back the TARP funds. Iberia Bank, which received $90 million in TARP funds last December, decided it didn’t want to have the government looking over its shoulder any more than it already was. In late February, CEO Daryl G. Byrd announced that Iberia would pay back the funds with interest by the end of March. “Our board of directors has determined that continued participation in this program is no longer in the best interest of our company and its shareholders,” Byrd said.

In other words, instead of simply complaining about the financial and cultural restrictions imposed on banks by the TARP, Iberia actually did something about it. It’s true that not all financial institutions asked for—or particularly needed—the bailout funds. But most did. Running a bank is a difficult job these days. But bank CEOs are well-compensated for their troubles. And part of the job is making tough choices about the appropriate use of capital and resources.

President Barack Obama speaks to the press during his meeting with British Prime Minister Gordon Brown (not pictured) in the Oval Office of the White House in Washington

WASHINGTON (Reuters) – President Barack Obama on Wednesday will order a crackdown on waste and cost overruns in U.S. government procurement that he estimates will save up to $40 billion a year, an administration official said.

Elected on campaign promises of sweeping change and greater accountability in Washington, Obama, who took office on January 20, will sign a presidential memorandum seeking to “reform our broken system of government contracting,” the official said.  The president will unveil his plan at a White House ceremony at 10:00 a.m. EST, nine days after holding a “fiscal responsibility” summit where he pledged to make curbing procurement excesses, especially in defense spending, one of his top priorities.

The reform program also comes less than a week after Obama forecast a $1.75 trillion deficit for the 2009 fiscal year, the biggest since World War Two and stark evidence of the heavy blow the deep recession has dealt to the country’s finances.  Republican critics have condemned Obama’s budget proposal as part of a “tax-and-spend” onslaught by the new Democratic president, a charge he and his aides strongly deny.

Obama will seek to show his determination to apply fiscal discipline even as he ratchets up government spending to try to jolt the economy out of recession.

“The presidential memorandum will dramatically reform the way that we do business on contracts across the entire government,” the official said, speaking on condition of anonymity.

White House budget director Peter Orszag will be instructed to start working immediately with Cabinet officials and agency heads to develop tough, new guidance on contracting by the end of September, the official said.

“The president will say that by stopping outsourcing services that should be performed by the government, opening up the contracting process to small businesses, ending unnecessary no-bid and cost-plus contracts, and strengthening oversight to maximize transparency and accountability, we can save the American people up to $40 billion each year,” the official said.

Obama’s objective is that “the American people’s money is spent to advance their priorities, not to line the pockets of contractors who have figured out how to work the system, or to maintain projects that don’t work,” the official said.

The president will praise Defense Secretary Robert Gates for his efforts to reform Pentagon procurement, but will also say he “does not accept billions in wasteful spending.”

Obama vowed last week to crack down on costly military programs, which now routinely run far over budget. He cited a project to build a new presidential helicopter fleet as an example of the procurement process “gone amok.”

How to rescue housing?- The Obama administration doesn’t have a plan — or, more accurately, it has only half a plan. It presupposes that preventing or minimizing home foreclosures is a formula for revival. It isn’t.

Almost everyone agrees that a housing recovery is essential for a broader economic upswing, in part because housing’s collapse brought on the recession. Mortgage delinquencies triggered the financial crisis. Tumbling home prices (down 26 percent from their peak) ravaged consumer confidence, borrowing and spending. Since late 2007, housing-related jobs — carpenters, real estate agents, appraisers — have dropped by 1 million, a quarter of all lost jobs.

Housing’s distress is too much supply chasing too little demand. Huge inventories of unsold homes have depressed prices and construction. Given that prices rose too high in the “bubble” — homes were affordable only because credit was dispensed so recklessly — much of this painful adjustment was unavoidable. But that process should be mostly complete.

Here’s a little-known fact: Housing may be more affordable now than at any recent time, thanks to lower prices and falling mortgage rates (now about 5 percent). The National Association of Realtors has an “affordability index” that estimates the family income needed to buy a median-price house, assuming a 20 percent down payment and monthly mortgage payments equal to 25 percent of income. Affordability is now the highest since the index’s start in 1970.

Unfortunately, demand hasn’t followed affordability. In January, sales of new and existing homes continued prolonged declines, dropping 10.2 percent and 5.3 percent, respectively, from December. There’s a buyers’ strike. Why? Shouldn’t lower prices spur demand?

Well, yes. There are many theories as to why they haven’t. Perhaps prospective buyers can’t get loans. Or people are so gloomy that they’re afraid to buy. But the most important explanation is probably deflationary psychology. If yesterday’s $250,000 house is now $200,000, it may be $175,000 by June. Waiting is better.

Unless such deflationary psychology is broken, it becomes self-fulfilling. The more buyers wait, the more prices fall; and the more prices fall, the more buyers wait. The Obama administration essentially ignores this problem, though it can be addressed.

The simplest way is to bribe prospective buyers not to wait. For example: Give them a 10 percent tax credit, up to $15,000, on the purchase of a new home. Anyone who bought a $150,000 home would get a $15,000 tax break. The credit would expire in a year. Waiting would be costly. Buyers would delay only if they thought home prices would drop as much or more.

Precisely this proposal comes from the National Association of Home Builders. Normally, it would be an atrocious idea, because it would reward people who would buy anyway and would be skewed toward wealthier buyers. But now it’s worth trying.

Somehow, we need to cut bloated inventories (13 months of supply for unsold new homes), curb falling prices and stimulate new construction. The hope is that once buying improves, it would feed on itself. People would join from the sidelines. The NAHB says its plan would create 250,000 jobs and cost $40 billion — big money, but tiny compared with the hundreds of billions lavished on recovery programs. The Senate included the plan in its stimulus, but it was later dropped.

It wasn’t an Obama priority. Some administration proposals, focused on foreclosures, are desirable. It’s sensible to allow Fannie Mae and Freddie Mac to refinance older mortgages, at lower interest rates, even if homeowners’ equity has dropped below today’s requirement of 20 percent. This would reduce defaults and increase borrowers’ spending power.
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Other ideas seem more dubious. For $75 billion, another proposal would subsidize homeowners so their monthly mortgage payments dropped to 31 percent of their income. Because that’s still high, many of these homeowners would probably default anyway. Even worse is the “cramdown” proposal, backed by the administration. This would allow bankruptcy judges to cut mortgage payments. If passed, this would probably raise future mortgage costs because lenders would have less access to collateral.

In any case, minimizing foreclosures alone won’t revive housing. If the recession and unemployment worsen, foreclosures will increase, because people without jobs and income can’t make their monthly payments.

The best way to limit foreclosures is to promote an economic recovery by stimulating home buying. It’s true that the recent “stimulus” plan included a tax credit of up to $8,000, but that was restricted to first-time buyers and made “refundable,” meaning people could receive the money even if they didn’t owe taxes. These are younger and poorer buyers — the weak credit risks of today’s crisis. They won’t rescue housing.

All this is telling. The administration and Congress, though pledging to restore economic growth, care more about protecting foreclosure victims and promoting homeownership among the young and poor. Politics trumps economics.

Call it deflection politics.

Listen to the No. 2 Republican leader in the House, Rep. Eric Cantor. “We want to work with this president,” he said Sunday. “We want people to regain their confidence in Washington. And what people are looking for is results.”

But what of the $787 billion economic recovery legislation that not a single Republican in the House supported? That, Cantor said, was “Speaker (Nancy) Pelosi’s stimulus bill.”

Now consider White House chief of staff Rahm Emanuel. “It’s our desire that the Republicans would work with us and try to be constructive, rather than adopt the philosophy of somebody like Rush Limbaugh, who is praying for failure,” he said.

Six weeks into Obama’s presidency, both sides are trying to divine the terms for public debate. Obama and Republican lawmakers clearly understand two things: The president is popular; raw partisanship is not.

The Republican goal is to separate Obama from his policies and go after congressional Democrats, who fare much more poorly in public approval.

A convenient target
Obama, meanwhile, recognizes that part of his appeal is his outreach to Republicans, even if it’s not intended to bear immediate fruit. As a result, the White House and its allies won’t be too critical of Republican political leaders. Limbaugh, who has said he hopes Obama fails in his economic policies, makes a more attractive, and convenient, target.

This weekend, a labor-liberal coalition began airing about $100,000 in ads on national cable television and in Washington markets in an effort to handcuff the GOP to Limbaugh, whose provocations don’t always follow party script.

“Rush Limbaugh is the leader of the Republican Party — he says jump and they say how high,” said Brad Woodhouse, president of Americans United for Change, the liberal advocacy group that is sponsoring the ads with the American Federation of State, County and Municipal Employees.

Limbaugh has refused to back down. Speaking Saturday to a conservative convention in Washington, he said: “What is so strange about being honest and saying, ‘I want Barack Obama to fail if his mission is to restructure and reform this country so that capitalism and individual liberty are not its foundation? Why would I want that to succeed?’”

The words have made some Republicans flinch. And on Sunday, Cantor seemed eager to change the subject. “Nobody — no Republican, no Democrat — wants this president to fail, nor do they want this country to fail or the economy to fail,” he said on ABC’s “This Week.”

But no less a political pugilist than Emanuel drove the Limbaugh-Republican connection home.

“He is the voice and the intellectual force and energy behind the Republican Party,” Emanuel said on CBS’ “Face the Nation,” bestowing backhanded praise on Limbaugh. “And he has been upfront about what he views, and hasn’t stepped back from that, which is he hopes for failure.”

Hate-the-policy, like-the-policy-maker strategy
Republicans, meanwhile, have drawn careful distinctions between Obama and the rest of the Democratic Party.

“Republicans want to be partners with the President in finding responsible solutions to the challenges facing our nation, but thus far congressional leaders in the president’s own party have stood in the way,” said Rep. John Boehner, the House Republican leader, after Obama’s address to a joint session of Congress last week.

And Michael Steele, the chairman of the Republican National Committee, singled out Pelosi for criticism after the House approved the $410 billion spending bill. “It’s disappointing that less than 24 hours after President Barack Obama urged Congress to restore fiscal responsibility, Nancy Pelosi’s House Democrats passed a spending bill laden with pork,” he said.

Eventually, it will become harder for Republicans to continue their hate-the-policy, like-the-policy-maker strategy. Obama’s budget, with its sweeping calls for a restructured domestic policy, made clear that he was the Democrat driving the party’s ideas. And while Republicans have flattered Obama and his call for fiscal restraint, Obama aides left no doubt he will sign the spending bill and not heed their call for a veto.

“We just need to move on,” White House budget chief Peter Orszag said.

At the same time, the White House and its allies will be able to play the Limbaugh gambit only so long. After all, the talk radio master may have a big bullhorn, but it’s Republicans such as Cantor and Boehner who are driving the Republican message in the Capitol hallways.

For now, though, Limbaugh and Pelosi will do.