U.S. Bank Chiefs Prepare to Justify Their TARP-related Actions

On Tues., the heads of the U.K.'s largest banks appeared before Parliament to apologize for the mess that is that country's financial system. Today, the chiefs of America's top banks will sit before Congress and try to convince lawmakers that they are, in fact, using their TARP money to make loans.The Wall Street Journal says prepared remarks by bank "chieftains" such as J.P. Morgan Chase's Jamie Dimon, Bank of America's Kenneth Lewis and Citigroup's Vikram Pandit show they will "vigorously assert that they are lending despite economic headwinds, and are lending more because of the government capital they had received." They are due to give testimony before the House Committee on Financial Services.

It's also likely, however, that many of the bank bosses will need to defend themselves from accusations that they were out of touch with public sentiment over how TARP money is being spent, such as bonuses and events perceived as wasteful by some, says the Journal.

It looks like many of the banks have the numbers to show they are making an effort to revitalize lending and stem foreclosures. Figures from the Journal article, for example, show that Citi used its share of TARP money to provide nearly $37 billion in new lending initiatives and prevented 440,000 home foreclosures last year. And Chase's Dimon will point to his company's $150 million in new loans to businesses, consumers and other banks as evidence the TARP money is helping.

The article does bring up a good point from BofA's Lewis, however, regarding compensation. According to the Journal, Lewis says compensation is intended to grow business, enhance profitability and generate returns for investors-including U.S. taxpayers. With news of the government-imposed salary cap and greater scrutiny that will be given to what and how financial services executives are paid, I can't help but wonder whether this will do more harm than good. Perhaps it's a helpful short-term fix to bring bankers back down to earth and to assuage angry taxpayers. However, in the long-term, wouldn't limiting compensation and bonuses for senior workers discourage some good people from entering the upper echelons of banking? Would innovation suffer? When will be "the right time" to lift the salary caps? I guess that's the price businesses have to pay when the government is forced to step in and take over. But it's only temporary... Right?

I'd like to hear your thoughts on the kind of impact the TARP program may have on banking innovation. Feel free to speak up below.