The Emergency Economic Stabilization Act (more commonly known as the Wall Street Bailout Plan) was passed under the presumption that $700B was needed to buy up troubled assets such as mortgage backed securities (which is why the program was originally called TARP - for Troubled Asset Relief Program). The program was supposed to work by taking the troubled assets off the market and off bank balance sheets thereby enabling the banks to regain their footing and not be forced to sell these assets at fire sale prices.  The plan was supposed to stop the downward price spiral of mortgage related securities, free up capital for loans, slow foreclosures and stabilize the financial markets.  That was the plan anyway…

But the act placed very few restrictions on how the money could be used. So its not surprising that the use of the funds changed from purchasing troubled assets to direct injection of capital (taxpayer provided) into a handful of financial institutions who promised to make those funds available for loans. It now appears that some of those institutions have chosen to pay bonuses and dividends that they would not otherwise been able to afford without the injection of government funds.

Representative Henry Waxman (D. - California), Chairman of the House Committee on Government Oversight and Reform, sent this letter to Mr. Vikram Pandit, CEO of CitiBank. in which the Chairman observes:

Earlier this month, the Treasury Department announced plans to invest $125 billion of
taxpayer funds in nine major banks, including yours, as an emergency measure to rebuild
depleted capital. According to recent public filings, these nine banks have spent or reserved
$108 billion for employee compensation and bonuses in the first nine months of 2008, nearly the same amount as last year.

Some experts have suggested that a significant percentage of this compensation could
come in year-end bonuses and that the size of the bonuses will be significantly enhanced as a
result of the infusion of taxpayer funds. According to one analyst, “Had it not been for the
government’s help in refinancing their debt they may not have had the cash to pay bonuses.”

Chairman Waxman states that his committee will be investigating these claims and requested information from CitiBank.

For reference, the financial institutions which received TARP cash injections are listed below. The rest of the approximately $350M which has been spent so far under the program was used to shore up AIG (in the form of loans and purchase of troubled assets).