The Dirty Little Secret Of The Banking Industry
Paulson's Piggy Bank, aka The Department of the Treasury. (Sorry it's kind of a crappy photo, but we sped past, worried that some big hand would reach into our car, grab us, and shake us down for our cash.)
Bankers' best friend, Henry Paulson, who's been dispensing billions of dollars in taxpayer-funded allowance money to his buddies, apparently "forgot" to attach any strings before he forked it over. Whoopsy!
Shockingly, bankers are acting in their interest instead of the taxpayers'. (Who woulda thunk it!)
You can, however, thank The New York Times' Joe Nocera, who somehow snuck onto a recording of a JP Morgan employee-only conference call, and found out where that money they were supposed to lend to keep the recession from getting worse ($25 billion in federal funds in their case) is actually going to go. Nocera writes:
In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who's been indiscreet enough to say it within earshot of a journalist.(He didn't mean to, of course, but I obtained the call-in number and listened to a recording.)
"Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase," he began. "What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop."
Read that answer as many times as you want -- you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I'm not naming because he didn't know I would be listening in) explained that "loan dollars are down significantly." He added, "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side." In other words JPMorgan has no intention of turning on the lending spigot.
It is starting to appear as if one of Treasury's key rationales for the recapitalization program -- namely, that it will cause banks to start lending again -- is a fig leaf, Treasury's version of the weapons of mass destruction.
In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, "the government wants not only to stabilize the industry, but also to reshape it." Now they tell us.
Indeed, Mr. Landler's story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: "It couldn't be clearer if they had taken out an ad."
Is anybody AWAKE out there? At what point do the taxpayers start screaming? I mean, almost everyone I know is downscaling in various ways, and the government is giving our money to bankers and hoping they'll do the right thing?
Excuse me if I'm too economically naive to know if this is somehow a must to keep from having breadlines on the streets. Do tell me if I am. And if we must fork over the money we work hard to earn...can't we attach a string or two? At least a couple piece of dental floss with a couple weak stopgaps on the other end?
Righteous post.
Apologies if this has been linked before or is otherwise redundant... But this guy does an excellent job of explaining the problems without using big words. He points a home video camera at his computer spreadsheet and lets 'er rip.
Crid [cridcridatgmail] at October 26, 2008 12:03 AM
It is absolutely clear that the current financial crisis is due in large part to individual banks being too large and two financially intertwined. Why would anyone want them to become even larger and fewer?
bradley13 at October 26, 2008 1:54 AM
Better child care!
(Hi Jody!)
Crid [cridcridatgmail] at October 26, 2008 2:43 AM
are you kidding...give the banks all the money they can't screw us as bad as the government will or does, at least someone might get a job out it.
don at October 26, 2008 6:01 AM
We got this story, and the one about the Obama campaign using credit card fraud to raise money, so now I'm looping this video.
doombuggy at October 26, 2008 6:34 AM
You can't make a reasonable decision if you don't know who or what to blame. Which is more believable:
() All of the big banks together, along with the GSE's (Government Sponsored Enterprises) Fannie Mae and Freddie Mac, decided that they could make money by making or buying risky loans, against government advice and regulation, and contrary to all past banking practice, OR
() They followed government policy, regulation, and incentive to make loans and sell them to Fannie and Freddie, under the loan terms that Fannie and Freddie found acceptable.
This same government (Congressmen and Senators) is now handing out money to "save" us. This money is being borrowed against future collection in taxes. This is going to hit everyone, not just the "rich". Or, if they don't borrow it, and just print it, there will be inflation in 2 years that will reduce the value of current incomes. A tax in fact if not in name.
Don't trust the people who contrived this disaster. Vote out your Congressman and Senator unless they opposed Fannie, Freddie, and the financial bailout. Empower a new group of people to work things out.
Andrew Garland
Story: We Guarantee It
Andrew Garland at October 26, 2008 7:14 AM
Heh...there was a nice report on NPR about this topic, on how all the banks are clamoring for a share of the cut, whether or not they actually need it. It's only money, right?
Tha Mad Hungarian at October 26, 2008 5:35 PM
Amy, I'm sorry I haven't posted this before.
There's a principle involved here, one that you will see again and again, and w/r/t different issues.
The first duty of any organization is to preserve its own existence. It's not you. It's never you. Its actions take on the appearance of working for the average member's, or the public, good, but there is no direct correlation. The charter may not even have anything in it regarding its role, but people won't notice, and they won't believe it if you point it out to them. For example, you have no Constitutional right to vote for President, and chances are the Constitution itself doesn't say what you think it does.
The public is easily distracted, so agents' roles are increasingly mysterious. When a majority cannot recognize that the goal of an agency is not their welfare, the agency can run amok until their primary duty is at risk. Ironically, when a majority cannot understand that their welfare is not the duty of any particular public agency, the public itself is at risk. But I digress.
Thus, you have Bank of America, the US Treasury and assorted actions of Congress, the judiciary and the Executive Branches - all unaccountably distant from any semblance of justice.
Like your homeowners' association.
Radwaste at October 26, 2008 5:41 PM
Brutal metaphor, Raddy.... Brutal.
Crid at October 26, 2008 6:59 PM
Amy:
I recommend stopping by your local library and grabbing the October 14th issue of The Economist.
It contains a precis of the situation and how we got here. It will take the better part of an hour to read it, but it will be well worth your time. (The writing is pitched at the college graduate level, but that is a doddle for you.)
For instance, it explains why the Chinese refusing to allow the Yuan's exchange rate to freely float is significantly contributed to the real estate bubble in the US.
Heh...there was a nice report on NPR about this topic, on how all the banks are clamoring for a share of the cut, whether or not they actually need it. It's only money, right?
Shows how much NPR knows.
The primary reason credit has seized is a lack of confidence that institutions have the liquidity to repay.
If only some banks take the equity investment, then they become suspect.
Consequently, the Fed forced even strong banks to take the money.
Hey Skipper at October 27, 2008 12:57 AM
bradley13, to answer your question, because an industry with only a few large players is much easier for the government to control and exert inordinate influence over. The players themselves go along with this because government promises to more or less guarantee their profit margins, and to enact additional regulation which will make it impossible for new players to enter the industry in the future. It's a co-dependent relationship; the dictionary defintion of facism.
It sometimes backfires. Twelve years ago, the Defense Department force a consolidation on the defense industry by changing the way it procures things; lumping work into a small number of huge, winner-take-all contracts eliminated most of the smaller players. Now the DoD complains that there isn't enough competition.
Cousin Dave at October 27, 2008 10:22 AM
Amy:
Excuse me if I'm too economically naive to know if this is somehow a must to keep from having breadlines on the streets. Do tell me if I am. And if we must fork over the money we work hard to earn...can't we attach a string or two?
Yes, you are economically naive, and in fact it is completely necessary.
All the instruments the Fed is purchasing have an intrinsic non-zero value (a foreclosed house is worth far more than nothing), and the prices at which the Fed is purchasing them may very well be below their value in the medium term (say, three years) future.
Therefore, not only will the ultimate cost to the taxpayers will be far less than the headline numbers you read, it is well within the realm of reason that the government could make money on this deal.
Judging by your photo, you are far too young to remember when the federal government bailed out Chrysler.
And ultimately made a profit.
Hey Skipper at October 27, 2008 5:39 PM
The government didn't bailout Chrysler, it guaranteed loans... Which were repaid, early and in full.
Crid at October 27, 2008 7:09 PM
Crid:
Your depiction is more correct than mine.
However, the essential point remains. The headline cost to the taxpayer of the Chrysler loan guarantees was entirely different than the actual cost.
Just so here, with the added potential of eventually returning a profit.
Hey Skipper at October 27, 2008 7:23 PM
Lesson: Iacocca for Secretary of Treasury.
brian at October 27, 2008 9:39 PM
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