Talking Business – So When Will Banks Give Loans? – NYTimes.com
Joe Nocera at the NYT notes, with some damning evidence, that banks (at least JP Morgan Chase, now the proud owner of my bank, Washington Mutual) don’t really plan on using Treasury Secretary Hank Paulson’s magical capital injections to free up credit for ailing business owners, despite that being the entire justification for the capital injections in the first place. Instead, banks would prefer to munch on the tattered carcasses of other banks through high-finance acquisitions.
I supported these, uh, injections (into the rump!), since they would yield profits for the government if they work, and hopefully give some control to the government over how the businesses are run. (A note on “moral hazard”: if you want to bail out a failing bank, make sure heads roll, first. CEOs getting generous severance packages for screwing up creates an environment where CEOs take risks without personally facing the consequences, convinced that shareholders have their backs. They might, say, bet the entire company on dodgy financial vehicles, for instance.) Of course, to sweeten the deal for his Wall Street chums, Paulsen made sure that the government bought only non-voting shares, and that the deal wouldn’t put restrictions on how the banks used their money. Wow! Imagine if you went to bankuptcy court and got terms this favorable. You’d think the government would have a bit more leverage in dealing with companies about to go belly-up if they can’t get a government lifeline.
Back to the issue at hand. The whole idea of the “capital injections” was that we would partially nationalize the nation’s failing banks to keep them afloat for a while. The government, as it is said, is the “investor of last resort”; if nobody else will buy stock in your company, perhaps Uncle Sam will (though I’m flabbergasted at why Paulsen wouldn’t have insisted on giving Uncle Sam a seat on the board). This was an idea initiated by Gordon Brown, Prime Minister of Britain, and now being copied all over the world as though it were a high-concept game show. Now, Britannia had a good idea: banks that bent over and accepted the injections would be held to certain terms on how they spent the money (according to Nocera, here); for instance, they would have to lend the money to ailing businesses, as freeing up credit was the entire justification for the plan here and everywhere. The United States of America, on the other hand (or at least its appointed “Count Baron von Moneypants,” in Jon Stewart’s words), made no such requirement.
Back to the damning evidence. So, banks, at least JP Morgan Chase, are more focused on consolidation than the stated goal of “freeing up credit.” Without the requirement to lend, they won’t, and are instead planning to use the money to purchase smaller banks and place them on their corporate mantles. Now, I generally think well of the practice of, say, Chase buying out Bear Stearns and the Surprised Cow Bank (“Wha?! Mooooo…”); if Bank of America buys out Merrill Lynch for $2.50 and a Snickers bar, that’s a lot of accounts that aren’t to go down in a bank failure. (And, you’ll note that Paulsen let Lehman Brothers go under, begetting this crisis; had he given government backing to an acquisition, Lehman Brothers may have found a suitor and we may not have been faced with a crisis so big that we’d need to give him sweeping powers to handle it. …Wait a minute…)
But, there’s a problem: this disaster began with institutions “too big to fail”, well, failing. If big banks decide to play Pac-Man and gobble up all the smaller (or formerly big) ones, the next financial crisis will involve banks way too big to fail. Plus, there’s the problem Nocera focuses on: this whole bailout package was proposed as a way to free up credit, so that businesses can get loans and your friend can keep his job in lean times. If banks want to play hunter-gatherer with the money—instead of making loans and freeing up credit—what, exactly, are we paying for?
Is Paulsen—a man who predicted none of this, was consistently behind the curve, and spent the months before the crisis insisting everything was fine—just laying the groundwork for the next big crisis? And when does he plan to disprove our notion of him as a man beholden to his former colleagues on Wall Street and put some enforcement into his role as temporary supreme bank lord? When is Uncle Sam going to start carrying a big stick, and stop simply handing out free bags of money?