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Banks hoarding bailout money, still not giving loans
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| josh4 |
| quote: | So When Will Banks Give Loans?
By JOE NOCERA
�Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?�
It was Oct. 17, just four days after JPMorgan Chase�s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.
Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.
The JPMorgan executive who was moderating the employee conference call didn�t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.
Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.
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.�
Friday delivered the first piece of evidence that this is, indeed, the plan. PNC announced that it was purchasing National City, an acquisition that will be greatly aided by the new tax break, which will allow it to immediately deduct any losses on National City�s books.
As part of the deal, it is also tapping the bailout fund for $7.7 billion, giving the government preferred stock in return. At least some of that $7.7 billion would have gone to NatCity if the government had deemed it worth saving. In other words, the government is giving PNC money that might otherwise have gone to NatCity as a reward for taking over NatCity.
I don�t know about you, but I�m starting to feel as if we�ve been sold a bill of goods.
�
The markets had another brutal day Friday. The Asian markets got crushed. Germany and England were down more than 5 percent. In the hours before the United States markets opened, all the signals suggested it was going to be the worst day yet in the crisis. The Dow dropped more than 400 points at the opening, but thankfully it never got any worse.
There are lots of reasons the markets remain unstable � fears of a global recession, companies offering poor profit projections for the rest of the year, and the continuing uncertainties brought on by the credit crisis. But another reason, I now believe, is that investors no longer trust Treasury. First it says it has to have $700 billion to buy back toxic mortgage-backed securities. Then, as Mr. Paulson divulged to The Times this week, it turns out that even before the bill passed the House, he told his staff to start drawing up a plan for capital injections. Fearing Congress�s reaction, he didn�t tell the Hill about his change of heart.
Now, he�s shifted gears again, and is directing Treasury to use the money to force bank acquisitions. Sneaking in the tax break isn�t exactly confidence-inspiring, either. (And let�s not even get into the less-than-credible, after-the-fact rationalizations for letting Lehman default, which stands as the single worst mistake the government has made in the crisis.)
On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson�s point man on the bailout plan, on the subject of banks� continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans � �besides rhetorically begging them?�
�We share your view,� Mr. Kashkari replied. �We want our banks to be lending in our communities.�
Senator Dodd: �Are you insisting upon it?�
Mr. Kashkari: �We are insisting upon it in all our actions.�
But they are doing no such thing. Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.
Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldn�t take place.
But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the �too big to fail� category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask the fact that some of them are much weaker than others.
We have long been a country that has treasured its diversity of banks; up until the 1980s, in fact, there were no national banks at all. If Treasury is using the bailout bill to turn the banking system into the oligopoly of giant national institutions, it is hard to see how that will help anybody. Except, of course, the giant banks that are declared the winners by Treasury.
JPMorgan is going to be one of the winners � and deservedly so.
Mr. Dimon managed the company so well during the housing bubble that it is saddled with very few of the problems that have crippled competitors like Citi. The government handed it Bear Stearns and Washington Mutual because it was strong enough to swallow both institutions without so much as a burp.
Of all the banking executives in that room with Mr. Paulson a few weeks ago, none needed the government�s money less than Mr. Dimon. A company spokesman told me, �We accepted the money for the good of the entire financial system.� He added that JP Morgan would use the money �to do good for customers and shareholders. We are disciplined to try to make loans that people can repay.�
Nobody is saying it should make loans that people can�t repay. What I am saying is that Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital � and are perfectly capable of repaying the money. How about a loan program for them, Mr. Dimon?
Late Thursday afternoon, I caught up with Senator Dodd, and asked him what he was going to do if the loan situation didn�t improve. �All I can tell you is that we are going to have the bankers up here, probably in another couple of weeks and we are going to have a very blunt conversation,� he replied.
He continued: �If it turns out that they are hoarding, you�ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.�
Let�s hope so.
http://www.nytimes.com/2008/10/25/b...r=1&oref=slogin |
Does this really surprise anyone? Apparently the plan is to play out the troubled markets so the banks can buy up their competitors for cents on the dollar. Dodd gets on my nerves, he talks a big game and gets red in the face but nothing ever comes from it. |
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| {b.s.e.} |
| quote: | Originally posted by josh4
...so the banks can buy up their competitors for cents on the dollar. . |
It wouldn't be the first time. |
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| Shakka |
| quote: | Originally posted by josh4
Does this really surprise anyone? |
No. The system is broken, in part, because none of these institutions trust each other given the poor decisions they've all made. No amount of "free" money from the government can change that. We need clearing prices for all of this toxic garbage so that the markets can start to function properly again. Unfortunately, it's a huge game of chicken and nobody wants to actually show their hand. Instead they all take a multi-billion dollar mark and tell the public that they've marked their assets down by an appropriate amount. However, at the end of the day, nobody knows what the hell they're still holding or what it is actually worth. This is basically a system where the government is going to figure out who the strong and who the weak are, and let the strong swallow up the weak and/or let the weak fail, leaving us with a theoretically more stable system in the end.
| quote: | | Dodd gets on my nerves, he talks a big game and gets red in the face but nothing ever comes from it. |
And he should. As Chairman of the Senate Banking Committee, he should've had a lot more oversight, involvement, and understanding of what was going on years ago before it came to such a nasty head. He points fingers, but never points one at himself. |
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| {b.s.e.} |
| quote: |
He continued: �If it turns out that they are hoarding, you�ll have a revolution on your hands. People will be so livid and furious that their tax money is going to line their pockets instead of doing the right thing. There will be hell to pay.�
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That's a frightening statement, considering how easily a police state could be invoked. |
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| pkcRAISTLIN |
yeah, was reading this last night. what a load of bollocks.
| quote: | Originally posted by {b.s.e.}
That's a frightening statement, considering how easily a police state could be invoked. |
grow up :rolleyes: |
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| mndeg |
I called it!
http://paul.kedrosky.com/archives/2008/10/23/the_bank_capita.html |
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| atbell |
| quote: | Originally posted by josh4
Does this really surprise anyone? Apparently the plan is to play out the troubled markets so the banks can buy up their competitors for cents on the dollar. Dodd gets on my nerves, he talks a big game and gets red in the face but nothing ever comes from it. |
The banks have been legislated to hold money.
Part of the many different government responses to the crisis (everythings a ing crisis these days) is that banks need to increase thier reserve ratio, ie hold more cash. |
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| josh4 |
Legislated to hold money? If this was part of the response, why is the WH telling them to quit being so stingy.
| quote: |
White House tells banks to stop hoarding money
Tuesday, October 28, 2008
(10-28) 12:27 PDT WASHINGTON (AP) --
An impatient White House served notice Tuesday on banks and other financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans.
http://www.sfgate.com/cgi-bin/artic...L&feed=rss.news |
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| Shakka |
| quote: | Much Bank Aid May Not Go to Loans
By DAVID ENRICH, ROBIN SIDEL and MICHAEL R. CRITTENDEN
The federal government's bank-rescue plan will spread more than $15 billion among 10 regional banks, those companies announced Monday. But some banks acknowledged that perhaps only a small chunk of the money would be funneled into loans.
[SunTrust] Getty Images
SunTrust will take more Treasury money to help expand business.
That deepened criticism from some lawmakers that Treasury Secretary Henry Paulson should have set tougher conditions on the $250 billion being pumped into the U.S. banking industry through capital infusions. "In their eagerness to get everyone on board, I think they failed to make the program stringent enough," Sen. Charles Schumer (D, N.Y.) said in an interview.
Monday's announcements ranged from credit-card issuer Capital One Financial Corp., based in McLean, Va., and approved for $3.55 billion in taxpayer-funded capital, to First Niagara Financial Group Inc., a 114-branch Lockport, N.Y., bank that will get $186 million.
Nearly $35 billion in capital infusions have been disclosed since Friday, led by the $7.7 billion in cash that PNC Financial Services Group Inc., Pittsburgh, is using to buy National City Corp. for $4.69 billion in stock. The first nine banks in the Troubled Asset Relief Program are getting an additional $125 billion, meaning the Treasury Department now has doled out roughly two-thirds of its planned injections.
The list of recipients is likely to mushroom, since many large and small U.S. banks still are hungry for capital. Federal funds also are viewed as a seal of approval by regulators, likely making it easier for banks on the government's list to raise more money from outside investors but much tougher for banks that fail to qualify for aid.
"I don't think the weak guys have a choice other than to apply," said John Duffy, chief executive of Keefe, Bruyette & Woods Inc., an investment bank that provides financial advice to banks. "If they get denied, their regulators are basically accelerating their death."
Several banks said Monday they plan to use their new capital to make loans and possibly buy weakened rivals. Others suggested a substantial increase in loan volume is unlikely as long as the U.S. economy is troubled, since that is likely to worsen loan delinquencies and charge-offs.
James M. Wells III, chairman, president and chief executive of SunTrust Banks Inc., said the Atlanta bank will engage in "prudent deployment" of "some" of the $3.5 billion for which it was approved in "expansion of careful lending" and potential acquisitions, according to a statement. SunTrust also slashed its dividend Monday by 30%.
More
* Sortable Chart: Treasury's bank stakes
First Niagara President and CEO John R. Koelmel said the bank is "strongly committed to supporting the economy in upstate New York." In a conference call last week, Mr. Koelmel said that First Niagara was "clearly looking longer term, and opportunities would certainly include M&A at that point, as well as continued organic growth."
Zions Bancorp, Salt Lake City, is expected to announce later this week that the Treasury Department has approved its application for a sizable infusion, according to a person familiar with the matter. A Zions executive said last week the company wasn't likely to plow much government capital into new loans unless Zions also could increase its deposits.
Synovus Financial Corp., a Columbus, Ga., bank, applied Friday for government capital, spokesman Gregory Hudgison said. Other banks are still working on applications. Still others haven't decided whether to apply.
The government has set a Nov. 14 deadline. Comptroller of the Currency John Dugan, one of the nation's primary bank regulators, reiterated Monday that he expects banks to deploy the government's capital. But he noted that lending isn't the only way for them to use it.
"The capital is there both to be lent and to make them stronger, so counterparties will have more confidence in them and lend to them more freely," Mr. Dugan said.
House Financial Services Chairman Barney Frank (D, Mass.) said Monday that it is "legitimate to put some conditions" on the capital injections to prevent banks from holding on to the taxpayer funds.
Messrs. Frank and Schumer suggested lawmakers could be reluctant to let the Treasury Department have access to the second $350 billion in funds authorized as part of the $700 billion rescue plan if their concerns aren't addressed. "That's why we did it," Mr. Schumer said of the decision to allocate the money in phases. Lawmakers want to "make sure the stated goal and the result have some degree of coincidence," he added.
Mr. Frank warned that resistance by banks to convert their new capital into loans could haunt the industry's future efforts to seek regulatory relief and other legislative assistance. |
Source: Todays' WSJ, C1 |
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