No One Could Have Seen This Coming
Gee, what a surprise: Banks Are Likely to Hold Tight to Bailout Money
The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?
John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.
“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion.”
Granted, the banks are in a deep hole. For every dollar the banks earned during the industry’s most prosperous years, they have now wiped out $1.06.
Even with the capital from the government, analysts say, the banking industry still needs to raise around $275 billion in light of the looming losses.
But Treasury Secretary Henry M. Paulson Jr. is urging them to use their new capital soon. On Monday, Mr. Paulson unveiled plans to provide $125 billion to nine banks on terms that were more favorable than they would have received in the marketplace. The government, however, has offered no written requirements about how or when the banks must use the money.
“There is no express statutory requirement that says you must make this amount of loans,” said John C. Dugan, the comptroller of the currency. “But the economics work so that it is in their interest to do so.”
Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would “be open to the court of public opinion.”
The banks could use the money from the government for any number of things. Some analysts say the banks may use it to acquire weaker competitors. Others say they might use it to avoid painful cost-cutting. And still others say the banks may sit on the capital.
Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government’s money.
“I don’t think that the market wants to see that capital being put to work to leverage the business up again,” said Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month. “My expectation is it’s quarters off, not months off, before you see that capital being put to work.”
…so, could someone tell me again how this is supposed to help the economy, when the banks don’t seem to be too eager to use our money for its intended purpose? And can anyone give me one single reason to have any faith at all in the wisdom and good sense of ANYONE in the Senate, the House, or the White House?
October 22nd, 2008 at 3:24 am
[...] No One Could Have Seen This Coming …back on credit lines for businesses, mortgages, home equity loans and credit card offers, and … put to work to leverage the business up… [...]