Dems Warn Banks: Lend Bailout Money—or Else
We’ve been pointing out for the past week that the government’s bailout money to banks doesn’t actually require the banks to lend out the money. Instead, many of the banks are planning to use the money to gobble up other banks. Today’s Wall Street Journal has more details on those plans—and criticism from senators who say there should be requirements for banks benefitting from the government’s munificence.
“In their eagerness to get everyone on board, I think they failed to make the program stringent enough,” Sen. Charles Schumer (D-NY) told the Journal.
The Journal flags another bank that has been approved for government money—and isn’t planning on using much of it for lending. Citing an “executive” at Salt Lake City’s Zions Bancorp, the Journal says the bank “isn’t likely to plow much government capital into new loans unless Zions also could increase its deposits.”
The chairman of another one of the banks to get cash, First Niagara One ($186 million), gave a similar message to investors in a conference call last week. Quoted in the Journal, he said the bank is “clearly looking longer term, and opportunities would certainly include M&A [mergers and acquisitions] at that point, as well as continued organic growth.”
A top Treasury Department regulator, John Dugan, suggested to the Journal that banks should be using at least part of the money to lend: “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.”
But Congress might be about to put its foot down and end the banks’ free hand. House Financial Services Chairman Barney Frank (D-MA) told the Journal that it’s “legitimate to put some conditions” on the capital injections. According to the paper:
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.
One thing that is not clear to us is what the overall economic effect might be of banks using much of the government cash to buy other banks rather than to lend. After all, contrary to the criticism, perhaps using the money for mergers would be a big help for the economy. Or not. (Hey, we’re not economists here. But we are going to call some, and we’ll report back.) Meanwhile, if you have thoughts—and know a lot about this stuff—drop us a line.
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1 comments
Richard Spix
Oct. 28, 2008, 4:52 p.m.
Leftys have historically and routinely been fractionated over the means to, and extent of “reforms”. The economic meltdown has, at least temporarily, unified the progressives to permit a wholesale shift in American politics if the polls are right. This has created a polarization of the largely class-based camps and the breakdown of the previously controlling elite-religous consortium. The polarization leads to strident, even shrill claims of world-ending scenarios. Definitional labeling such as “Socialist” does little to advance the substantive discourse. It is hard to think of any government policy that is not redistributive in some way. An example of discourse that should have occurred: Obama took a public position favoring a homeloan modification program administered by Bancruptcy judges be included in the bailout/rescue. Reps said thanks, but no thanks to the proposal and it was transformed into a toothless program without the judges. Obama lobbied Dems for support basically saying that the proposal could be brought up again after the election when they would likely be in a stronger position. Fast forward. We’re now looking at 27,000 home foreclosures a month with more ARM resets to occur over the next three years. Even financial companies (e.g. PNC) that take bailout redistribution are balking at actually allowing mortgage modifications for home owners, claiming their constitutional right against “impairment of contract”. What’s really going on? Existing Federal law for years has given bancruptcy judges the power to modify mortgages for second, vacation, or investment homes (and luxury boat loans)so that the debtors can keep them after declaring bancruptcy; but not primary residences. Is it really “socialist” to have the same protection for folk that actually live in the home? Redistribution to the elites justified with a “tricle-down” theory is good, but the life as we know it will end when the theory is modified to a bottom-up approach? The vast number of non-performing mortgages could be restored to some level of performance, and their derivatives could hence regain value using an effective mortgage modification program. It is unlikely under the current administration where Sec. Paulson gives away $7.7 Billion bonus to PNC and doesn’t require that ANY mortgages actually be modified for our kid’s money. See
http://seekingalpha.com/article/101965-hedge-funds-threaten-to-block-mortgage-modifications
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