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Dems Warn Banks: Lend Bailout Money -- or Else

We’ve been pointing outfor thepast 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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