Saturday, October 25, 2008

Treasury bailout is a fraud!

“Chase recently received $25 billion in federal funding. What effectwill that have on the business side and will it change our strategiclending 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 UnitedStates government, when a JPMorgan employee asked that question. Itcame toward the end of an employee-only conference call that had beenlargely devoted to meshing certain divisions of JPMorgan with its newacquisition, 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 conferencecall didn’t hesitate to answer a question that was pretty politicallysensitive 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 bailoutmoney to recapitalize banks instead of buying up their toxicsecurities, which he had then sold to Congress and the American peopleas the best and fastest way to get the banks to start making loansagain, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry isthat it has no intention of using the money to make new loans. But thisexecutive was the first insider who’s been indiscreet enough to say itwithin 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 folkswho are struggling more than Chase,” he began. “What we do think itwill help us do is perhaps be a little bit more active on theacquisition side or opportunistic side for some banks who are stillstruggling. And I would not assume that we are done on the acquisitionside just because of the Washington Mutual and Bear Stearnsmergers. I think there are going to be some great opportunities for usto grow in this environment, and I think we have an opportunity to usethat $25 billion in that way and obviously depending on whetherrecession turns into depression or what happens in the future, youknow, we have that as a backstop.”

Read that answer as many times as you want — you are not going tofind a single word in there about making loans to help the Americaneconomy. On the contrary: at another point in the conference call, thesame executive (who I’m not naming because he didn’t know I would belistening in) explained that “loan dollars are down significantly.” Headded, “We would think that loan volume will continue to go down as wecontinue to tighten credit to fully reflect the high cost of pricing onthe loan side.” In other words JPMorgan has no intention of turning onthe lending spigot.

It is starting to appear as if one of Treasury’s key rationales forthe recapitalization program — namely, that it will cause banks tostart lending again — is a fig leaf, Treasury’s version of the weaponsof mass destruction.

In fact, Treasury wants banks to acquire each other and is using itspower to inject capital to force a new and wrenching round of bankconsolidation. As Mark Landler reported in The New York Times earlierthis 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 funnelsome of the bailout money to help banks buy other banks. And, in analmost unnoticed move, it recently put in place a new tax break, worthbillions to the banking industry, that has only one purpose: toencourage bank mergers. As a tax expert, Robert Willens, put it: “Itcouldn’t be clearer if they had taken out an ad.”[...]


  1. I guess what the employee is saying is that the twenty five billion dollars will be used to shore up losses that were incurred by the bank. However as far as cash flow is concerned for credit the bank is not ready to again expand its risk portfolio and stick its toe into the water yet.

    More corporate welfare.

  2. People who are interested in the economy should read the Wall Street Journal and not the NY Times for their information.

    This December's reruns of "It's a Wonderful Life" might remind Americans of some of the consequences of the banks failures and economic collapse that led to the Great Depression.

    What happens to the average American if suddenly his credit cards stopped working?

    or his mortgage is suddenly foreclosed? (UK banks began calling in mortgages last March in response to deflation in housing prices).

    What would happen to the average American if his paycheck bounced because the bank on which it was drawn could not pay out?

    What would happen to the average American if he went to withdraw his savings to find the bank shuttered and his every last penny gone?

    In Bernanke's June 1983 "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression". THE AMERICAN ECONOMIC REVIEW 73 (3): 257-276:

    Debt is cited as one of the main causes of the Great Depression. Banks which had financed this debt began to fail as debtors defaulted and depositors attempted to withdraw their deposits, triggering multiple bank runs.

    Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier, because prices and incomes fell by 20–50% but the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By 1933, depositors had lost $140 billion in deposits.

    Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending.Banks built up their capital reserves and made fewer loans, which intensified deflationary pressures. A vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression."

    Everyone today knows that their deposits are protected by the FDIC, an institution founded during the Great Depression to prevent bank runs such as crippled the economy during that time.

    The Great Depression saw
    more than 50% of the nation’s
    banks go out of business,
    leaving their depositors penniless.
    This destroyed consumer confidence
    in the nation’s banks. To restore that confidence, the Federal government in 1933 created the Federal Deposit Insurance Corporation. Although
    chartered by Congress, FDIC is a
    private insurance company and
    receives no federal funding.
    Rather, its money comes from
    banks, which pay insurance premiums
    to FDIC, much as you pay
    premiums to your auto insurer. Thus,when a bank fails, it files a claim with FDIC requesting that it pay off the bank’s depositors, just as you would ask your auto insurer to pay your
    repair bill when you have an accident.

    The FDIC was designed to reassure
    consumers that their money would
    be safe even if their bank was to fail.

    Federal Deposit Insurance Corporation, with $45.2 billion on hand as of June 30, will fall far short of the $200 billion or more needed to pay claims by the end of 2009.

    Seven banks collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.

    INDY MAC, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.

    By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.

    It won't take too many failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion it will need to pay claims by the end of next year.

    The U.S. Treasury must come to the rescue of the banks or the US will sink into a Great Depression.

    Just as today, in 1932 bank assets were tenuous at best and everyone knew it. President Hoover created the “Reconstruction Finance Corporation or RFC” in 1932.

    The Reconstruction Finance Corp., proved that making the government a shareholder in thousands of banks can restore order during periods of financial chaos.

    The RFC was repaid the roughly $1.1 billion it invested in nearly 6,800 banks during the Depression. That suggests the same should happen this time.

    I also recommend reading about the economic policies of John Maynard Keynes (ie. General Theory)who advocated government spending as a means for getting an economy out of Depression.

    Although Keynes never mentions fiscal policy in The General Theory, and instead advocates the need to socialize investments, Keynes ushered in more of a theoretical revolution than a policy one. His basic idea was simple: to keep people fully employed, governments have to run deficits when the economy is slowing because the private sector will not invest enough to increase production and reverse the recession.

    Keynesian economics was the basis for the New Deal which was criticized at the time for being Socialism.

    Anyway, I am not going to cover Economics 101 in a single post, but I do hope that this will inspire the readers of this blog to read up on the topic.


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