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The "dirty little secret" of the US bank bailout

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  • Robert Sterling
    Please send as far and wide as possible. Thanks, Robert Sterling Editor, The Konformist http://www.konformist.com
    Message 1 of 1 , Oct 30, 2008
      Please send as far and wide as possible.

      Thanks,
      Robert Sterling
      Editor, The Konformist
      http://www.konformist.com

      http://wsws.org/articles/2008/oct2008/pers-o27.shtml

      The "dirty little secret" of the US bank bailout
      27 October 2008

      In an unusually frank article published in Saturday's New York
      Times, the newspaper's economic columnist, Joe Nocera, reveals what
      he calls "the dirty little secret of the banking industry"--namely,
      that "it has no intention of using the [government bailout] money to
      make new loans."

      As Nocera explains, the plan announced October 13 by Treasury
      Secretary Henry Paulson to hand over $250 billion in taxpayer money
      to the biggest banks, in exchange for non-voting stock, was never
      really intended to get them to resume lending to businesses and
      consumers--the ostensible purpose of the bailout. Its essential aim
      was to engineer a rapid consolidation of the American banking system
      by subsidizing a wave of takeovers of smaller financial firms by the
      most powerful banks.

      Nocera cites an employee-only conference call held October 17 by a
      top executive of JPMorgan Chase, the beneficiary of $25 billion in
      public funds. Nocera explains that he obtained the call-in number
      and was able to listen to a recording of the proceedings,
      unbeknownst to the executive, whom he declines to name.

      Asked by one of the participants whether the $25 billion in federal
      funding will "change our strategic lending policy," the executive
      replies: "What we do think, it will help us to be a little bit more
      active on the acquisition side or opportunistic side for some banks
      who are still struggling."

      Referring to JPMorgan's recent government-backed acquisition of two
      large competitors, the executive continues: "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."

      As Nocera notes: "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."

      Later in the conference call the same executive states, "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."

      "It is starting to appear," the Times columnist writes, "as if one
      of the Treasury's key rationales for the recapitalization program--
      namely, that it will cause banks to start lending again--is a fig
      leaf.... 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."

      Early this month, he explains, "in a nearly unnoticed move,"
      Paulson, the former CEO of Goldman Sachs, put in place a new tax
      break worth billions of dollars that is designed to encourage bank
      mergers. It allows the acquiring bank to immediately deduct any
      losses on the books of the acquired bank.

      Paulson and other Treasury officials have made public statements
      calling on the banks that receive public funds to use them to
      increase their lending activities. That, however, is for public
      consumption. The bailout program imposes no lending requirements on
      the banks in return for government cash.

      Already, the credit crisis has been used to engineer the takeover of
      Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by
      Bank of America, Wachovia by Wells Fargo and, last Friday, National
      City by PNC.

      What the Wall Street Journal on Saturday called the "strong-arm
      sale" of National City provides a taste of what is to come. The
      Treasury Department sealed the fate of the Cleveland-based bank by
      deciding not to include it among the regional banks that will
      receive government handouts. It then gave Pittsburgh-based PNC $7.7
      billion from the bailout fund to help defray the costs of a takeover
      of National City. PNC will also benefit greatly from the tax write-
      off on mergers enacted by Treasury.

      All of the claims that were made to justify the bank bailout have
      been exposed as lies. President Bush, Federal Reserve Chairman Ben
      Bernanke and Paulson were joined by the Democratic congressional
      leadership and Barack Obama in warning that the bailout had to be
      passed, and passed immediately, despite massive popular opposition.
      Those who opposed the plan were denounced for jeopardizing the well
      being of the American people.

      In a nationally televised speech delivered September 24, in advance
      of the congressional vote on the bailout plan, Bush said it
      would "help American consumers and businessmen get credit to meet
      their daily needs and create jobs." If the bailout was not passed,
      he warned, "More banks could fail, including some in your community.
      The stock market would drop even more, which would reduce the value
      of your retirement account.... More businesses would close their
      doors, and millions of Americans could lose their jobs ...
      ultimately, our country could experience a long and painful
      recession."

      One month later, the bailout has been enacted, and all of the dire
      developments--banks and businesses disappearing, the stock market
      plunging, unemployment skyrocketing--which the American people were
      told it would prevent are unfolding with accelerating speed.

      While Obama talks about the need for all Americans to "come
      together" in a spirit of "shared sacrifice"--meaning drastic cuts in
      Medicare, Medicaid, Social Security and other social programs--and
      the cost of the bailout is cited to justify fiscal austerity, the
      bankers proceed to ruthlessly prosecute their class interests.

      As the World Socialist Web Site warned when it was first proposed in
      mid-September, the "economic rescue" plan has been revealed to be a
      scheme to plunder society for the benefit of the financial
      aristocracy. The American ruling elite, utilizing its domination of
      the state and the two-party political system, is exploiting a crisis
      of its own making to carry through an economic agenda, long in
      preparation, that could not be imposed under normal conditions.

      The result will be greater economic hardship for ordinary Americans.
      The big banks will have even greater market power to set interest
      rates and control access to credit for workers, students and small
      businesses.

      While no serious measures are being proposed, either by the Bush
      administration, the Republican presidential candidate or his
      Democratic opponent, to prevent a social catastrophe from overtaking
      working people, the government is organizing a restructuring of the
      financial system that will enable a handful of mega-banks to
      increase their power over society.

      Barry Grey

      ***

      http://www.nytimes.com/2008/10/25/business/25nocera.html

      October 25, 2008
      Talking Business
      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.
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