The "dirty little secret" of the US bank bailout
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Editor, The Konformist
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
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
"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
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
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.
October 25, 2008
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
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
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
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
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.