WASHINGTON -- The federal government's $250 billion plan to bolster U.S. financial institutions is aimed at persuading healthy banks to lend again, but it's likely to foster further consolidation in the industry, with some banks already saying they intend to use the funds to help make acquisitions.Of course, this may just be happy talk to reassure investors that things aren't really so bad. And the banking sector does need to consolidate and shrink; that's what happens in the wake of a financial crisis. But I can't see any particular reason why the US taxpayer should pay to send BB&T on a buying binge.Treasury Secretary Henry Paulson has repeatedly emphasized that the government's investment is to restore confidence in the banking sector, so banks will lend again and private investors will put up capital for banks.
"Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, that capital," Mr. Paulson said on Monday.
If the banks use the government funds to pay for acquisitions, it could prove controversial. Taxpayers essentially would be footing the bill as strong banks gobble up their weaker peers. Such acquisitions probably would provide less of a boost to the economy than would new bank lending.
BB&T Corp.'s chief executive, John Allison, said his Winston-Salem, N.C., bank will "probably participate" in the government capital infusions, in part to help fund acquisitions. "We think that there are going to be some acquisition opportunities, either now or in the near future, and this is a relatively inexpensive way to raise capital" for that, Mr. Allison said in a conference call discussing the bank's third-quarter results.
Mr. Allison didn't say whether government money would prompt BB&T to open its lending spigot. He said regulators were encouraging the bank to apply to the program.
« Stuffing our faces | Main | Social insecurity » Anything but lending21 Oct 2008 03:35 pm
Paulson et. al. want to stuff money into the banks so that they will lend it, keeping the supply of money and credit from contracting dramatically. Unfortunately, the banks seem rather determined not to go along:
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I read a similar news report but with a very different spin: that the government supported and may actually be targeting some of the bailout money to help acquisitions.
Presumably, this is the government engaging (with some dash of irony) in leveraging. If there are unstable and failing banks that will either need bailed out or will fall back on federal insurance, it may be cheaper for the government to infuse a lesser amount of capital into, say, BB&T, who then uses a combination of government cash and its own funds to acquire the troubled bank. My hypothesis is that this (a) is cheaper for the government because some of the purchase is funded by BB&T's non-gov't money; (b) reduces the number of banks the government is entangled with by one; (c) minimizes operational disruption since the acquired bank never actually fails; (d) speeds the removal of an at-risk bank from the market before more vendors, lenders, customers and investors and be harmed; and (e) helps speed a post-meltdown reality of fewer but stronger banks.
I could be wrong about many of these assumptions, but it would seem there may be arguments that using the bailout money to spur acquisition may not be such a bad policy.
How 'bout this.....because Congress is giving them the money without strings attached?
What would you do if Congress cut you a check? Would you spend it on what economists wanted you to spend it on, or what you felt it was in your best interests to spend it on?
I'm guessing you (and most people) would spend it in your personal best interests.
Who are the bank going to lend to?
I just got a call from a bank wanting to lend to me. They were pushing variable rate, .76 below prime. I asked to what fixed rates they offer, 6-7%. I said I wouldn't consider borrowing until rates get below 5% fixed. They're just looking to get people into variable rates.
The capital infusions are a farce. Paulson still doesn't understand the nature of this crisis. Why would a bank whose balance sheet has fundamentally not changed want to lend out it's extra cash? No balance sheets were resturctured so far. The banks who are distressed simply have a little more cash to tide them over until their structural problems catch up with them.
If Paulson is going to FORCE good banks to take his capital then why shouldn't they actually go do what needs to be done and take down some sick balance sheets and restructure them. That is the heart of this liquidity problem. Confidence is not restored with cash, but by the underlying balance sheets being sound. Paulson hasn't done that. Let's let a few sound money (Objectivist) CEO's go do it.
WSJ has a great editorial by Anna Schwartz: "Bernanke Is Fighting the Last War" that details the horrendous mistakes being made in this bailout. I'm surprised you havne't commented yet on Bernanke's advocacy today of what is nothing more than welfare going under thh dubious name of a "stimulus" package. Antheer 300B! that will do nothing.
http://feeds.wsjonline.com/~r/wsj/xml/rss/3_7041/~3/5TYAq6TpYu8/SB122428279231046053.html
Sounds like the No Bank Left Behind Program is working.
A bottom-up infusion would have worked better, no? This all continues to get more appalling. Rest assured, the banks will get whatever they 'need,' and the real estate market in Westchester County will be fine. As will the future consulting gigs of future ex-congressmen.
What acquiring banks buy is a deposit base AND clients to lend to. No lending, no profits.
Net, takeovers of weak banks by strongeer ones can be expected to lead to more lending - and as opposed to letting the weak ones go bust, quite a lot of additional lending.
It's worth revisiting (or visiting for the first time, if you haven't read it) BB&T CEO John Allison's September 23rd letter to Congress(PDF) re the rescue plan as it was proposed at the time.
I'm alright with bank acquisitions. Because that way when this is over, we can threaten to dust-off the Sherman Anti-trust act and smash the bank industry back into little banks.
No not really, but it does give me comfort at the moment. I don't like the way this is looking, but then again I haven't for a while.
Megan, your last line is discouraging. Capital, as with cash, is fungible. And that is ok. If stronger players use the capital to acquire weaker players the capital will, in the aggregate, be used more efficiently. And the Treasury will earn a better return.
The real "problem" is that lending standards have improved over what they were 3 years ago. The reason for the improvement is that the results of bad lending practices are front and center today.
Note what is really being asked here- we want lending to loosen up so that money can be lent without having to worry whether or not the borrower will actually have the means to repay. The powers that be are attempting to reinflate the credit bubble. We are deep in the process of destroying ourselves, and the prescriptions are more of the same disease that got us here. In the words of a frequent commenter at CalculatedRisk, we are born and bred dopes.
Re Yancey's comment, it isn't enough any longer to support our economy with credit-assisted consumption. Now we have to do it with credit bubble-assisted consumption. Maybe we should just take our medicine instead of this snake oil.
Treasury should not have taken non-voting shares.
Yancey may be right, but it wouldn't have to be that way.
(1) It may be that partial reinflation of the bubble to allow it to be deflated slowly, rather than in a catastrophic manner, would make the "medicine" much easier to manage and take;
and/or
(2) While this may be a needle that is hard to thread, it appears to me that the goal is to restart interbank and commercial credit flow but not necessarily to restart consumer credit flows. I may be missing some big consumer spending push, but it appears everyone accepts that further overextending mortgages and credit cards wont help -- the problem is that a certain amount of higher-level credit is a necessary lubricant to any economic velocity, and so the trick is to spur credit in a contained way, where it remains solely in one province of the economy. As Rick noted above, that is a fiarly tricky proposition where cash is fungible. It has a way of spilling over beyond any artificial constraints policy makers may try to put on its flow.
Consumer credit seems to be roaring along. My mailbox has literally been overflowing with 0% promo-rate credit cards offers (and local free news papers and coupon circular). Consumer credit is smoothing out my cashflows while I ramp up my retirement savings.
So they want commercial lending?
The 8 regional Federal Reserve should offer automatic loans, to any company who has previously had two or more loans and has paid at least one off. The rate should be 1% higher than previously paid, or less.
Get rid of the non-lending bank middlemen, and let the Fed give the needed cash to real production / distribution / non-financial service companies.
The Fed should also offer to lend cheap cash to any bank that wants money to lend, as long as the bank is currently solvent (minimal or no MBS / CDS exposure).
ALL the Big Banks might be insolvent, and perhaps should die; and many, but only a small percentage, of small banks were messing with derivatives and, if not solvent now, should die.
All shippers needing letters of credit should probably get them from the Fed, same conditions as companies above.
There are NOT too many well-run small banks, nor too many restaurants. But every year lots of restaurants fail. Well run banks should be helped more than poorly run banks (any with MBS exposure that didn't prepare for 50% house price bubble pops).
The gov't should also be offering to pay 50% of most prior mortgages in foreclosure, to provide a low but stable floor to house prices.