Joe Nocera fromNY Times today had a must read explosive article on the actual use of the bailout funds made available to the banks. I have personally witnessed at least 3 very good businesses struggling to get loans from their respective banks to support operations. All the 3 businesses have an excellent credit history, excellent corporate and community citizens who have never defaulted.
Naturally I was extremely puzzled and honestly distressed about the crisis they were all facing. Why were the banks reluctant to give them loans? I thought, naively perhaps, that the first installment of the bailout plan was intended to help banks feel secure about making loans. So what happened here?
Apparently in a recent conference call for employees, an employee from JP Morgan Chase asked the following question:
“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?”
Well, what was the answer?
"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.”
In other words, this money is being used by banks not to help businesses, but to consolidate their market positions and increase their market share.
As Joe Nocera from NYT 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. 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.
I don’t mean to pick on JP Morgan here. The article states that most of the banks have no active plans to use the government bailout to help the American economy. Instead they plan to invest it in growth or consolidation opportunities that have no direct and tangible benefit for tax-payers.
What does Senator Dodd think about all this?
“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.”