Was the bank bailout bill a bill of goods?

Joe Nocera, New York Times business analyst, thinks so.

Christopher J. Dodd, a Connecticut Democrat and chair of the Senate Banking Committee On Thursday, asked Neel Kashkari - the former Goldman Sachs Vice President Henry Paulson appointed to oversee the bailout - why the banks were being slow to make loans.

Senator Dodd: "How was Treasury going to ensure that banks used their new government capital to make loans — “besides rhetorically begging them?”

Kashkari: “We share your view. We want our banks to be lending in our communities.”

According to Nocera, what is actually happening is quite different. He suggests that Paulson’s rationale for the bailout - that banks would start lending again - "is a fig leaf.”

Instead the real agenda is more bank mergers.

Treasury recently introduced a new tax break that, according to Nocera, has only one purpose: to encourage bank mergers”. He cites tax expert Robert Willens: “It couldn’t be clearer if they had taken out an ad.”

As a result of this and other moves, “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."

And loans to the public meantime?

“The dirty little secret of the banking industry is that it has no intention of using the money to make new loans”. Nocera listened in on a conference call between Chase executives and caught the following discussion of how Chase was going to spend the $25 billion it received from the Treasury:

“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”, says Nocera, “you are not going to find a single word in there about making loans to help the American economy.”

Nocera chased down 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 .... If it turns out that they are hoarding, you’ll have a revolution on your hands. ... There will be hell to pay.”

Nocera’s summary:
“I don’t know about you, but I’m starting to feel as if we’ve been sold a bill of goods.”


So When Will Banks Give Loans? By Joe Nocera, NYT. Published: October 24, 2008