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Banks Are Likely to Hold Tight to Bailout Money
Key Excerpts from Article on Website of New York Times
Posted: October 25th, 2008
http://www.nytimes.com/2008/10/17/business/17bank.html?partn...
All of the combined profits that major banks earned in recent years have vanished. Since mid-2007, when the credit crisis erupted, the countrys nine largest banks have written down the value of their troubled assets by a combined $323 billion. The problems that began with home mortgages, analysts say, are migrating to auto, credit card and commercial real estate loans. The deepening red ink underscores a crucial question about the governments plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves? John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. We will have the opportunity to redeploy that, Mr. Thain said of the new capital. But at least for the next quarter, its just going to be a cushion." For every dollar the banks earned during the industrys most prosperous years, they have now wiped out $1.06. [Treasury Secretary Henry M.] Paulson unveiled plans to provide $125 billion to nine banks on terms that were more favorable than they would have received in the marketplace. The government, however, has offered no written requirements about how or when the banks must use the money. There is no express statutory requirement that says you must make this amount of loans, said John C. Dugan, the comptroller of the currency. The banks could use the money from the government for any number of things. Some analysts say the banks may use it to acquire weaker competitors. Others say they might use it to avoid painful cost-cutting. And still others say the banks may sit on the capital.
Note: With no requirements placed on how the bailout money is to be used, what is to stop the banks from using taxpayers's money to inflate the bonuses to top executives, or to increase political campaign contributions to Congress members in return for future favorable legislation?
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