More reasons why the government will be taking over allocation of America’s capital
What are the banks doing with the funds provided by the US government (aka you and me)? The answer is no secret, but not what was advertised. Several articles tell the story.
- “Morgan Stanley’s Bonuses Get Saved By You and Me“, Jonathan Weil, op-ed at Bloomberg, 21 October 2008
- “So When Will Banks Give Loans?“, New York Times, 24 October 2008 — Not soon, since they prefer to expand their reach and power.
- “Our U.S. banker overlords“, James Fallows, blogging at The Atlantic, 26 October 2008 — A pundit’s perspective.
Keep these in mind as you vote in November. Trillions will be spent by the government during this crisis, with far less debate than usual. Do what you can to influence the outcome: vote, donate time and money, talk and write about the issues.
This is a natural behavior during a crisis. Businesses do not want to invest, or banks to make loans. If the recession grows long and severe, this starves the economy into a spiral. Then we are forced into government acting as the primary spending and investing agent, as described in this post.
By the way, this is pure grade-A reporting. Despite fantasy-land bragging by bloggers, this is why we need a professional press. Now they just need to find a way to pay for it.
“Morgan Stanley’s Bonuses Get Saved By You and Me“, Jonathan Weil, op-ed at Bloomberg, 21 October 2008
You can imagine the devilish grins on the faces of Morgan Stanley employees last week, after the Treasury Department said it would pump $10 billion into the bank. Not only did we, the taxpayers, save their company, with the help of a Japanese bank named Mitsubishi UFJ Financial Group Inc. More importantly, we funded their 2008 bonus pool.
Morgan Stanley has accrued $10.7 billion of employee- compensation expense this year, almost twice as much as its pretax earnings. The vast majority of this remuneration hasn’t been paid yet. Now it probably will be, assuming the firm survives through next month. Meantime, Morgan Stanley’s stock- market value has dropped $34.7 billion, to $21 billion, since the company’s fiscal year began.
The rescue of Morgan Stanley’s bonus pool is an unpleasant downside of Treasury Secretary Hank Paulson’s decision to inject $250 billion of cash into U.S. banks in exchange for preferred stock. It is one thing for a company to pay much more to employees than it earns for its shareholders. It’s quite another to keep doing it while receiving taxpayer bailout bucks.
Before securities firms were public companies, a brokerage in need of capital would have called on its partners to pony up. That’s how it still works at private partnerships, such as law firms. The reason they don’t get taxpayer rescues is they can’t credibly threaten to take down the world’s financial system.
Morgan Stanley can.
“So When Will Banks Give Loans?“, New York Times, 24 October 2008
“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?”
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 Mutual.
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 worse.
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. … 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.
“Our U.S. banker overlords“, James Fallows, blogging at The Atlantic, 26 October 2008
As my friend Joe Nocera pointed out in his terrific piece yesterday in the NY Times, some of the (shameless) banks that have benefited from the huge public bailout bill are (shamelessly) planning to use the money not to loosen up lending to their client businesses, helping to offset the inevitable damage to the “real” economy that the credit freeze-up is causing. Instead they are using it as cheap capital for their own expansion plans.
Grrrrrrr. … This will become a bigger issue.
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
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For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about America – how can we reform it?
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- links to Damage Reports from home and abroad
Some solutions to the financial crisis
- Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
- Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
- How should we respond to the crisis?, 24 September 2008
- A solution to our financial crisis, 25 September 2008
- A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
- The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008
- Prof Roubini prescribes first aid for America’s economy, 4 October 2008
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy - stat!, 7 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- Results from the IMF meeting – just thin gruel, 12 October 2008
- The G-7 meeting was the last chance for action before the global recession, 12 October 2008
- A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008