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. 

  1. Morgan Stanley’s Bonuses Get Saved By You and Me“, Jonathan Weil, op-ed at Bloomberg, 21 October 2008
  2. So When Will Banks Give Loans?“, New York Times, 24 October 2008 — Not soon, since they prefer to expand their reach and power.
  3. 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.

Excerpts

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.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

Please share your comments by posting below.  Please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

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:

Some solutions to the financial crisis

  1. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  2. Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
  3. How should we respond to the crisis?, 24 September 2008
  4. A solution to our financial crisis, 25 September 2008
  5. A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
  6. The Paulson Plan will buy assets cheap, just as all good cons offer easy money to the marks, 30 September 2008
  7. The last opportunity for effective action before disaster strikes, 3 October 2008
  8. Prof Roubini prescribes first aid for America’s economy, 4 October 2008
  9. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  10. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  11. The new President will need new solutions for the economic crisis, 9 October 2008
  12. Results from the IMF meeting – just thin gruel, 12 October 2008
  13. The G-7 meeting was the last chance for action before the global recession, 12 October 2008
  14. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  15. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008

14 thoughts on “More reasons why the government will be taking over allocation of America’s capital

  1. “This will become a bigger issue” indeed. When the show trials start and the scapegoating is in full force, these banking geniuses are going to really regret some of these statements.

  2. So far, every move taken by or proposed by Sec’y Paulson has backfired, not had its claimed impact. Has all that money been wasted? No, it’s gone into the hands of shareholders and bank executives. Yet Robert Rubin, Paulson’s predecessor at Goldman Sachs and the Treasury, still appears to be Obama’s chief economics advisor, so we can look for more of the same if he is elected (though Paul Volker, the anti-Greenspan, is now appearing along with Rubin at Obama events.)

    Meanwhile, as reported in FT today, state pension funds are losing value and state tax revenues are falling, so public services and money for retirement are at risk. Will there be any money left in the Treasury to pay for these?
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    Fabius Maximus replies: Of course there will. We will borrow or print the money, as recommended in standard Keynesian theory. See this post for details and citations.

  3. Is there ANYTHING the current administration has done right, on anything at this point? The danger of preferred stock rather than common stock (like the UK did instead) was quite clear before the infusion of capital.

    January can’t come soon enough.

  4. Show trials? Did I miss something?

    At least it will provide some revenue for certain companies who have honed their interrogation skills in the recent wars, and we’ll have all that empty space in Guantanamo anyway.

    Seriously, you raise an interesting issue. If things get bad — really bad — the public may demand blood, yet it’s hard to see how such trials would solve anything. Even the victorious North didn’t put Jefferson Davis and the other senior Confederate leaders on trial, much less execute them or even keep them in prison very long. (For more info, see Michal Belknap’s American Political Trials Greenwood, 1994)

    I recommend we get on with economic reconstruction (perhaps not the wisest choice of words …)

  5. I’ve long been claiming that money to banks is silly — the Big Banks know that many banks will have to die, and they’ll be using whatever cash they get from gov’t to be survivors and predators.

    The Federal Reserve should be buying commercial paper. They should be making low cost loans/ capital injections to banks who have made regular business loans — rewarding recent good behavior.

    Let the Big Banks die.

    I’d like some big 90% ‘incompetent financial winfall bonus’ clawback taxes on bonuses, too. (I have lots of wishful thinking.)
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    Fabius Maximus replies: Hoover allowed massive bank failures. The results were sufficiently painful that nobody will follow such advice, no matter how intense the religious fervor of its advocates.

  6. In the often vague, if not opaque, AP report at “Treasury begins to deploy financial rescue plan” it mentions how banks will use these funds to take over others.

    The old insult that ‘either you’re stupid or a liar’ seems to be germane here. I don’t think the Treasury and its cohort private sector Titans like Goldman Sachs, JPMorgan etc. are stupid. I think they are literally stealing and in full public view.

    This has NOTHING to do with socialism. We are into the oligarchy phase now and until the banking sector is brought to heal with comprehensive reform they threaten to bring down the entire real economy. If the new President keeps any single one of the current group in charge or appoints yet another Goldman Sachs executive to Treasury, then the whole thing is utterly hopeless until a bona fide collapse unravels and, with any luck, the population will not allow the same players to rig the game in this upcoming century’s innings.

  7. FM. You keep urging your readers to vote. Vote for what? Both major parties are fully in hock to the same special interests, be it AIPAC, the (uber) Finance sector, American Empire think tank Grandees (either of Neocon or Trilateralists persuasions, makes no ultimate difference) and so on.

    I have come to the (reluctant) conclusion that the best thing to do is NOT vote or simply cast protest third-party vote. But better than the latter is NOT voting or simply writing in: ‘none of the above’. But if those who are elected only get 25% of the vote, at some point people are going to start questioning the entire basis of US democracy, which is a sham in any case. Better to expose it as such than participate, no?
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    Fabius Maximus replies: First, I find it difficult to imagine that both sides are equally bad. That would be an extraordinary oddity. And if you can support neither, than find a third party candidate. Or work to support some State or local candidates.

    If nothing on our political menu — at any level — meets your standards, perhaps your standards are unrealistic. You can wait to arrive at Heaven — which I hope meets your standards — but you do not get to vote there.

  8. At the risk of offending American capitalist sensibilities; All these billions wasted being pumped into these greedy corporations would probably have been better spent setting up and captialising a government owned bank and a seperate insurance company to engage in commercial operations rather than pushing untold sums down the plug hole, bailing out these failed businesses.

    They would have served a useful purpose in keeping the life blood of the economy flowing whilst the poorly managed corporations tanked and went belly up.

    Further, a few years down the track once the crisis had abated, they could be floated on the stock exchange via a dutch auction, earning a profit for the tax payer.

  9. As a techno guy, I find myself leaning more and more to a Kondratiev view of what is happening. The bankers fighting for dominance is a side show. The real overarching “crisis” is that the telecom revolution has played itself out, and a new innovation driven cycle is yet to begin, and we are trapped dealing with the ensuing uncertainty. Mis-allocation of resources as per the housing debacle, and now the banker’s money grabbing shenanigans will end when the new wave of innovation is revealed. Until then, it will not be clear where to invest, so we will run in place furiously as we are doing now. With that in mind, I have my own opinions of what the next big things need to be, and I’d love to hear what others think.

  10. “If money isn’t loosened up, this sucker could go down.” G.W. Bush – September 25, 2008.

    The biggest bubble of all time, the bubble of financial capitalism, is bursting. The twin suckers of greed and self-deception are going down. Once the dust settles, one reform will be to divide banks into much smaller entities. We have a long way to go…

  11. Whatever happened to Truman’s famous desktop sign? Is that at JP Morgan Chase now? All bucks do seem to be stopping there.

  12. FM: very witty about being fussy re the candidates. But I must say that I do find that on substantive/large issues there is no difference. That said, would 9/11 have happened on Gore’s watch? And if it did, would he have gone into Iraq? (Assuming the President has a substantive role in such decisions.) Probably not, but not definitely not. Still, I guess you have a point. (But not much of one!)

    bc re the wave: actually, I think if America could get behind sweeping energy reform it could function as a new industrial wave. For example, switching cars to electric would require more power stations, upgrading the national grid, mucho new manufacturing of course, better coal-burning technology (the no-brainer solution that nobody wants to do because it’s too obvious!) and so forth.

    But also some places do work well with wind, some with solar, all with increasing insulation and efficiency. I think people are far too hysterical about global warming, environmentalism and so forth but if a major push was done to get the energy system fully self-sufficient from in-country resources and also therefore highly efficient, this would be a massive undertaking that would indeed constitute the equivalent of a major new industry.

    We still have to get rid of the debt-dependent (aka usury-based) financial system and get back to productivity as the main quanta, not blips on computer screens.
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    Fabius Maximus replies: I agree that there is relatively little difference between the candidates, as the national political spectrum is quite narrow. That is characteristic of America, both a strength and weakness. It facilitiates united action during a crisis, a major strength.

    But there are State and local candidates as well. We are not electing an Emperior, and these other offices are important. Esp to ferment change, which often starts at the State and local levels. And this grassroots-up political evolution is a great strength of our system.

  13. On voting, it’s easy in one respect — vote against every incumbent. This should have been followed, in both parties, in the primaries, but was not much. (I tried). I think very few incumbents lost in primaries they ran in. So much for a low approval rating in Congress.

    On bank failures — I oppose ‘massive bank failures’, but support allowing ‘massive banks to fail’, while even more supporting the smaller banks. Loans to (non-finance) companies is the key banking metric to watch.

    A prior link to 4 Myths About the Financial Crisis of 2008 has graphs showing that there is not yet a real credit crunch for according to amount of loans going out (the quantity).

    The two economists at Marginal Revolution are arguing about this very point in an extremely interesting (and entertaining!), fact based way with acceptance of the others’ facts, while maintaing their own contradictory analysis.
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    Fabius Maximus replies: Always interesting to see that no matter how obvious or large a phenomenon, there are always those who deny its existance (referring to the MN Fed staff — Chari, Christiano, and Kehoe). Next month: “Myths of the recession; the collapse in sales, employment, and income are just figments of your imagination.”

    Update:

    More evidence that this MN Fed study is nonsense: “Record Spreads between 30 Year Corporate and Treasury Yields“, Calculated Risk, 13 November 2008 — Another measure of the credit crunch is the price of credit, and it is very very high.

  14. Updates to this post

    (1) “Hard Times, But Big Wall Street Bonuses“, The Early Show, CBS, 12 November 2008 — Excerpt:

    According to a report from financial news agency Bloomberg, Goldman Sachs, for example, has set aside $6.8 billion for bonuses, and Morgan Stanley, $6.4 billion.

    And the chairman of the House Financial Services Committee, Massachusetts Democrat Barney Frank, isn’t happy. “These are people who lost enormous amounts of money,” Frank observes. “How do you give a bonus to someone for having failed so badly as many of these people did?”

    What’s got many on Main Street and Capitol Hill angry, David says, is the possibility that some of the $700 billion government bailout package could go into the pockets of Wall Streeters to pay their bonuses.

    “All of the money is to go into new loans,” Frank points out. “None of it is to go into compensation of any kind for the employees.”

    New York State Attorney General Andrew Cuomo has opened an investigation into the Wall Street bonuses. He sent a letter to nine financial institutions, demanding “a detailed accounting regarding your expected payments to top management in the upcoming bonus season.”

    Cuomo told CBS News, “These are tax dollars that are going to these institutions, and I believe the taxpayers have a right to hold the institutions accountable for what they’re doing with their money.”

    (2) “Bonus Jackpot Can Be Yours in Five Easy Steps“, Michael Lewis, Bloomberg, 10 November 2008 — Excerpt:

    It may still take awhile before Wall Street finally accepts that it won’t get paid.

    At the moment, as their bony fingers fondle the new taxpayer loot, the firms appear to believe that they might still fool the public into thinking that bonus money isn’t taxpayer money.

    “We’ve responded appropriately to the attorney general’s request for information about 2008 bonus pools,” a Citigroup Inc. spokeswoman told Bloomberg News recently, “and confirmed that we will not use TARP funds for compensation.” But as the Bloomberg report noted, “she declined to elaborate.”

    As well she might! For if the Citigroup spokeswoman had elaborated she would have needed to say something like this: “We’re still trying to figure out how the $25 billion we’ve already taken of taxpayers’ money has nothing to do with the $26 billion we’re planning to hand out to our highly paid employees in 2008 (up 4 percent from 2007!). But it’s a tricky problem because, when you think about it, it’s all the same money.”

    Sadly, the public is now poised to see through any ruse: This pile of money instead of that pile, stock instead of cash, options instead of stock, options on options instead of options – – none of it is going to fool anyone anymore.

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