Bailout Cash Not Lent – Used By Banks for Mergers Instead, Despite Kashkari’s Testimony

27 10 2008

Joe Nocera at the New York Times writes that Banks are hoarding their new bailout cash for the onrushing downturn, instead of making loans to free up the credit markets.

He reports that on 17 October, only four days after taking a $25 billion bailout, a JPMorgan Chase executive admitted during an employee-only conference call that there was no intention on the part of management to use the money to make loans.

(emphasis added-dcm)

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?”

Answer:

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase … 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.

Yet, here is what Neil Kashkari said to Senator Chris Dodd and the Senate Banking Committee on Thursday, 23 October:

Full Hearing Video

Either somebody’s cribbing, or JPMorgan Chase has plans for the money that the Congress hasn’t.

The problem is the bailout was passed to buy up toxic mortgage debt in the form on credit default swaps of dubious and opaque valuability.  But the Fed’s direction changed after they got the money, and realised that the unfreezing of the credit markets through the recapitalisation of the banking system was the way our European Partners had determined to go about this, and we had better follow suit.

The Economist:

In America, where the authorities have helped to shovel failing banks into the hands of bigger ones, the retail-banking landscape now has three towering figures. On September 25th JPMorgan Chase overtook Bank of America as the country’s largest deposit-taking institution by snapping up the assets and deposits, but not the other liabilities, of Washington Mutual (WaMu), a Seattle-based savings-and-loan bank that had been suffocated by bad mortgage loans.

Four days later Citigroup, its risks capped by a loss-protection agreement with the Federal Deposit Insurance Corporation (FDIC), strengthened its domestic deposit base by acquiring the banking operations of Wachovia. Further consolidation is likely. Jim Eckenrode, an analyst at Tower Group, a consultancy, reckons that a top tier of five banks (Wells Fargo and US Bancorp are two other contenders) may end up holding as much as half of America’s deposits.

So now it looks like the credit markets will have to wait, and we must endure the resultant deep wave of medium and small business layoffs and bankruptcies due to a lack of available credit, while the Fed forces a round of bank consolidation with what bailout money they have at the moment.

As Joe Nocera put it:

“Nobody is saying it should make loans that people can’t repay. What I am saying is that [JP Morgan Chase CEO] Mr. Dimon took the $25 billion on the condition that his institution would start making loans. There are plenty of small and medium-size businesses that are choking because they have no access to capital — and are perfectly capable of repaying the money.”

Senator Dodd did press the urgency of lending to Kashkari in Thursday’s hearing:

While JP Morgan Chase may use their $25 Billion as a “backstop” against what’s coming,  Bloomberg reports that Goldman Sachs may raise capital to buy assets assuming it finds the right opportunities, according to company spokesman Lucas van Praag:  “If we see assets that are attractive, we might raise capital in order to be able to acquire them,” but Goldman has “no immediate plans to raise capital.”

Bloomberg:

Goldman, now the sixth-largest U.S. bank by market value,
is more interested in buying deposits than in buying entire
banks, according to a person familiar with the firm’s thinking.

– 30 –

It’s been a long day.  Looks like the Fed is letting the banks sit on the money for a rainy day, or to buy other banks.  Doesn’t look like they’re gonna lend out much, at any kind of decent rates, anytime soon.  I hope Senator Dodd can talk some sense into them.

I can’t fix that right now.  But I can rest, kick back, crack open a Foster’s, and enjoy Oscar Peterson and Joe Pass show me how a Nigerian Marketplace should work.

Thanks Oscar, Guys, Joe.

-dcm

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