April 30, 2009
No Loans for the Little Guy
In a move that may not be seen as surprising to many critics of the reigning financial oligarchy, a recent New York Times piece divulges that many banks are using the initial injections of capital from the Treasury not to buck up the ailing small business sector, but to purchase their stumbling competitors.
For those with the biggest appetites, the free lunch continues! And why should we as taxpayers be surprised by this?
From the New York Times:
"On Thursday, at a hearing of the Senate Banking Committee, the chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel Kashkari, the young Treasury official who is Mr. Paulson's point man on the bailout plan, on the subject of banks' continuing reluctance to make loans. How, Senator Dodd asked, was Treasury going to ensure that banks used their new government capital to make loans -- "besides rhetorically begging them?"
"We share your view," Mr. Kashkari replied. "We want our banks to be lending in our communities."
Senator Dodd: "Are you insisting upon it?"
Mr. Kashkari: "We are insisting upon it in all our actions."
And yet, the article continues, unlike Great Britain, which has mandated lending requirements in return for the cash, our own government has stipulated no such return. Instead, they have merely requested it. As a favor.
``The truth of the matter is, they can't put a gun to their head and say you have to lend this money,'' said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington. (via Bloomburg)
But what about a contract? You ask favors of friends, of colleagues, but not of banks to whom you are issuing $25 billion dollar checks. For those sorts of situations, it helps to have a contract. And yet here we are gambling on good faith with the same kinds of sharks who got us into this mess in the first place--and who will happily take as many of our dollars as we are willing to throw at them.
We can't conclude that the bailout thus far has failed or succeeded because of any one element. In fact, much remains to be seen as the effects of shrinking global capital are just now starting to trickle in. Next month, it could be a tsunami; and what then? Print more money? Give it to the same guys who flushed the last $25 billion down the toilet?
Former Secretary of Labor, and author of the book "Supercapitalism", Robert Reich, follows that up with this thought on his blog:
"We seem to have forgotten that the original purpose of antitrust law was also to prevent companies from becoming too powerful. Too powerful in that so many other companies depended on them, so many jobs turned on them, and so many consumers or investors or depositors needed them - that the economy as a whole would be endangered if they failed. Too powerful in that they could wield inordinate political influence - of a sort that might gain them extra favors from Washington.
"Maybe the biggest irony today is that Washington policymakers who are funneling taxpayer dollars to these too-big-to-fail companies are simultaneously pushing them to consolidate into even bigger companies."
Then again, this is not to say that backing up failing banks--with their untold slew of FDIC insured deposits--is a bad idea. If those institutions (and their accompanying loans) go into receivership, this would be bad all around.
But this article also highlights an almost unbelievable new tax break the treasury introduced on September 30th of this year, with little to no extra-industry publicity, for the sole purpose of encouraging bigger, more financially salient banks to acquire their struggling brethren.
In a real world example, U.S. Rep. Steven C. LaTourette (R-OH) told WKYC Cleveland that PNC, the Pittsburgh-based bank that's buying National City Bank, could get a $5.5 billion tax break that is almost equal to National City's purchase price, and will also get National City's share of $7.7 billion in bailout money. So, ultimately, the tax change will allow PNC to write down about $20 billion in National City loan losses. (via WKYC.com)
From today's Wall Street Journal:
"Congress generally restricts the annual amount of losses of a company after it gets acquired to prevent companies from buying and selling other firms solely to benefit from the ability to shelter income from taxes. But the shift by the IRS and Treasury was designed to help the struggling banking sector by significantly easing those rules."
In response to this, Senator Charles Schumer of New York drafted a letter to the treasury expressing exasperation at the matter, and wondering whether this could "end up costing taxpayers tens of billions more dollars on top of the hundreds of billions of dollars already approved." His fear is that this could lead to "more consolidation than would be necessary to restore stability in the financial sector".
Indeed, if banks are getting tax breaks to devour each other, what motivation do they have to do the lowly taxpayer the favor which the Treasury has requested?
In a surprisingly candid conference call, one banking executive admitted: "loan dollars are down significantly". So then where, asks the NYT columnist, are the dollars that so many cash poor, but commodity liquid, small businesses so desperately need?
Well, it seems they're tied up in mergers.
For those of us who live in the real world, 1lb of ground beef can only go so far. For bankers, it seems, they can turn that same cut into as much filet mignon as they can eat.
And for the American taxpayer? Well, there's no shortage of crow.
(via NYT and the WSJ)